Risk - Trap - Pitfall - Finance - Chasing Money off a Cliff

11 HSA Pitfalls to Avoid – Part 2

Intro

Health Savings Accounts (HSA) are very powerful in that they can save you a lot on your taxes, but there are many pitfalls/risks that HSA participants should be mindful of. This is Part 2 of 2 episodes detailing 11 HSA pitfalls to avoid. In this episode, we discuss the remaining 5 pitfalls, including:

  1. Employer mistakes
  2. Not reconciling expenses
  3. Not keeping good records
  4. Doing a full Transfer of Assets (TOA) when you don’t intend to close the outgoing account
  5. Not investing your HSA funds

We also discuss some bonus material regarding:

  1. HSA beneficiary designation elections
  2. Words of wisdom to employees and employers

See 11 HSA Pitfalls to Avoid – Part 1 if you haven’t already.

Podcast

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Hey everybody, welcome to the Bigger Insights Finance podcast, where we’ll help you build

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a life you don’t need a vacation from.

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This episode is part two of 11 HSA Pitfalls to Avoid.

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So if you haven’t yet listened to Part 1, if you could go ahead and just do that, that

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would be great.

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So before we get into pitfalls seven through 11, let’s do a quick recap.

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HSAs are great tax-favored accounts (TFA), and they can save you a lot on your taxes.

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But to be honest, there are a lot of pitfalls that you need to be aware of, and it’s very

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easy to make costly mistakes if you don’t know what you’re doing.

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And again, like always, we are not CPAs, tax attorneys, enrolled agents, or other tax

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professionals, and none of this is tax advice, so make sure you run any of this by your tax

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advisor.

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All right, so let’s get into it.

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Pitfall #7: Employer Mistakes.

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I’m going to go over three employer mistakes that I’ve personally experienced in the past.

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Now obviously, there’s only so much that you can do to avoid these, but you should at least

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be aware of them so that you know what to look for and what to do if you encounter these

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as well.

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The first mistake is not applying your contribution elections on-time.

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I can recall at least one occasion where I filled out the proper form to change my HSA

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contribution elections, and I turned them into HR, and they just didn’t bother getting

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around to processing it.

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So when the next paycheck rolled around, they made my contribution per the old elections.

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So then I had to recalculate what my contribution should be going forward to account for this

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mistake.

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What we would recommend here is that you talk to HR or whomever handles your payroll and

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ask them at what point in the payroll cycle, you should change your elections to make sure

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that they’re processed and made effective on the correct paycheck.

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The second mistake that I’ve encountered is your employer deducting their contributions

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from your pay.

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This has happened to me multiple times, in one case, two years in a row.

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So basically, employers are allowed to make contributions to your HSA, and some of them

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do.

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When I used to receive paychecks, I would check all the numbers on them to make sure

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that they’re correct.

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And in these cases, I noticed that my paycheck was short by the amount of the employer HSA

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contribution, because they deducted it from my pay rather than from their account.

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If you receive a paycheck, we recommend that you do the same because employers are liable

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to make errors, and from our experience, very few people scrutinize their paychecks.

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At my last employer, it seemed to me that I was one of, if not the only person to catch

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payroll errors.

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I’ll go over the third mistake that I’ve experienced with a story.

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And like I said in part one, if you’re one of these people that take pleasure in other

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people’s pain, turn up your volumes because this was pretty painful for me.

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Several years ago, I received my 5498-SA.

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This form reports your HSA contributions to the IRS, which we went into more detail in

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a prior episode called HSA – Demystifying Tax Form 5498-SA.

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I immediately noticed that the reported contributions were a little bit over the contribution limit.

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So right off the bat, I knew there was a problem because I would never make a mistake like

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this.

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I started going through my records to total up my contributions, but my records were

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not matching my 5498-SA.

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Then I realized that the tax form was over-reporting my contributions by one month’s worth of contribution.

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That’s when I realized what was going on.

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Almost a year prior to this, my employer accidentally sent out HSA contributions twice, then withdrew

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one of them.

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I thought at the time that the story ended there. Well, I was wrong.

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So now I realized that my bank was reporting that erroneous double contribution on this

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form.

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Then I checked my 1099-SA, which reports HSA distributions, and that was off by one month’s

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worth of contribution as well.

