Economic commentator Kyla Scanlon is noticing a potentially worrying trend in the investing outlook among younger generations.

“It’s a bifurcated world,” she told CNBC’s “ETF Edge” this week. 

Scanlon, 26, who rose to prominence through her social media videos on the market and economy, explained why some members of Generation Z are aggressively saving for milestones like retirement, while others are taking a far more lax approach. 

“You do have these people who are maxing out their 401(k)s. They’re doing everything they can to plan for retirement,” she said. “But then you have the other side, which is an element to financial nihilism, where people don’t want to save for retirement. They don’t want to save money in general because they don’t believe the future is there.”

Scanlon is aiming to bridge Gen Z’s divided financial attitudes with her new book, “In This Economy? How Money and Markets Really Work.”

“Financial education is always going to be an uphill battle, just because money is such a personal subject. But it’s important that we give people the tools that they need to start somewhere,” she said.

She points to the housing market as a prime example of where young people are falling behind. Gen Zers represented just 3% of total home buyers in 2023, according to a recent report from the National Association of Realtors — a statistic Scanlon attributes to higher interest rates.

“The younger generation definitely wants [homeownership], because there’s a lot of financial benefit to having equity,” she said. “People are just trying to figure out how to do that financially right now, considering where mortgage rates are, considering where home prices have been. It’s difficult.”

Disclaimer

Months of high inflation weighed heavily on households.

As of December, 64 percent of Americans were living paycheck to paycheck, according to a recent LendingClub report — up from 61 percent a year earlier and in line with the all-time high first reached in March 2020.

For the first time, more than half of all six-figure earners also said they were too thin, up from 42% a year ago.

“The effects of inflation are eating away at every American’s wallet, and as the Federal Reserve’s efforts to curb inflation drive up the cost of debt, we’re seeing a near-record number of Americans living paycheck to paycheck,” said Anuj Nayar, LendingClub’s chief financial health officer.

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For its part, the Federal Reserve is expected to announce its eighth straight rate hike at this week’s policy meeting.

While wage growth is high by historical standards, it has not kept pace with the increased cost of living, which rose 6.5% in December from a year earlier.

That puts many Americans in a tight spot as inflation and higher prices force more people to tap into their cash reserves or rely on credit just as interest rates are rising at their fastest pace in decades.

Other reports also show that financial well-being is generally deteriorating.

Certified financial planner Ted Jenkin, CEO and founder of oXYGen Financial in Atlanta and a member of CNBC’s Board of Financial Advisors, offers his top tips for spending less and finding a better return on your savings.

Jenkin said some simple financial hacks can help, such as going to the grocery store less and cutting back on online shopping.

“Grocery stores are just like Las Vegas; they are there to separate you from your wallet,” he said. Meal planning is one way to edit your shopping list down to weekly essentials and save money.

Deactivating a one-click order or deleting stored credit card information can also help. “Anyone who shops on Amazon and has a credit card stored, you’re effectively putting lighter fluid in your budget,” Jenkin said.

Jenkin recommends waiting 24 hours before making an online purchase and then using a price tracking browser extension like CamelCamelCamel or Keepa to find the best price.

Finally, tap into a savings tool like Cently, which automatically applies a coupon code to your online order, and pay with a cash-back card like the Citi Double Cash Card, which will earn you 2%.

“You really have to discipline yourself or you’re going to outperform your income,” he said.

The money you put aside should also work in your favor, he said.

Even though deposit rates are rising, even a high-yield savings account won’t pay enough to keep up with the rising cost of living.

Jenkin recommends buying short-term, relatively risk-free Treasuries and stacking them to make sure you’re earning the best rates, a strategy that includes holding bonds until they expire.

“It’s not a huge return, but you won’t lose your money,” he said.

Another option is to buy federal I-bonds, which are inflation-protected and nearly risk-free assets.

I bonds currently pay 6.89% annual interest on new purchases through April, down from the 9.62% annual rate offered from May to October 2022.

Still, it will work well as an inflation hedge for long-term savers. The downside is that you can’t redeem I bonds in one year, and you’ll pay the last three months of interest if you redeem them before five years.

LendingClub’s paycheck-to-paycheck report is based on a survey of nearly 4,000 U.S. adults in December.

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If you’re eager to boost your retirement savings, there’s good news for 2023: higher contribution limits for your 401(k) and individual retirement account.

