EP 68: Roth IRA vs. Health Savings Account (HSA): Which Is Better?

Show Transcript

Mat

You can record audio records.

Mark

Sorry, guys.

Mat

You’re all good. This is probably this might only be 30 minutes or less. Just, you guys know. Okay. All right. Freddie, we’re.

Mark

Seeing.

Mat

Welcome everyone to the Directed IRA podcast with Matt Sorensen and Mark Kohler. We are so excited for today’s episode and the great debate today, Roth IRAs versus HSAs.

Mark

And that’s health savings account. For those of you that aren’t in the fight yet, you’re like, Who’s HSA? I’ll take.

Mat

Hs a. I’m Mark’s HSA.

Mark

I’m the HSA.

Mat

Team. Yeah. So this is actually today’s podcast was born out of a dispute that Mark and I had last week on which is better, and we thought this would be a pretty good podcast episode.

Mark

So getting to the point, many of you know, a Roth is going to grow tax free and come out tax free, but you don’t get a tax deduction on the way in. And there’s all sorts of pros and cons that go along with the Roth. When you compare it to even a regular IRA, a health savings account has its own set of pros and cons. You do get a tax deduction on the way in. It does grow tax free and comes out tax free, but only for medical. And then again, a host of other little things. And the big debate is if you only had five grand, would you put it in the Roth or put it in the HSA? Oh. Well, we’re going to debate.

Mat

That question today. So and this will help you learn a lot about the differences between the two accounts and how they can be used where the pros and cons are. So do you want to you’re going to take the position of HSA like we drew straws but also that’s I think Mark, you know what.

Mark

He’s got a coin in here.

Mat

Is HSAs.

  

START OF TRANSCRIPT

Mark

Dude gets the opening statement of why they think which one’s better. Got a coin, who’s got a quarter anything. Can we flip anything and we got.

Mat

Let’s flip your phone.

Mark

Yeah, flip the lid. Oc If the lid lands like this, you’re going to go first. Oc If it lands like this, then I get to go. I think I’m going to lose. I’m going to throw it on the floor.

Mat

Oh, geez.

Mark

It’s up. I know it.

Mat

It’s up it. I’m going.

Mark

Yeah.

Mat

You get. Yeah, I’m going first. Opening statement. Hold it. No, that’s mine. Oh.

Mark

Let’s go like that. Okay. Oh, it’s me.

Mat

Okay.

Mark

All right, see you. Okay. Thank you, guys. We have to get a third party verification on that.

Mat

Flip mark Kohler opening.

Mark

Statement. Okay, opening statement. That was legit. I mean, I literally threw it. Okay. Okay. All right. Here’s my opening statement. They both grow tax free. They both come out tax free. But the HSA, you can pull out for medical at any age. I’m not even going to worry about the tax deduction on the way in here. I’m going to I’ll throw.

Mat

That cherry on top.

Mark

That’s that’s the cherry on top. I’m going to throw out the point that the number one reason people pull out money out of their retirement account, sometimes with the penalty, and certainly after age 59 and a half, the number one thing they go to their retirement account for is not to go on a cruise, not take the grandkids to Europe just to pay for medical bills. Number two, the number one reason for bankruptcy in America are medical bills. That HSA. We want to fund it, grow it, build it and have access to it for our medical bills as soon as possible, even before a Roth IRA. Okay. That’s my opening.

Mat

Sorry. That’s all.

Mark

Right. Can you do that?

Mat

Okay. All right. Theory. Hear me on this. This is the big point for anything. Roth IRA. That money’s coming out tax free at 59 and a half. Little caveat there. But for anything, no matter what, I don’t have to medical maybe I’ve you know, I work out, I’m in, I’m fit. I don’t have any medical issues. Thank you. I can use the Roth IRA for anything. And if I do have medical, I’ve been pretty solid on my Roth IRA and growing it. I could use it for that too. Now I know I don’t get a tax deduction on the way in. I get that I’m okay passing on that because I want the freedom. For anything.

