- Kristian Finfrock, founder and financial advisor of Retirement Income Strategies, demystifies the tax advantages behind a health savings account (HSA).
- He calls an HSA an “incredible tool” when adhered to correctly.
- Finfrock also relays three common misconceptions surrounding retirement.
- Click here for more BI Prime stories.
When it comes to organizing your retirement, the tax portion of the conversation is the most likely to put you to sleep.
However, this often-overlooked segment of planning is absolutely crucial. After all, the more Uncle Sam takes, the less you’ll have at your disposal.
Kristian Finfrock, founder and financial advisor of Retirement Income Strategies, has found the perfect way to minimize the tax man’s keep: an health savings account (HSA).
“I believe in eliminating taxes as much as possible,” he said on “ValueWalk,” an investing podcast. “We are always looking for ways to help our clients — legally, ethically, morally — disinherit the IRS from their life savings.”
Finfrock continued: “When followed correctly, the HSA is an incredible tool.”
An HSA is a tax-advantaged savings mechanism that can be opened in concurrence with an HSA-eligible, high-deductible health insurance plan.
“If you think about tax-planning and investments, there’s basically only three accounts you can put your money into: A taxable account, a tax deferred account, and a tax-free account,” Finfrock said. “The reason it’s so valuable is because, regardless of your income, you get a tax deduction on your contributions.”
He added: “The money grows tax-deferred, and when you take the money out in the future — as long as it’s for qualified health related expenses — it’s tax-free.”
Finfrock says that under the IRS’ current code, taxes can be deducted, they can be deferred, or you can get tax-free income. But you can’t have all three.
However, the HSA is the one exception to the IRS’ tax code — and retirement investors/savers can take full advantage of the tax benefits.
As far as the overall retirement picture is concerned, Finfrock sees an HSA as an “additional tool” for a saver/investor looking to pay less in taxes down the road. Ultimately, a retiree is going to have health-related expenses, and when the time comes, their HSA will be waiting in the wings.
“In my professional opinion, it’s the greatest tax-planning tool ever created,” he said.
Retirement misconceptions
With all of that under consideration, Finfrock shares three misconceptions that he sees appear frequently amongst his clientele.
1. What worked in the past will work going forward.
“The most common misconception is that the investment strategy that you used to get to get to retirement is the same one to get you through retirement,” he said. “That’s like thinking your primary physician that you’ve been seeing since you were 8-years-old is going to do your hip-replacement surgery or your heart surgery.”
Finfrock’s point highlights the reality that a saver who’s achieved retirement will then start the decumulation phase of their financial journey. The accumulation phase is over — and different objectives require fresh plans and approaches.
2. How much money is needed and what’s a safe amount to withdrawal.
“Most consumers wrongly believe you can take 6% to 8% of your money from your portfolio every year,” he said. “Historically speaking, the safe withdrawal rate is more than likely 4% or less.”
This means that you’ll have to save a lot more money in order to reach a comfortable level of retirement. The returns that your assets would need to garner in order to sustain a lifestyle where your pulling out 6% to 8% percent is most likely unrealistic, in Finfrock’s view.
3. It’s the same for everyone.
“Over 40% of our business comes from referrals,” he said. “I can’t tell you how common it is for one of our referral clients to come in and tell me they want a portfolio exactly like the person that referred them.”
This goes without saying, but everyone’s financial situation, risk tolerance, and goals are much different. There’s generally no one-size-fits-all plan in retirement.
“We really do customize a portfolio based on everybody’s situation,” he concluded.
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