In 2023, the deferral limit for employees was $22,500, up from $20,500, and catch-up deposits for savers 50 and older rose to $7,500, up from $6,500. These increases also apply to 403(b) plans, most 457 plans, and savings plans.

“This is a big change for a lot of people,” said certified financial planner Brandon Ober, founder of TrustTree Financial in Huntersville, North Carolina.

But without a reminder from your 401(k) plan advisor or provider, these increases “may go undetected,” he said.

Contribution limits have also increased for IRAs, allowing you to save up to $6,500 for 2023, up from $6,000 in 2022. While the compensation deposit remains at $1,000 for 2023, it will mark inflation starting in 2024.

Some of the biggest personal finance changes of 2023 are related to inflation, said Scott Bishop, CFP director and CEO of Wealth Solutions at Houston-based Avidian Wealth Solutions.

For example, in October the IRS announced “some relief” as the federal income tax brackets for 2023 rose, he said, which means you can earn more before you get to the next level.

Each bracket shows how much you’ll owe in federal income taxes for each portion of your “taxable income,” calculated by subtracting the largest standard or itemized deductions from your adjusted total income.

The standard deduction also increases in 2023, rising to $27,700 for married couples filing a joint application, up from $25,900 in 2022. Single applicants may claim $13,850 in 2023, a jump from $12,950.

If you plan to sell investments from a taxable portfolio in 2023, you’re less likely to foot a long-term capital gains tax bill, experts say.

Based on inflation, the IRS also raised income thresholds of 0%, 15% and 20% for the 2023 long-term capital gains categories, which apply to profitable assets owned for more than a year.

“It’s going to be very important,” Tommy Lucas, CFP and registered agent for Moisand Fitzgerald Tamayo in Orlando, Florida, told CNBC recently.

Lucas said that with higher standard deductions and income thresholds for long-term capital gains in 2023, it will likely fall into the 0% category.

For 2023, you may qualify for the 0% rate with taxable income of $44,625 or less for single applicants and $89,250 or less for married couples filing together.

Experts say the inflation adjustments for 2023 also mean more investors may qualify for Roth IRA contributions.

“We talk a lot about Roth conversions,” said Lawrence Pon, CFP and CPA at Pon & Associates in Redwood City, Calif., referring to the strategy of converting pre-tax IRA money into a Roth IRA for future tax-free growth.

But what about Ruth? [IRA] contributions? “

More Americans may be eligible in 2023 because the adjusted gross income range increases to between $138,000 and $153,000 for single applicants and $218,000 and $228,000 for married couples filing jointly.

While some investors may seek “complex” moves, such as so-called Roth back-end conversions, which move post-tax 401(k) contributions into a Roth IRA, Boone urges investors to double-check Roth IRA contribution eligibility first.

in December. On September 23, Congress passed a $1.7 trillion comprehensive benefits bill, including dozens of retirement provisions known as “Secure 2.0.”

One of the provisions for 2023 is the change in the required minimum distributions, or RMDs, that must be taken annually from certain retirement accounts.

Currently, RMDs begin when you turn 72, with a deadline of April 1 of the year following your first drawing, and on. 31 due dates for future years. However, Secure 2.0 changes the starting age to 73 in 2023 and age 75 in 2033.

“Those who already take RMDs won’t be affected, even if you’re 72 now,” said Nicholas Ponyo, a staffing expert with Retirement Wealth Advisers in Berwyn, Pennsylvania.

But he said the change could provide some “great planning opportunities” if you’re younger and don’t need RMDs, such as potential Roth conversions.

It is natural to focus on portfolio losses, especially with Standard & Poor’s 500 down more than 20% on the year.

But you can still make gains after years of growth, and earnings may qualify for a 0% tax rate, depending on your earnings.

The thresholds may be higher than you expect — up to six figures for a married couple’s combined income, say financial experts.

Many investors are considering two rates of long-term capital gains, 15% and 20%, explained Dale Brown, chairman of Salem Investments in Winston-Salem, North Carolina, which ranked No. 6 on CNBC’s 2022 FA 100 list.

But there are actually four rates – 0%, 15%, 20% and 23.8%, with a 3.8% surcharge for higher earners. “I had clients with low, six-figure incomes who didn’t pay any taxes,” Brown said.