Mark

Now we have two options. Should I give you? Should I say now take devil’s advocate and tell you what I think is good about a Roth and HRSA will kind of go back and forth. Here’s the reality, everybody. I’m going to cut.

Mat

Joining my team for a.

Mark

Second. Yeah, we’re going to switch teams now. We’re going to say, you know, how kind of like you have to kind of argue for the other person. It might be a high school debate thing. I don’t know. But but I want to say this. I’m going to give a spoiler alert. I don’t think there’s a clear cut winner. I think it really depends on the person, their age, their health, their goals, how much money they may already have in retirement. There’s variables, of course, but I think we could argue there’s some general I’m going to say, General, generally, I’m going to lean on the HSA first. I was going to say I’m generally going to be the. But the reality is it comes down to your situation, but let’s keep playing with this. So I’m going to say a couple of things on behalf of the Roth. What I think is cool about a Roth is even though you don’t get a tax deduction put in the money, you can use a mega Roth strategy. You can actually put more money into a Roth than you could an HSA this year. It’s 3650 if you’re single, 7200 if you’re married.

Mat

So 7300.

Mark

70, 300, sorry, 70, 36, 50 and 70, 300. That’s all you can put into the HSA when you pass go. Now you can invest it, you can land on Park Place, you can triple the money, you can keep building it and growing. It is portable. You can take it anywhere you want, just like a Roth. They’re the same that way. And we can talk about there’s some similarities in a variety of ways here in a minute. But if I wanted to throw down some Roth money, we’ve got the mega Roth strategy that’s over 60 grand this year. So I will give that to the Roth, too.

Mat

And let me say this. Even if you don’t go to the mega Roth strategy, think about this. If you’re single, it’s 3650 in an HSA. If you’re single, it’s 6000 in a Roth IRA. If you’re married, it’s 7300 and an HSA. If you’re married, it’s 12 grand in a Roth IRA because you can do a Roth IRA and so could your spouse. And you know what? If your kids are involved in your small business, we’re throwing in money in their Roth IRA.

Mark

Too, now. So you’re breaking the rules already. I just went and argued for your Roth. You were supposed to turn around and argue for the HSA.

Mat

You just sucked me more into the Roth. Oh, my gosh. I’m like.

Mark

Sure. And this is a rope. A dope rope.

Mat

You just beat me.

Mark

Up, and then I got I got a punch coming in the seventh round. I’m going to get you.

Mat

So now.

Mark

What do you like about.

Mat

It? Let me say what I like about the HSA. I love a tax deduction. All right. I do want that tax deduction right now, reducing my taxable income.

Mark

Now, any income.

Mat

Level, any income level, let’s say I put 7300 bucks in, I’m married or I got a kid and I could do the family 7300 bucks. I’m getting an above line tax deduction. Doesn’t matter whether I itemize or not. 7300 bucks. If you’re in a 30% tax bracket, that’s saving you a 2000 bucks in taxes. I love that. I got one other one.

Mark

I’ll give you another. But I’m arguing for Roth now. Okay. Kind of change sides change teams little you know Seinfeld reference there I’m for the the Roth here’s a cool thing about the Roth too. You can contribute to a Roth till the day you die at age 104. I mean, you can always be putting money into a Roth. So even clients that call up and say, hey, I’m taking Social Security, I’m in this, I’m in that, I’m like, Hey, if you’ve got money, put it in a Roth because your kids will love inheriting a Roth. Inheriting a Roth is a big deal.

Mat

You don’t want to inherit an HSA. You can’t unless you’re a spouse.

Mark

That’s right. You’re only a spouse can inherit an HSA. So I really like the fact that you can keep putting money into a Roth even after age 65 with an HSA. Once you hit 65, you can keep investing your Roth bucket if you have money. I’m sorry, your HSA bucket if you have it. But you can’t put new money into the HSA because now you’re on Medicare. The government says, enjoy Medicare.