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Basically, what happened was that either my employer improperly withdrew that double contribution

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or the bank failed to report it properly.

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Now I should have caught this sooner, but in my defense, this was several years ago,

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and since then I’ve developed a system where I already know what all of these forms should

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say before I receive them.

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I’ve also developed a checklist that I go through each year to catch these kinds of issues.

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If you become a Bigger Insights client, which you should, if you know it’s good for you,

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we can help you set up a system like that as well.

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Anyway, so then I contacted my employer and told them that this little stunt that they

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pulled screwed up my 5498-SA and my 1099-SA. And my boss basically said, and this is almost

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a direct quote, but I’m going off of memory.

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He said something like, “If you really feel like we screwed this up, then we might see

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if we can do something to help you out.” And that really pissed me off.

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I mean, not only did they very clearly create a tax headache for me, through no fault of

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my own, but now they’re basically trying to make it sound like that they didn’t do anything

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wrong.

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Now, in this case, I wasn’t necessarily expecting that they would fix it, but I felt like they

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needed to know that this is what they did, and they also should have used this as an

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opportunity to warn all of the other HSA participants, because this probably affected

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them as well.

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And of course, they didn’t do that.

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So then I had to talk to the bank and convince them that this is what happened and beg them

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to issue corrected forms.

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They eventually did, so hopefully that’s all resolved.

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But even that is somewhat questionable, because when tax forms get corrected, at least with

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this bank, they only notify the IRS of this through the mail.

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So if the USPS failed to deliver those corrected forms, or if Bob the Bureaucrat who received

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them failed to process them, this could still be an open issue on my account.

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So if you’re going to have an HSA, you need to scrutinize your 1099-SA and your 5498-SA

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very carefully.

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All right, Pitfall #8 is: Not Reconciling Your Expenses.

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Now if you’ve been around long enough, you’ll learn the hard way that healthcare providers

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have a tendency to overcharge you upfront, and then never get around to reimbursing you

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until you ask for it.

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So if you go to your doctor or your dentist for an appointment, and they ask you to make

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a payment upfront, which sometimes they’ll do for certain types of work like a surgery

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or something like that, just be aware that that is an estimate.

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The final amount won’t truly be known until your insurance company receives the claim

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and pays what they think they should pay to the provider, and then they bill you for

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the remainder.

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Now very conveniently, healthcare providers tend to over-bill you rather than under-bill

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you.

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So if you paid the upfront payment with your HSA, now you have a problem on your hands.

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Because your HSA-qualified expenses are based on what’s owed, not what’s paid.

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So if you pay $500 upfront, but the final bill was only $400, you can only deduct $400,

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not the $500.

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So when you go back to that provider and say, “Hey, you over billed me”, they’ll cut you a

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check for $100.

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But now you have a problem because $100 of your HSA distribution does not qualify.

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This is another reason to shoebox your expenses.

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So if I go to the doctor and they make me pay upfront, I’m going to pay them with a personal

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check or credit card or something like that, then wait for my Explanation of Benefits (EOB) to

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show up to see what the final amount is that I owe, and then I can decide to reimburse myself

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the exact amount.

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The ninth pitfall is #9: Failing to Keep Good Records.

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Now one of the things that’s kind of unique about HSAs relative to certain other types

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of accounts is they really operate on the honor system.

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Each year, the IRS gets your 1099-SA, which reports your distributions, but that doesn’t

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tell them what those funds were actually spent on.

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They don’t receive your receipts or your Explanation of Benefits until they ask you or demand that

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you provide them.

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So there’s really not a whole lot stopping you from using your HSA debit card to go

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buy beer or something. And the IRS obviously knows that,

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so they do scrutinize HSA accounts and records, so make sure you keep good records.

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And what we like to recommend is that you keep original receipts for the statute of

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limitations and indefinitely for expenses that you’re going to shoebox. Like if you

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have a medical bill today and you don’t reimburse yourself for 20 years from now, you need to

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keep a record of that expense for that 20 years plus the statute of limitations.

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And also make and keep digital copies. Because believe it or not, paper receipts go bad.

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When I was young, I literally used to keep all of my receipts from any significant purchase

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in a shoebox.

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And one day after several years, I had this idea of going through there, pulling them out

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and scanning them all so that I had a digital copy just in case something happened to them.