Here’s how: The rates use “taxable income,” calculated by subtracting the largest standard or itemized deductions from the adjusted gross income, which is earnings minus the so-called “above the line” deductions.

For 2022, you may qualify for a 0% long-term capital gains rate with taxable income of $41,675 or less for single applicants and $83,350 or less for married couples applying together.

While a couple making $100,000 might assume they don’t qualify for the 0% long-term capital gains tranche, Brown said investors need to tackle the numbers.

For example, let’s say a retired couple has $30,000 in tax-deductible interest, $25,000 in ordinary income and $75,000 in capital gains and long-term earnings. Their gross income is $100,000 because it does not include tax-deductible interest.

After subtracting the standard deduction of $27,000, they have $73,000 of taxable income left, and fall within the 0% long-term capital gains tax bracket for 2022.

Brown said that even if a couple’s taxable income was above $83,350, a portion of their earnings could still fall into the 0% bracket of long-term capital gains.

Suppose the same retired couple had $30,000 in tax-free interest, $25,000 in ordinary income and $100,000 in long-term capital gains and dividends.

In this case, their total income is $125,000 and taxable income is $98,000. Since the standard deduction of $27,000 exceeds $25,000 of ordinary income, the $98,000 is all capital gains and long-term earnings.

This means that $83,350 is taxed at 0% and the spouses owe 15% long-term capital gains taxes on the remaining $14,650.

“That’s the 0% segment benefit,” Brown said.

When the stock market goes down, many investors focus on harvesting the tax loss, or using the losses to offset other profits.

You can also explore harvest gains if your assets are still higher than in previous years, said Cory Robinson, vice president and portfolio manager at Tom Johnson Investment Management in Oklahoma City, which ranked first. 30 on the FA 100 list.

“The interest is zero tax, whether it’s dividends or capital gains,” he said, as long as you’re below the taxable income threshold.

For investors in the 0% category, it is possible that there is an opportunity to lower taxes on future earnings.

Because taxes are based on the difference between the value at sale and the original purchase price, you can sell the profitable asset and buy back to increase the purchase price.

“That’s the beauty of cashing in: you can reinvest right away,” Robinson said, explaining how investors don’t need to worry about the so-called wash sell rule.

Although the wash sell rule prevents realized losses if you buy a “substantially identical” asset within the 30-day period before or after the sale, the same rule does not apply to gains, he said.

Whether you’re selling assets for income or taking advantage of a long-term tax strategy, Brown said, there may be opportunities to reap gains during low-income years.

For example, there may be an income gap if you retire but don’t immediately get Social Security, a pension, or withdrawals from pre-tax retirement accounts.

You may also have lower taxable income in a year with a temporary job loss, Brown said.

“The most important thing is timing,” Robinson added, explaining how important it is to estimate taxable income before trying to reap the gains.

Huntington Beach, California. Professional athletes face a challenging task early in their careers – learning how to handle large sums of money as they propel them toward stardom, often at a young age.

All-star basketball player and Major League baseball player, Dexter Fowler, Isaiah Thomas sat down with CNBC at the Future Proof Wealth Festival to discuss the financial lessons they’ve learned during their careers. Financial advisor Joe McClain, who works with Fowler and Thomas, also shared tips from working with wealthy athletes such as NBA star Clay Thompson and professional golfer Sergio Garcia.

Here are six of their best financial tips.

“Once I had the money, once I started my career, learning how to save was the most important thing I learned,” said Thomas, 33, a base keeper who is now a free agent. He has played for many teams over a decade and was a two-time NBA All-Star during his stint with the Boston Celtics from 2014 to 2017.

When his first paycheck rolled in, Thomas and MacLean set the parameters: 70% of every net dollar was allocated to a savings pool. This made savings automatic, said MacLean, founder and CEO of California-based Intersect Capital, which ranked 94th.^{The tenth} On CNBC’s Top 100 Financial Advisors List of 2021.

“Saving was more than what we spent every month,” Thomas said.

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McClain said the percentage that is provided can change, depending on the athlete and the stage of their career. It could be 40% in the player’s first decade, 60% to 70% in the second decade, and 80% in the third decade and beyond because “cash flow is very high” at that point, McClain said.

He added that this approach helps players choose the lifestyle they want to live “before your lifestyle chooses it.”

“You have to make the decision from the beginning” to build a surprise, he said.

