Subscribe
Share
Share
Embed
Freedom for Retirement™ is the podcast designed to help you move beyond the fear of the complexity of finances so you can be financially free to achieve personal significance. Tune in with Josh Duncan each week to turn fear into fuel that drives you into Freedom & Significance.
Welcome to the Freedom for Retirement Podcast.
If you're a high-earning professional, business owner, or someone approaching retirement
and wondering whether you are truly on track, you are in the right place.
This podcast is all about helping you make smart, confident financial decisions without
the fear, confusion, or sales pressure that so often comes with money advice.
Each episode is designed to break down complex topics like retirement planning, investing,
taxes, and cash flow in plain English.
So you can understand what really matters and avoid the most common and costly financial
mistakes.
Everything you hear here is educational, fiduciary focused, and grounded in real-world
planning experience working with clients just like you.
I'm your host, Josh Duncan, partner at F5 Financial Planning.
Let's get started.
Every open enrollment season, someone tells you to max out your health savings account for
the tax deduction.
That advice is not wrong, and it's also the smallest part of the story.
A health savings account is the only account anywhere in the tax code with three breaks stacked
on top of each other.
Money goes in without being taxed, it grows without being taxed, and it comes out without
being taxed as long as it pays for a qualified medical expense.
Some people use only one or two of those three breaks and never touch the other two.
The account gets treated like a coupon for this year's doctor's visits instead of what it
can also be, which is a second retirement account with a health-cost label on it.
I'm Josh Duncan, partner at F5 Financial Planning, where we take a fiduciary approach to
maximizing our clients' wealth.
The question I hear more than almost any other about these accounts is whether you should
pay your medical bills out of pocket and let the health savings account sit and grow
instead.
The honest answer depends on one thing, and it's not how disciplined you are with money.
It's your cash flow.
This is not a strategy that works for everyone.
I want to walk through what makes this account different, what the growth strategy
requires before it applies to you, what to do if you are not there yet, and how Medicare
changes the picture and how to decide for yourself.
Let's start with the mechanics because
the strategy only makes sense once you see all three tax breaks at once.
A traditional IRA gives you a deduction going in and taxes you on the way out.
A Roth IRA taxes you going in and lets the growth come out tax-free.
A health savings account skips the tax on all three steps, provided the money is
eventually spent on a qualified medical expense.
No other account in the tax code does that.
Think of the deduction as an immediate return before a single dollar is even invested,
since it lowers your tax bill the same year you contribute, regardless of what the account
does afterward.
Additionally, if your HSA contributions are from your payroll deduction, you also avoid
payroll taxes.
Even your 401(k) contributions are subject to payroll taxes first.
In 2026, you can contribute up to $4,400 to a health savings account with self-only
coverage, or $8,750 with family coverage.
If you are
55 or older, you can add $1,000 on top of either limit.
To be eligible at all, you need a high deductible health plan, and you cannot also be
covered by a general-purpose flexible spending account, including one through a spouse's
employer, since that coverage disqualifies you.
For 2026, a high deductible health plan means a deductible of at least $1,700 for
self-coverage only, or $3,400 for family coverage,
and total out-of-pocket costs capped at $8,500 self-only or $17,000 family.
Unlike a flexible spending account, there is no deadline to spend what is sitting in a
health savings account.
Nothing reverts to the employer at year end, and nothing expires.
The balance is yours for as long as you want to keep it there, which is what makes the
growth strategy possible in the first place.
Another great feature of HSA plans is that
you can invest your money.
Once your balance clears whatever minimum your provider requires you to keep in cash, the
rest can go into mutual funds or index funds, the same as an IRA.
That minimum varies by provider, so check what your own plan requires before assuming you
can invest the whole balance.
Left alone, that invested money compounds for as long as it sits there, shielded from tax
the entire time, which means decades of growth with no tax drag along the way.
The common mistake is treating the account like a second checking account.
Deposit this year's contribution, spend it on this year's copays and prescriptions,
balance back to zero, repeat every January.
That is a perfectly legitimate way to use it.
It also means only ever getting two of the three tax breaks because nothing ever gets the
chance to grow.
Neither approach is automatically correct.
Which one fits you is the question the rest of this video answers.
So should you pay your medical bills yourself and let
the health savings account ride?
Here's the condition that has to be true before that strategy makes sense for you.
Your regular cash flow and your emergency reserve already comfortably absorb a surprise
medical bill without the health savings account's help.
Positive cash flow means income that covers your expenses with room left over every month,
not just savings sitting in an account somewhere.
If that is true, letting the account grow can yield major benefits decades down the road.
If it is not true yet, the strategy is not for you right now.
And that's fine.
Take two people with the same balance in their health savings account.
One has room in the monthly budget and a reserve set aside for the unexpected.
An unplanned surgery or emergency room visit lands a bill for several thousand dollars, and
it gets paid from checking without a second thought, while the health savings account
keeps growing untouched.
The other is stretched every month with little room for a surprise expense.
That same bill paid out of pocket instead of from the account built for this purpose means
dipping into savings meant for something else, or reaching for a credit card.
The difference between them was cash flow that already existed before the bill arrived,
not willpower and not a better understanding of tax law.
The mistake I want you to avoid is hearing "let it grow" as advice for everyone and applying
it to yourself before checking whether the condition behind it is true in your situation.