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And much to my surprise, I looked at these receipts and almost all of them were almost

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completely illegible.

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Some of them were literally blank.

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I mean, it looked as if they had printed like disappearing ink on them, like you couldn’t

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even tell that they ever had ink printed on them.

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It was crazy.

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So if the IRS is going to require that you keep certain documents and receipts for several

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years, you really need to make digital copies of them so that doesn’t happen to you.

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Because if you get audited and you show up with a shoebox full of blank receipts, you

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know, that’s not going to turn out very well for you.

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The 10th Pitfall and admittedly, this is a very minor edge case, but it’s worth mentioning

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is #10: Doing a Full Transfer of Assets (TOA) from One HSA to Another

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When You Don’t Intend to Close the Original HSA. This is a little bit complicated.

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We might go into more detail in a future episode, but you can have as many HSA accounts as

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you want. You know, opening additional accounts obviously doesn’t increase your contribution

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limit or anything like that.

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But you might want to have multiple accounts for one reason or another.

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In my case, I had an HSA that my employer set up when I started working for them, but

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it was pretty useless.

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I mean, they were only giving me like 50 or 80 basis points worth of interest or something.

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And when I found out that I could open an HSA at a brokerage firm and invest my HSA funds

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in anything that I wanted to, that’s exactly what I did.

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So I opened an HSA at another firm and I did a full Transfer of Assets from my employer’s

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HSA account over to my brokerage [HSA] account.

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Now when I filled out that form, I read it a dozen times and nothing in that form said

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anything about closing my original HSA account.

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So I sent it through and they transferred the money, everything was great until I logged

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into my online account access for my original HSA and found out that they closed my account.

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So with some institutions, when they get a full Transfer of Assets form, they just assume

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that you’re intending to close your account and move it somewhere else, which wasn’t the

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case for me.

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So luckily, I noticed this in time and I called them and because I was within like a 30 or

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60 day window, they were able to reopen it without any issue.

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So if this does happen to you, make sure you call your bank immediately and ask them to

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reopen your account.

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But one of the things that I do going forward to prevent something like this from happening

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is I’ll leave about $10 in the original account to make sure that they don’t close it.

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So you might want to consider doing that as well

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if you’re going to do a transfer of assets from one HSA or other account like an IRA

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or 401k over to another one. The 11th and final Pitfall is #11: Not Investing Your HSA Funds.

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Now we’re going to go into that in more detail in future episodes, but just be aware you

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might you might not realize this.

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So HSA stands for Health Savings Account.

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So most people just think of them as a savings account. But the tax code allows you to invest

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your HSA in almost anything.

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You have so many investment options that they, rather than whitelist what you can invest

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in, they actually blacklist the few things that you’re not allowed to invest in.

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And I don’t have that full list in front of me,

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so I’m just kind of going off of memory here.

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But last time I checked, you’re not allowed to invest in collectibles, alcohol, artwork.

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I’m pretty sure insurance policies are on that blacklist as well.

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There’s very few things.

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There’s like five or six or something like that.

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The whole collectibles thing gets a little bit iffy with precious metals, but in 401k’s,

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HSA’s, and IRA’s, you can invest in certain types of gold and silver bullion.

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But you need to be careful about that because the rules are kind of specific. But you can

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invest your HSA funds in stocks, bonds, ETFs, mutual funds, like I said, certain types of

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gold and silver, cryptocurrencies, commodities, real estate. You can literally buy an apartment

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complex with your HSA.

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So if you’re not investing your HSA funds, we think that you’re probably making a mistake.

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But just be aware that when we say “investing”, we’re using that term somewhat loosely because

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if you’re kind of conservative or if your financial situation is not looking that great,

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you can still open an HSA at a brokerage firm* and just keep your cash in short-term

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treasuries or short-term CDs or even money markets might be worth it.

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So right now, since it looks like, you know, we might be on the verge of a 2008-style bust,

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my HSA portfolio is relatively conservative and I’ve got pretty big positions in a short-term

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treasury ETF.

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I also have a couple of one-month CDs. And the money market fund that I’m invested in

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is giving me, I think like somewhere around 4.5%.

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So even if you need to be conservative and you’re going to need your HSA funds in the

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near future, you can still consider opening an HSA at a brokerage firm and putting some

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of your money in some of these short-term instruments that will give you 4-5% on

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your money, which beats the, you know, 50 basis points or whatever that you’re probably getting

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in your HSA account at your local bank or credit union.

