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Wanted to share a story. Our son started a new job at the first of the year that paid more than his last one. He got his first paycheck last week and the net amount was less than he expected. We talked about it and what the problem could be. He was not in a higher tax bracket. I asked about W4 and he did need to adjust it. He also needed to get his taxable income down, so the first thing I asked him was “Are you maxing out your HSA?”, and he wasn’t. So I went into a short lesson about how they are the only account that is triple tax advantaged, the money can be invested, and for him to try not to touch it, pay his bills OOP and save the receipts. If he did this, he would have a lot in the accounts at retirement. I told him how Spouse and I did this after I learned about HSAs. As I was talking to him, I could see the light bulb go off in his eyes. As you all know, I was not taught about finances and had to learn on my own, so am making sure our kids will do better. It made me feel good that he came to Spouse and me and that we could help him. Chris
Nice story, Chris. Our HSA in the 90’s was very helpful in paying for childcare. Much later, I was left with several thousand to be used for healthcare. I’ve started spending it down but was dinged one year by the IRS because I forgot to give my receipts for appropriate expenses to my tax preparer. It was a tiny amount – so I sent them a check but I won’t make that mistake again. (When I told my financially sophisticated son the story, he was surprised. He thought you only had to produce receipts if your return was being audited. Idk).
HSA for childcare? Do you mean FSA?
Question for you, Linda. If you had the HSA receipts for appropriate expenses in your possession, why did the tax preparer need the HSA receipts too?
As a novice a HSA, FSA, and other Roth savings guidelines I’d recall reading about Peter Thiel had started his retirements incomes all under a Roths umbrella, ..somehow.
Little doubt his having had a tax Atty’s guidance both before, during and after PayPals inception.
My best to you, and your helping your sons incentive to learn the ropes asap that many of us are still grappling with.
Chris, I like your story. Most important is to save. How we invest this savings is then a good problem to have. Financial education begins early and it is best not to learn the wrong things. Parents are important. My children all decided to go to college and pursue engineering careers . When they decided to go to out of state schools, I required that they take on a small part of the financial responsibility. The loans were a trivial part of the costs, but I felt it was important that they spend a small part of their post graduate paychecks as a reminder of their financial decision. The children are doing much better in their 40s than I did at their age and that includes their retirement accounts.
Like Chris, I have come to believe the most critical retirement advisory decade is ages 15-25, not 50-60. I feel parents are wise to help their kids:
1) Fund Roths in their teen years.
2) Initiate the full 401(k) match or a bit more (10-15%) when starting full-time employment.
3) Lean toward Roth over tax-deferred in the early working years when in their lowest income years. Unfortunately, only 28% of eligible employees fund Roths.
4) Fund HSAs, if available, since these provide the best overall tax advantages.
Young workers have the unbeatable advantages of their lowest-ever tax rates to fund Roths and the longest runway for Roth\HSA compounding.
Nice story, it’s hard to project those paychecks, esp when your raise is always in the highest tax bracket and your overall pct starts going up.
HSAs are an underutilized financial instrument. They’re essentially a way for you to become the insurance company, you get to keep the profits of carrying the reserve instead of ceding it to your health insurer. Frequently people are able to accumulate enough to create income flows that will cover OOP without any extra savings.
Only caveat, you have to save those receipts (wish I had been better at this) because then the HSA can act like a Roth, liquidating at the end paying no tax on either the contribution or the gains.
Remember you can use your HSA to pay Federal part b premium, but not you traditional supplement premium.
That’s a great story Chris, thanks for sharing it.
Is a HSA the top priority in saving above retirement investing? Your son does not have 401k available?
While an HSA is a valuable tool, with a HDHP one medical misstep can wipe it out. There is risk it may not be there at retirement.
In my opinion having an HSA at retirement is a bonus, not a good strategy ahead of other ways to save and invest, especially if maxing out the HSA limits other saving.
Oh, I forgot to mention he has a 401k and is also contributing to that. C
Thanks for the story Chris. I fondly remember reviewing our children’s first pay-stub with them, and explaining the categories, as well as doing their first simple tax returns. Was the lower net amount solely due to his W-4? In addition to the does he take advantage of ay employer sponsored retirement plans and garners any employer match – I’m sure you had that discussion a long time ago!
Yes, thanks Rick. He is contributing to his 401k, 15% ever since he started working. C
Speaking of kids and HSAs, if your child is on your HSA-eligible insurance and isn’t a dependent for tax purposes, they can contribute up to the family contribution limit to their own HSA.
Yes! I just learned this recently. I wish I knew it when he was in grad school before he went on the school’s (cheaper) insurance. C
Thanks for this – and the reminder of one of my own stories.
I was in my 20’s, and my Dad and I were working on a problem with my car. He suggested something and I agreed that was a good idea. Then he said something along the lines of “Do you remember when you decided I might have a good idea or two?”. I said yes, it happened just recently. 🙂
Something about the infallibility of youth, the inability to be wrong, the confidence that you know everything – comes tumbling down with a maturing viewpoint of the world and those around you.
As the old saying goes,”It’s amazing that the older I get the smarter my parents become”.
Now my father was a self designated genius. Not sure he ever formally tested 😊
Love your story, Jeff, thanks for it. C