• Hugh F. Wynn

Real World WynnSights: How to Spend 30 Large

In this episode of Q&A: Real World WynnSights, I voice support in favor of Health Savings Accounts (HSAs), talk mortgage loan modifications and ponder what is the best use of an $30,000 nest egg.

Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Q: I have $30,000 in savings, no debt, and no retirement savings. Should I invest the $30,000, start my own business, or use it as down payment on a house? I'm 36.

First, let’s place buying a house on the back burner. And as to “starting a new career”, why not first zero in on your educational needs – if any? Reaching a decision about the need for additional education might help clarify what career to pursue… and when. If back to school becomes your choice, it also adds clarity to what to do with the $30,000. School will require financing (unless you get a loan), and any residue should probably be set aside in a safe, liquid Rainy Day Fund and/or in a conservative, short-term investment that might help fund your own business once you reach that decision point.

In short, you have several balls in the air that require strategic prioritization to best meet your current objectives. Housing and retirement savings can follow at the appropriate time, but at your age I would strongly suggest that you do some prioritizing, and then set your course… age 50 isn’t that far down the road!

Q: Does it make sense to use a Health Savings Account (HSA) to invest in stocks and mutual funds?

Absolutely, but this question requires some background information for those unfamiliar with HSAs. Unlike a Flexible Spending Account (FSA), money contributed to a Health Savings Account (HSA) can be invested much like contributions to a 401(k) or an IRA. And unlike an FSA, HSA contributions are not lost if not spent in a given plan year. They can be carried over from year-to-year, year-after-year. This makes HSAs excellent vehicles for saving and investing to cover healthcare expenses after retirement – when such expenses are likely to increase. BUT, unless you’re enrolled in a health insurance plan with an annual deductible of at least $1,400 for single coverage ($2,800 for a family), you aren’t eligible to contribute to an HSA. And the IRS sets annual contribution limits. In 2020, they're $3,550 for self-only coverage and $7,100 for a family (if 55 or older, participants can contribute an additional $1,000 as a catch-up contribution).

HSA funds can be invested in a selection of options not unlike 401(k) choices. Also, if invested wisely… and if affordable… it makes sense to pay certain healthcare costs out-of-pocket and leave your invested HSA dollars intact. This approach allows the participant to use an HSA’s investment feature to build a long-term health savings account – one of several tax advantages offered by HSAs.

Curiously, very few HSA participants invest their fund accounts – in my mind, the most compelling reason to enroll in an HSA. Using a Bankrate investment calculator, suppose that at age 25 your qualifying family joins an HSA and contributes the tax-deductible annual maximum of $7,100 (about $592 per month). Suppose further that this money is invested at 7%, compounded annually and grows tax-deferred for 25 years. Suppose after 25 years, tax-free withdrawals from the HSA (now totaling $469,400) are available to pay for qualified healthcare expenses. Quite a stress-reliever, wouldn’t you say? In short, your HSA combines the tax-free withdrawals of a Roth IRA with the tax-deductible contributions of a traditional IRA or 401(k). Or you could simply let it continue to grow another 15 years to provide you with an even larger nest egg ($1,472,000) for healthcare expenses going into retirement at age 65. Assuming a 2% annual inflation rate, you would still have spending power equivalent to $667,000 in today’s dollars. And don’t forget the $284,000 of contributions from age 25 to 65 that your family has been able to exclude from income. The kicker, of course, is that the money must be spent on qualified healthcare expenses… BUT NOT AFTER YOU TURN AGE 65!

When you turn 65, money can be withdrawn for any reason, but if not used for qualified medical expenses, those withdrawals would be treated as taxable income… but no penalty would apply. In short, over age 65 HSA withdrawals would be treated the same as withdrawals from a traditional IRA or 401(k). It’s worth mentioning that the penalty-free withdrawal age for most other retirement accounts is 59½ years old. This treatment is still another reason why HSAs make good retirement savings vehicles.

Wrapping up, those other characteristics that make an HSA such a good retirement savings vehicle include the enhanced family contribution limit of $7,100 ($1,100 greater per annum than for a 2020 IRA); no maximum income threshold as with a Roth IRA; upon retiring, no fretting about Required Minimum Distributions (RMDs) after reaching age 72 as is the case with other tax-deferred retirement accounts; and don’t forget the absence of that onerous “use it or lose it” provision, which enables HSA contributions to be carried over year-to-year, year-after-year and invested.

Q: Should I do a portfolio modification that takes me from a 30-year mortgage at 4.75% to a 15-year mortgage at 2.75%? I can probably get a lower refinance rate, but the hassle and the work involved is a bit overwhelming.

Generally speaking, a mortgage loan modification means extending the length of term, lowering the interest rate, or changing from an adjustable-rate mortgage to a fixed-rate loan. The terms of a modification are up to the lender, but the desired outcome to a borrower is a more affordable monthly mortgage payments. Lenders are often willing to consider loan modification to avoid a costly foreclosure process.

Not everyone can qualify for a loan modification. Typically, homeowners must either be delinquent or facing imminent default, meaning they’re not delinquent yet, but there’s a high probability they soon will be. Without knowing the size of your mortgage, to go from a 30-year, 4.75% note to a 15-year 2.75% note doesn’t seem to accomplish your goal – lowering a burdensome monthly cash outlay – although it would save you a bundle of cash over the long haul. I doubt it’s possible to find a low enough 15-year rate to even approach your current 30-year rate; thus, it appears to me that your best option is to negotiate a lower rate on your current loan, and when your finances permit, do a 15-year refinance to lock in those long-term savings.

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