“Always prepare for rainy days,” said Fowler, 36, a defensive player who won a world championship with the Chicago Cubs in 2016. It is currently a free agent.

“You never know what will happen,” he added. “You are [could] Being in a car accident you can stop working.

“Hope for the best, but prepare for the worst.”

Fowler describes himself as a life saver. As a young boy, he would keep physical Christmas checks from family members, because he didn’t know they needed to cash them.

“People live in the moment,” he added. “Don’t get me wrong, take your deputy.

“I love watches; these are my vices, but I don’t have 10 vices,” said Fowler. “That’s how you go crazy; you’re going to spend money but you’re spending it the right way.”

For individuals who earn large amounts of money, there is no immediate consequence to poor financial decisions, MacLean said.

“You might have a big bill for Amex, [you’re] “Hit, make some big purchases,” he said, “but because there’s still money coming in, the card is still working. You don’t feel like it.”

As MacLean explains, “The laws of finance do not follow the laws of physics.”

“If you are walking through tree trunks, you have to watch where you are going, and if you take your eyes off it, you will fall into the water,” he said. “If you close your eyes to your money when you make a lot of money, nothing will happen.”

Until the money dries up, that is.

“A lot of athletes think it’s never going to stop, or it’s never going to end,” Fowler said Tuesday during a question-and-answer session at Future Proof. “But it is.”

“Live like you’re already retired,” Fowler told CNBC.

The thinking is: If you spend too much during your working years, it’s hard to switch to a more frugal lifestyle later — which may be necessary for someone who doesn’t have a nest egg to support extravagant spending.

“You don’t have to change your lifestyle when you retire,” Fowler said with this mindset.

“It’s hard to do,” he added. “You’re in the locker rooms and clubhouses… [and] You see a man riding in a [Lamborghini].

“You’re like, I’m making seven times more than you make, and I don’t feel like I can stand that.”

MacLean said Thomas and Fowler, both in their 30s, have a long investment time horizon — and that’s a solid thing.

Time uses the power of compound interest, which is calculated on principal plus accrued interest – which means your investment gains accrue more quickly.

“This is what happens in sports: you save a lot of money but you have a great lifestyle and you don’t let that escalate,” McClain said. “Letting this money accumulate for another 10 years, double it again, [then another] time, when it becomes a multigenerational fortune.”

By comparison, it “would not allow a compounding effect” by continuing to spend heavily and shrinking the portfolio over the next decade, he said.

Fowler puts this idea into practice.

“We want to save the next ten years,” he said of his family. “We cut everything off.”

Fowler earned a signing bonus of about $1 million in 2004, when he was drafted by the Colorado Rockies. He said he was just out of high school, he was 18 and got his first contract.

“You’re sitting there and you’re like, I have a million dollars?” He said. “A million dollars and then a ton of money.”

“But a million dollars wouldn’t go a long way,” he added.

For everyday retirees, the same principle may apply – a million dollar nest egg may seem like a lot of money to live on but may not reach as far as people expect during a retirement that can last three decades or more.

Upon receiving the signing bonus, Fowler immediately wanted to buy a car. Fowler said all of the newly drafted players were buying Escalades and Range Rovers – so he bought a Range Rover, against the advice of his father, who recommended renting rather than buying a car. (Fowler now leases his cars exclusively; he has two Teslas cars. Cars are “expendable assets,” he explained.)

Fowler added that the tax was also a large part of his signing bonus. Then he realized, playing the minor league ball after enlisting, that it was hard to live on that salary, which was bringing him roughly $300-$400 every two weeks — making the bonus necessary to help make ends meet.

“I saw a bunch of guys getting off-season jobs,” he said. “I was lucky enough that I didn’t have to do that.”

With the cost of living rising, a federal lawmaker wants to remove any barriers to buying Series I bonds, an inflation-protected, virtually risk-free asset that currently pays 9.62% annual interest through October.

re \ come back. Abigail Spanberger, of Virginia, on Thursday sent a letter to Treasury Secretary Janet Yellen, expressing concerns about bond-buying difficulties amid rising inflation and stock market volatility.

“During this inflation crisis, the Treasury Department needs to do more to ensure that red tape and outdated systems do not prevent Americans, especially the elderly, from accessing savings options that can protect their money from inflation and market volatility,” Spanberger wrote in a letter.