Paying a covered medical bill with a credit card or draining an emergency fund earmarked for
something else, just to preserve a health savings account balance you cannot really afford
to leave untouched defeats the purpose.
The account is there to help you.
If using it is what your cash flow calls for, use it.
There's nothing to prove by leaving a balance untouched that you need.
So what if you are not there yet?
Well, many people in this position contribute what they can, take the deduction,
and pay medical costs directly from the health savings account as they come up.
That still means two of the three tax breaks in full.
The money went in without being taxed, and it comes out without being taxed because it's
going toward a qualified medical expense either way.
Say someone contributes to their health savings account in January and pays a dentist bill
from that same account in March. They get the same deduction and the same tax-free
treatment on the withdrawals as someone who let their balance sit for 20 years before
touching it.
The only difference is the third tax break on investment growth,
which never had time to happen.
The mistake here runs in the opposite direction from the one before, feeling like using
the account for current medical costs is somehow doing it wrong because everything you
read about health savings accounts talks about investing and growth.
Using the account as intended is not a lesser strategy.
It is the strategy that fits your situation right now.
This also does not have to be all or nothing.
Someone with a little room in their budget can invest a portion of the balance
and keep the rest in cash for near-term costs, adjusting that split as cash flow improves.
The account does not force a single choice for every dollar in it.
Building an emergency reserve of three to six months of expenses is a more useful early
goal at this stage than whether the health savings account is invested, since that reserve
is what eventually creates the room this whole strategy depends on.
That cash flow can be built over time through paying down debt, growing income,
or simply giving a budget room to develop slack.
The investing approach does not disappear.
It becomes available later, the same account with the same balance still working in the
meantime.
Now, what changes once you're on Medicare?
Your ability to contribute ends the month you enroll in any part of Medicare, including
premium-free Part A, which many people enroll in automatically once they start Social
Security.
There is no partial-month exception.
The month your Medicare coverage begins is the month new contributions have to stop.
That's not automatically age 65, either.
Many people keep working past 65 with qualifying coverage through an employer and delay
enrolling in Medicare, and they can keep contributing to their health savings account the
whole time they hold that coverage and have not enrolled.
Now, enrollment is the trigger, not the birthday.
So, what does not stop is the balance you already built.
Past age 65, a health savings account can pay Medicare Part B premiums, Part D premiums,
and Medicare Advantage premiums,
all tax-free.
The one exception is a Medigap premium, which the account cannot cover tax-free.
This is where the growth strategy pays off in a way that looks a lot like retirement
income planning.
Someone who spent their working years paying medical costs out of pocket and investing
their health savings account arrives at Medicare with a pool of money that can cover
premiums for years,
none of it counted as taxable income for that year.
This carries a second benefit beyond the premium itself:
a health savings account withdrawal never shows up as income,
so spending from it in retirement does not add to the income figure that determines the
surcharge added to Part B and Part D premiums for higher earners.
If you are also managing Roth conversions or required minimum distributions in those same
years, that makes the account one of the only retirement dollars that does not compete for
room in your income.
The mistake worth clearing up is the assumption that Medicare enrollment closes the
account or empties it out.
It does neither.
It only stops new money from going in.
Everything already inside keeps working the same as it did before, and you can still spend
on qualified medical costs and on those specific premiums for the rest of your life.
So how do you decide which side of this you're on?
Well, let's start with what you spent out of pocket on medical costs last year.
Compare that against what is sitting in your checking account and your emergency reserve
right now, separate from money already earmarked for something else.
If those funds could have absorbed last year's medical spending without strain, you
could be in a position to invest your health savings account and let it grow.
If they could not have, spend from the account and build toward that position over time. It
also helps to look ahead, not just back.
A planned procedure, a new family member on the way, or a health change you already know
is coming is a reason to keep this year's contribution liquid, even if your general cash
flow looks solid on paper.
This is worth revisiting every year because cash flow changes.
A promotion, a paid-off debt, or kids finishing college can shift you from one side of
this line
to the other, and the account is flexible enough to move with you.
Circumstances that made this a stretch a few years ago do not necessarily hold true today,
and the plan for the account should move with them rather than stay fixed to an old
assumption.
If you are working with a financial planner, this is the kind of question worth bringing
to that relationship since it touches your cash flow, your tax picture, and your
retirement plan all at once.
And a plan built around your full financial picture will get you a more precise answer
than a general rule of thumb.
Okay, so a health savings account is built to do three things at once.
Reduce what you owe today, grow tax-free for as long as you let it, and cover medical
expenses, including Medicare premiums down the road, without ever being taxed.
Which of those three you get to use fully comes down to your cash flow, not your
discipline or how much you have read about the account.
If your budget already has the room, let the account grow and treat it like a piece of
your retirement plan.
If it does not have the room yet,
use the account the way it was designed to be used and revisit the decisions as your
situation changes.
Either way, the account is working for you.
If you found this episode helpful, please consider subscribing to the podcast and leaving
a review.
It helps more people find the show and continue learning how to make smarter financial
decisions.
I'm Josh Duncan, partner at F5 Financial Planning.
If you would like to learn more about how we help our clients achieve financial freedom
for personal significance,
please visit our website at www.f5fp.com.
Thanks for listening, and I'll see you in the next episode.