HSAs, Taxes and Income versus Wealth

HSAs, Taxes and Income versus Wealth

Health Savings Accounts (HSAs) are another fantastic tool for sheltering retirement savings.  Well, that's if you don't need them to pay for healthcare in your retirement years.  But in any case, it's sheltered money to help out with your savings.  I remained ignorant about this for years and thus I would use the money we put in to pay our medical deductibles thinking I was being smart.  I was not.

If you are still trying to fully understand how an HSA can be a vital tool in your retirement planning, I fully recommend watching this 15:41 minute video by some dude I've never heard of.  But he does a great job of explaining the HSA and how you can use it to your advantage. The younger you start this the better off you'll be.

Oh, and contribution limits for 2022 will be slightly higher.

Tax Policy... with all the talk about our current administration coming up with more tax revenue I thought it might be a good idea to discuss two things; tax shelters and income vs wealth.

Tax Shelters... The term can seem like tax evasion when it is actually tax avoidance, smart business.  If the law allows you to do something, why wouldn't you do it?  If "they" (congress) really want you to stop doing it they'll change the law.  Yet, "they" are generally wealthy (if not before, then after they are elected) and are not inclined to change laws that impact them personally.  Clear enough?  Here is the best definition of a tax shelter I've seen.

A tax shelter is a financial vehicle that an individual can use to help them lower their tax obligation and, thus, keep more of their money. It is a legal way for individuals to “stash” their money and avoid getting it taxed.

That quote come from Corporate Finance Institute.  And while I am not vouching for their services (because I simply found the definition on a web search) I think it's great.  They also list a couple of tax shelters that may surprise some folks.  

Income versus Wealth... Folks, I only bring this up because I hear the terms being used as if they mean the same thing.  They don't. Most of you know this.  But just in case.  Your income is, well, the money you make each year.  Especially the money you pay taxes on;  Your job, your business, your non-sheltered dividends, etc.

Your wealth is the value of all your assets minus all your debts.  Wealth can increase in a year.  Maybe your house value goes up and you continue to pay down principal.  If both of those things happened your wealth, at least in that house, went up. That's a good thing.  But should you pay taxes on that?  How do we know exactly how much it went up without a buyer and a seller agreeing on a price?

Look, I'm acutely aware that some multi-national billion/trillion dollar companies are doing some creative accounting to avoid taxes. It peeves me even more that they shelter much of their wealth in foreign countries and not their own home country.  Maybe congress will figure something out, maybe they won't.  But wealth and income are two different things.  Make sure to listen carefully to what some congress people are saying.

Net Worth Reaction... I received several communications about last week's little blurb on figuring your net worth.  The fact that some of you sat down and figured your net worth and took the time to share the exercise with me was, well, I'm honored.

Clarity is power.

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