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I bonds have seen unprecedented demand since the annual rate climbed to 7.12% in November, with 1.85 million new savings bond accounts opened through June 24, according to a Treasury official.

Investors can buy bonds after opening an account through TreasuryDirect. While many sign up without problems, some accounts require additional identity verification, which includes bringing Form 5444 to a bank or credit union for a “signature guarantee” before mailing it back.

“While I understand the need for fraud protection, this complex process prevents Americans from opening these accounts,” Spanberger wrote, noting that some investors may concede or “miss weeks of accruing interest.”

The letter calls for more identity verification options, such as using a notary, and the ability to submit the form online. Treasury officials told CNBC in June that they are working to extend the certification to include any notary.

The letter also addresses customer experience concerns, including challenges with accessing phone support and the TreasuryDirect website.

“It is very difficult for Americans to reach customer service representatives,” Spanberger wrote, referring to regular wait times of more than two hours.

It urged the Treasury Department to increase its customer support capacity and to report on the progress of renovating the site, with requests to Congress for additional resources for both efforts, if needed.

“We are committed to ensuring TreasuryDirect users have a positive customer experience,” a Treasury spokesperson told CNBC in June, highlighting recent changes, such as transferred resources, hiring temporary staff, and location and phone support improvements.

“We are also in the process of developing a modern and updated alternative to the current TreasuryDirect system,” they added.

Months of stock market volatility, rising inflation and rising interest rates have left many investors wondering if a recession is about to happen.

The stock market fell again on Thursday, with the S&P 500 off its worst start in six months since 1970. Overall, it’s down more than 20% year-to-date. The Dow Jones Industrial Average and Nasdaq Composite have also fallen significantly since the start of 2022, dropping more than 15% and nearly 30%, respectively.

Meanwhile, consumer sentiment about the economy waned, according to a closely watched University of Michigan consumer survey, which measured a 14.4% drop in June and a record low for a report.

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About 68% of CFOs expect a recession during the first half of 2023, according to a CFO survey on CNBC. However, experts’ expectations differ about the possibility of an economic downturn.

“We all understand that markets go through cycles and that recessions are part of the cycle we may face,” said certified financial planner Elliot Herman, partner at PRW Wealth Management in Quincy, Massachusetts.

However, since no one can predict if and when a downturn will occur, Hermann pushes clients to be proactive and make sure their portfolio is ready.

Anthony Watson, a CFP and founder and president of Thrive Retirement Specialists in Dearborn, Michigan, said diversification is critical when preparing for a potential economic recession.

He said you can reduce the company’s own risk by choosing funds rather than individual stocks because you won’t likely feel a company going bankrupt within an exchange-traded fund of 4,000 other companies.

He suggests checking the mix of developing stocks, which are generally expected to provide above-average returns, and value stocks, usually trading below the value of the asset.

“Value stocks tend to outperform growth stocks that are entering a recession,” Watson explained.

He added that international exposure is also important, and many investors are lagging 100% of domestic assets for stock allotment. While the US Federal Reserve is aggressively fighting inflation, the strategies of other central banks may lead to other growth paths.

Because market interest rates and bond prices typically move in opposite directions, Fed increases have dumped bond values. The benchmark 10-year Treasury, which rises when bond prices fall, topped 3.48% on June 14, the highest yield in 11 years.

Watson said that despite the decline in prices, bonds are still an essential part of your portfolio. If stocks fall heading for a recession, interest rates may fall as well, allowing bond prices to recover, which can offset stock losses.

“Over time, this negative association tends to manifest itself,” he said. “It doesn’t have to be day in and day out.”

Advisors also consider term, which measures a bond’s sensitivity to interest rate changes based on the coupon, time to maturity, and the return paid over the term. In general, the longer a bond is, the more likely it will be affected by higher interest rates.

“High-yield bonds with shorter maturities are now attractive, and we’ve maintained our steady income in this area,” added Hermann of PRW Wealth Management.

Amid rising inflation and lower savings account returns, holding cash has become less attractive. However, retirees still need a cash store to avoid what is known as “return cascade” risk.

You should pay attention to when to sell assets and make withdrawals, as this can cause long-term damage to your portfolio. “This is how you fall prey to the negative sequence of returns, which will eat your retirement alive,” said Watson of Thrive Retirement Specialists.