Mat

Am I on HSA or am I back on Tim Roth and my son HSA? I’m still on HSA, right?

Mark

Yeah. You got to say something good about the HSA.

Mat

What I do love about the HSA is we can get at it in any time now. I do. There’s a caveat on the Roths here, too. There’s a good point on the roster still, but the HSA, you can get it at any time. I’ve used an HSA pay for kids braces. I mean, I’ve paid for I mean, I have three kids and I’ve paid for five sets of braces. All right. How does that work? I don’t know. I’m like asking the orthodontist. I’m like, how did we do this? I had braces twice on two of my kids. I got a good orthodontist. I’m like, I think this guy’s a better businessman than he is an orthodontist. Jeez. Oh, my gosh. So but, you know, I was going to tax section, throw that money in. It was helping me now. And that money was coming right back out to to cover medical. So some people use the HSA as a tool for today. They’re not necessarily using it as a tax strategy for the long haul to invest and grow. I like that. I want everyone to get there. But for some people the HSA works nice. As I’ve got an upcoming medical bill, it’s going to cost me 1000 bucks. I will not get a tax deduction for this, but if I drop that 1000 bucks into the HSA and pay it out of the HSA, I just got 1000 tax deduction that helps me today. And that’s a tool where you’re not going to get in the Roth IRA. You don’t get a tax deduction. It is not helping you today.

Mark

Yeah, I like that. Thank you for throwing the HSA bone. Now I know where Matt was going to go with the Roth. There is a caveat. With the Roth, you can pull out your contributions to a Roth at any time. At any age, no penalty, no tax, which theoretically you could do for medical. You know, again, you’ve got this. I didn’t get a tax deduction on the way in and now I’m going to pull out my contributions, not something we’d recommend. But again, if you had cancer or some travesty in your life with a medical need, you could dip into the Roth, at least the contributions you’ve made. So that that’s the Roth has that caveat.

Mat

Yeah. Wow so many differences between the two and we hit a little one on the inherited. What you mentioned is that you can inherit a Roth IRA, stretch it out for another ten years for your kids could do that. And we love that you can contribute to Roth IRAs for your kids and help them get started. That’s, you know.

Mark

All right. Now, this is the point in a negotiation. If we were helping in a maybe. Yeah, Palestinian Jewish conference, we could pull this off. We’re this good?

Mat

Yeah. Okay, well, we’re on the wall of bank. We’re like, we can solve the know. World peace is coming next. All right.

Mark

Okay, here’s here’s where I think we can find consensus, see if you agree with this. Let’s say. I’ve got 20,000. Single or married couple, let’s say somewhere in that range, 15 to 20000. And I’ve got a day job. And so there’s a little match option at work. Well, we always want to do the match matching out. I want to get it put in enough money to get 100% match. Just double my money. Always a good thing. So let’s say out of that 20 grand, I could do a match for five grand. I’m going to put in five grand out of my paycheck throughout the year and they’re going to double it. No brainer. Now I’ve got this 15 grand left. In that situation, I want it to to fund both the Roth and the HSA before you go back to the 41k and put more in the 41k, don’t just check the box at work that you’re going to do the max on your 41k and then go home and forget about your personal Roth or your personal HSA. You can do those outside of work, kind of get your consensus on that. Mr. Sorenson I love that.

Mat

I agree on that. This is another we had a little debate on this last weekend. What do you think we talk about when we get all of our attorneys together?

Mark

Yeah.

Mat

It’s it’s awesome, actually. It’s great to learn some of these different perspectives. So yeah, I love that. Why are we starting with the company retirement account if we haven’t? Because there’s free money there on the match. Yeah, but why do we not want to do more? Because there’s terrible investment options and there’s no more free money. It’s all my money. So where do we have better options? The Roth IRA and HSA are a better option. Now, once I got the match. Peace out, guys. There’s no more benefits here to me. I got crappy mutual funds. I’m stuck in here until I leave the job. I’d rather come over and have more control in my health savings account or my Roth IRA, which, by the way, you can self direct both of those that directed IRA directed IRA dot com.