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And just keep in mind that any income that your HSA generates is generally tax-free.

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So you know, if your diamond hands or your laser eyes generate $100,000 in capital gains

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or something like that, inside your HSA, that’s tax-free.

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That’s pretty amazing.

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But we should caution that this is not tax, financial, or health advice.

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Investing your HSA does involve some level of risk, which isn’t right for everyone.

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So make sure you consult the financial advisor before you invest your HSA funds.

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All right, so that’s it for the 11 Pitfalls.

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Now we’re going to go over some bonus material.

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Let’s talk about beneficiary elections.

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Make sure you keep these up-to-date.

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You know, we see stories on a somewhat regular basis about things like ex-spouses inheriting

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00:17:59,040 –> 00:18:04,320
millions of dollars because somebody forgot to update their beneficiary forms after they

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got divorced or something like that.

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You know, nobody likes to think about dying, and estate planning is usually at the bottom

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of everyone’s list, but this is something that you really need to take seriously and

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make sure that you’re keeping those forms up-to-date as your life changes.

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We also want to take this opportunity to impart some wisdom on the employees that are listening

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to this podcast.

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Just keep in mind, if your employer screws up your HSA, it’s YOUR problem.

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It’s not their problem.

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It’s not their tax forms that get screwed up.

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It’s yours.

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So you need to pay very close attention to the HSA rules, the numbers that are on your

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paychecks, and the numbers that are on your tax forms – 1099-SA and 5498-SA.

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Now we have a few words for you employers out there.

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If there’s one thing that you can’t do, it’s screw up your employee’s paychecks. Especially

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if all they get is a paycheck.

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You know, if you’re not giving your employees equity and they’re spending 40+ hours

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a week out of their life to build your business, the least you can do is not screw up their

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paychecks and create a headache for them.

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Now we acknowledge that mistakes do happen, but if you do make mistakes, don’t be like

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my former employer and do the following instead.

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1. Learn from your mistakes.

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Not only did they screw up my HSA multiple times, but they made the same mistake two

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years in a row.

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2. Don’t treat your employees like a jerk for pointing out your payroll mistakes, which

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is what my employer did to me.

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Because believe it or not, if this is the way that you’re going to roll, people aren’t

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going to want to work for you anymore.

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All right, that’s it for this episode.

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00:19:58,400 –> 00:20:03,000
If you’d like help with your HSA or other financial matters, consider becoming a Bigger

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00:20:03,000 –> 00:20:04,520
Insights client.

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00:20:04,520 –> 00:20:10,800
We help clients like you improve their* financial situation in one-on-one sessions.

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Our concern is that without help, it’s tempting to see the complications that come along with

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HSAs, other tax-favored accounts, and wealth building in general, and think that it’s just

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00:20:22,480 –> 00:20:23,880
not worth it.

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00:20:23,880 –> 00:20:28,840
But we believe that with the right support, you truly can live a life that you don’t need

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00:20:28,840 –> 00:20:34,120
a vacation from, and it is worth the added complications and risk.

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00:20:34,120 –> 00:20:39,480
So if that sounds interesting to you, go to our website, BiggerInsights.com, and fill

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00:20:39,480 –> 00:20:45,000
out the short form at the bottom of the page so we can set up your initial consultation.

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00:20:45,000 –> 00:20:49,420
Make sure you subscribe and share this podcast because we’re going to be producing a lot

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00:20:49,420 –> 00:20:54,960
of great content like this, which we believe can help a lot of people if we can spread

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00:20:54,960 –> 00:20:56,600
this information.

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00:20:56,600 –> 00:21:00,200
So with that, thanks for tuning in and staying until the end.

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00:21:00,200 –> 00:21:21,200
Don’t screw up your HSA, stay healthy, and stay wealthy.

Disclaimer

We are not CPAs, tax attorneys, or other tax professionals and nothing in this episode should be construed as tax, financial, health, or other advice. Investing your HSA funds involves risk, which may not appropriate to some HSA participants. Do not invest your HSA funds without first consulting your financial advisor. Bigger Insights also does not condone buying beer with your HSA funds! See our full Disclaimer for more details.

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