However, retirees may avoid tapping into their nest during periods of heavy losses with a large cash reserve and access to a line of credit for home purchases, he said.

Of course, the exact amount required may depend on your monthly expenses and other sources of income, such as Social Security or a pension.

From 1945 to 2009, the average recession lasted 11 months, according to the National Bureau of Economic Research, the official documenter of economic cycles. But there is no guarantee that the downturn in the future will not be prolonged.

Cash reserves are also important for investors in the “accumulation phase,” with a longer timeline before retirement, said Catherine Valleja, a CFP and wealth advisor at Green Bee Advisory in Winchester, Massachusetts.

“People really need to make sure they have enough emergency savings,” she said, suggesting 12 to 24 months of spending in savings to prepare for potential layoffs.

“I want to be more conservative than many,” she said, referring to the more prevalent suggestion of three to six months of expenses. “I don’t think that’s enough.”

With the extra savings, there’s more time to strategize for your next career move after a job loss, rather than feeling pressured to accept your first job offer to cover the bills.

“If you have enough liquid emergency savings, you give yourself more options,” she said.

Older Americans may have a number of different goals with their retirement savings. But usually their main goal is the same: to make it last.

Unfortunately, many baby-boomers and members of later generations who don’t have access to a traditional pension can live off the money in their 401(k) accounts, according to a recent study from the Retirement Research Center at Boston College.

Economists have compared decline speeds between those with traditional pensions and those with only 401(k) savings accounts. Although most research on how long retiree money lasts is based on the former, the majority of people now fall into the latter.

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“What most people have had the opportunity to notice are people with traditional pensions,” said Gal Wechstein, chief economic researcher at the Center for Retirement Research at Boston College, noting that 401(k) workplace retirement plans are becoming more widespread. in the eighties.

Those analyzes based on retirees with pensions found that they often did not spend their savings at all. In fact, many have seen their nest eggs continue to grow after they stop working.

“This optimistic notion from the past may give a false sense of security,” Whitstein said.

Access to traditional pensions has been scarce decades now. Workers have increasingly been mandated to save for their later years themselves in investment accounts, of which the poster child is a 401(k) plan offered through employers.

The researchers found that these plans wind up much faster than expected.

One example in the analysis looked at families entering retirement with $200,000 in savings. By age 70, retirees with a 401(k) plan but no pension were $28,000 less than retirees with a pension, according to their analysis — a difference equal to one-eighth of that starting balance. At age 75, 401(k) savers had $86,000 less than those with a retirement pension.

“People spend a big share of what they have when they have a 401(k),” Whitstein said.

A rapid withdrawal of savings into 401(k) accounts means that many dependent retirees may be at risk of fully depleting their money by age 85, although about half will survive after that time, the study said.

Wettstein said that although they will still receive their monthly Social Security checks, “this is not usually a sufficient substitute for their career-wide earnings.”

Wettstein said that because of the relatively new nature of 401(k) plans, more remains to be learned about why retirees are spending on accounts so quickly.

However, some reasons can be assumed. Those with a traditional pension, which guarantees a fixed payment each month until death, are likely to need to reduce their savings because of this reliable income. Perhaps they were able to keep their savings for inheritance purposes or in case of unexpected costs later in life.

On the other hand, many retirees who do not have a pension depend on their nest egg to cover a significant portion of their monthly expenses. Without a pension, people are also responsible for making sure they save enough to get them done through their post-working years, a task that requires decades of adequate earnings and discipline.

Additionally, the challenge with 401(k) savings plans is that they charge retirees a fee for figuring out how much to withdraw each month. It can be difficult to get into this account properly, and although those with big savings aim to live off their financial earnings, the market is unpredictable and has periods – like now – where it takes more than it gives.

“One of the advantages of the pension system was that it reassured you of how much you could spend, practically, because it would never run out, and from an advice perspective as well, because it says, ‘Here, you can spend that much, because next month, you’re going to get the same amount again. “A 401(k) does not give you that.”

Wettstein emphasized that it’s still too early to get a complete picture of how well 401(k) accounts keep people in retirement.

“But we did it as a first look at whether we should be concerned,” he said. “And our conclusion is, yes, we should.”

This article was written with support from the Journalism Fellowship of the American Aging Association, the Journalists’ Network for Generations and the Silver Century Foundation..