Mark

Nice plug thank you very much.

Mat

And and have the considerations we just talked about of course which which one is better who wins and that in that debate. And then you could come back to the for one K if you want if you’ve exhausted all those. Now, remember your spouse, of course, on the Roth IRA, too. Yeah. What are they? Are they maxing out on theirs, too? Of course. The HSA, if you could do family for those that are married that get you a little more money into it. But I like that as the general strategy for most people and pathway of priorities. And there’s all these account options I get distracted by where should I be dropping my money? What buckets are the most valuable places?

Mark

And this is where some you’re like, Oh my gosh, no one talks about this. Well, the only people that do talk about this is your tax lawyer. Our job is to find a path to you building wealth as quickly as possible with the least amount of taxes. If you go to your CPA, sometimes they don’t have the depth of knowledge with some of these little techniques and strategies. And I’m a CPA as well as an attorney, but I’ve really doubled down on these types of strategies where a CPA, they.

Mat

Get.

Mark

Busy prepping tax returns, they’re not spending time strategizing every day. And that’s not to their fault. That’s just the nature of the beast. So is your banker going to talk about this? Is your financial advisor really going to do this? You know, your financial advisor oftentimes doesn’t have an incentive to talk about your HSA, let alone real estate. And so if you’re saying, oh, my gosh, these guys are talking about things no one’s talked to me about, that’s when you make an appointment. If you don’t like our firm, fine. But find a tax lawyer that is focused on your path and you need to have the real estate in the conversation and all these pieces.

Mat

Yeah, the law firm is cakes, lawyers, cakes, lawyers, dot com. I feel like. Like reading the commercials today. You know those lawyers dot com. Today’s episode.

Mark

Yeah. There you go.

Mat

So. All right, let me let me say one other important item I think is key here. And this is kind of cheating in the Roth versus HSA, but I’m going to say do both. That’s what I do. Why do I do both? Because I want to have both to be big. I want to know the HSAs got some money. And if I want to pull out now for me, even if I’m going to the dentist or I got some medical or prescription drugs, it’s not astronomical. I’m like, I got it. I’m covering it today. I’m working now. This HSA for me is for the long haul. I’m trying to invest it. Grow it, right. Roth IRA, of course, I’m doing the same thing. Invest it, grow it for the long haul. Try to max it out. For those of you high income, you need to do what’s called the backdoor Roth IRA. So for those, you’re like, Well, guys, I can’t do a Roth IRA because I make too much money. Hold on. Make sure you watched our prior podcast episode on the backdoor, Roth IRA. It’s how high income earners can still do a Roth IRA takes a little you know you tap to step type process throw back to Tim Hardaway there the YouTube two step.

Mark

Yep.

Mat

Tim Hardaway I’m old school basketball fans so but I like to do both. And even if you’re like maybe you only have the five or six grand, you might want to say, well, I’m going to do some an HSA, some in Roth IRA, even because in 20 or 30 years, depending on where your age is and you’re sitting now when you hit retirement, you like to have two of those buckets. Yeah.

Mark

Always be built in both of these buckets. I think that’s something we can absolutely agree on. And I would say I’m going to go out another way and just say the big three, get your matching out at work. If you have a day job with a41k match, always grab that and then with your remaining funds, if you have to split them between the HSA and the Roth, great. Maybe you can max out both and then sit back and go, okay. Is it time to buy a rental property this year? Is it time to go back to my 41k and maybe double down there because I can put more money in there at that point and maybe you’re okay with the mutual funds that your employer provides, but it’s a receptacle. You can even go down and put more money in the Roth 41k piece typically so. But I think the big three right out of the gate, the match, the Roth HSA, then you’re thinking about real estate and other higher end strategies.