Health savings accounts can be a powerful way to build wealth and prepare for medical costs in old age — if used the right way.

HSAs carry triple tax advantages. Contributions and investment growth are tax-free, as are withdrawals if used for eligible health expenses.

Even if the withdrawal isn’t health-related, the account owner will only owe income tax on that money—in effect, the HSA is transferred to an account with tax benefits similar to a traditional 401(k) plan or individual retirement account.

“I almost don’t think of them as health savings accounts, but retirement accounts with a deep tax benefit,” said Andy Baxley, a certified financial planner at the Chicago-based Planning Center.

The best way for savers to use HSA is by contributing the annual maximum, investing the money and paying current healthcare costs out of their pocket through other savings, according to financial advisors.

This allows time for tax free HSA money. HSA investments are like those in any other retirement account, with diversified stocks and bond mutual funds, for example.

However, most people do not invest their HSA savings. Instead, they use HSAs like a bank account and withdraw cash as needed to pay for current medical costs.

Only 9% of account holders were investing a portion of their HSA balance in 2020, according to the Employee Benefits Research Institute. The rest – 91% – kept their entire balance in cash.

But that doesn’t really provide any positive growth — a drawback when health costs in retirement are projected to be around $300,000 for the average couple who retired in 2021, according to Fidelity Investments’ estimate.

The IRS sets a variety of eligible HSA health costs, such as those associated with dental care, vision, hearing, long-term care insurance premiums (subject to limits) and medications, for example.

Savers who pay out of pocket for health costs now can take advantage of another HSA advantage in future years: They can withdraw account funds to pay themselves (tax-free) for those past expenses.

As with withdrawals from a Roth 401(k) or IRA, these HSA payments can provide retirement income and help someone control their tax bill.

Let’s say you’re about to jump into a higher income tax bracket in retirement but have spent $10,000 out of your pocket over the years on medical bills. You can withdraw $10,000 from HSA for past costs without increasing your taxable income.

(One important point: expenses incurred prior to creating your HSA account do not count as eligible medical costs.)

“I suspect [people] Often you don’t realize how extensive the list of things you can make up for,” said Buxley, citing fertility treatment as an example.

He recommends creating a spreadsheet of unpaid medical expenses (to see how much you can pay yourself later) and keeping receipts for proof.

Of course, many people do not have the financial means to use HSA in the ideal way.

Individuals live longer and have had to take more individual responsibility for their retirement savings, as companies have shifted pensions to 401(k) plans, for example.

Limited cash flow could mean competing financial priorities: emergency funds, retirement plans, and health savings, for example. (Individuals and families can contribute up to $3,650 and $7,300 respectively to an HSA account this year.) Out-of-pocket payments for current costs may not be possible either, depending on the individual’s financial situation.

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Furthermore, only those with health plans with high deductibles can save on an HSA. In 2021, 28% of workers covered by employer-sponsored health insurance were enrolled in a high-deductible health plan with a savings option like an HSA, according to the Kaiser Family Foundation. (Enrollment is slightly higher for larger companies with more than 200 workers.)

Financial advisors said, aside from the caveats, those with access should try to use it as optimally as possible.

“An HSA is almost a no-brainer for anyone with access to one,” says Carolyn McClanahan, MD, CFP and founder and chief financial planning officer at Life Planning Partners in Jacksonville, Florida.

A plan with a higher deductible – and therefore, an HSA – may not be the best option for everyone. For example, a person with a chronic illness that results in frequent visits to the doctor may get a greater financial benefit from a plan with less out-of-pocket annual costs.

Like any other investment account, McClanahan said, it is essential to understand your financial and psychological ability to take risks by investing your HSA funds.

This means being able to withstand the ups and downs of the stock market, and aligning your strategy with the investment time horizon.

McClanahan said a young saver with enough money to pay for current health care could take the risk, for example — perhaps in a low-cost, widely diversified equity fund.

However, savers who don’t have the means to cover the maximum annual deduction or out of pocket with other savings should hold at least that amount in cash or something conservative like a money market fund before investing the rest, McClanahan said. (Some HSA providers require account holders to hold a certain amount in cash before investing.)

This is especially true of savers who are not healthy and need frequent health care, she added.

Likewise, someone closer to retirement age is likely to reduce their stock allocation to avoid putting money at risk near the age at which they will start bugging their accounts.