Mat

Yeah, love it. Wow. Yeah, we got to the point. We nailed it. You know, sometimes these fights only go two or three rounds. You know, sometimes.

Mark

I want to say one similarity or maybe there’s a there’s several, but one big one is and Matt already alluded to it, you can invest both, you can self direct both. And that’s that’s a huge takeaway because if you’re like, well, my HSA at Fidelity only gives me 2%. That’s because you’re at Fidelity. Get your HSA out and go invest it. Last year I had about a 25% return in my HSA. Now that’s not a promise. That’s just me I was doing. I believe I did cattle in my HSA. I also have a rental property in my HSA. Right now I’m sitting on about 15 grand of my HSA looking at a couple of strategies now, where am I going to deploy it this year? I want to see double digit returns on my HSA and I can self direct it. I can form an LLC. I still have an LLC called the Kohler Dutton Livestock Company for those out there that are, you know, Yellowstone fans.

Mat

John Dutton’s HSA in there too.

Mark

You know, I should call John Dutton, see Kelman offer, you know, Beth, Beth would have to approve since she’s his attorney. But I bet you Beth would be in on it.

Mat

She’s she’s I think she’s savvy here. Yes. Yeah. She’d see the light on.

Mark

I’d love to see Beth on this. Yeah, I’ll sell her. I’ll sell her. So anyway, so that’s a big takeaway is that you can self-direct both Yeah.

Mat

And that’s the distinction on the matching out on your 401. K at your day job, you’re not self directing there. You got the 41k plan at Dunder Mifflin. You know, you’re doing whatever they you know, you’re eating whatever food they’re serving in that 401k plan. You don’t have any freedom to eat what you want. So. And with the self-directed HSA, Roth IRA, we do it directly. Ira, of course you can invest in whatever you want, if you want by stocks, bonds, mutual funds, knock yourself out. But most of our clients are going to do unique things like Mark’s doing is done cattle and real estate. I’ve done real estate and notes and there’s there’s other things you can do. Private companies, all these things are possible with what’s called a self-directed IRA or self-directed HSA.

Mark

Now.

Mat

Happen to write a book on it.

Mark

So that’s the book. That’s my and here’s a book. Yep, here’s the book on the HSA tax. Look over their tax and legal playbook.

Mat

Okay.

Mark

There’s a book over here. Whatever book. What is that subject? Okay. Now I will say this in summary, if there’s a lot to learning, do you qualify for an HSA? How do you get them funded? Blah, blah, blah. We’ve got other podcasts on that. We have podcast dedicated to the Ra.

Mat

Ra plan and all that.

Mark

Yeah, so go do your homework on those things. But hopefully today was a nice summary of the debate.

Mark

Yeah, the two awesome accounts out there that every American should be using to save if you’ve got the employer plan. I love the matching out. We talked about Roth IRA HSA. If you’re only using one pick which one in the debate here. But at the end of the day, if you’re doing well, you should be using both. They’re an excellent tool to save for retirement. Our government, our Congress said, here’s the most efficient way we will give you where you can pay us the least amount in tax. Do you want this option or not? They put it in here for us. You just have to go take it and use it.

Mat

They’re there for the taking. Thanks, everybody. We’ll be here next week for another episode of the directed IRA podcast. Check us out on our sister podcast, the Main Street Business Podcast. We’ve got workshops this fall, still four or five of them. We’ve got the real estate tax summit, the self-directed IRA summit and several other business building workshops. Please check them out at our websites. It’s all in down there and the content below. Thanks everybody. See you soon.

Mark

Stay calm. Self tracked on. Three. 19 minutes. Gs. Bloomberg Bain has about 1750 probably. We started about 30 seconds, 40 seconds.

Mat

And you guys are troupers. The pain to go through this. Sorry.

Mark

I say much.