We all want to protect our children from financial ruin. We would love to lay the financial foundation for them to follow throughout their lives.
However, we must understand these complex products to assist them. Nobody can substitute for us learning the financial information we need to help others.
One of the best ways to prepare your children for financial success is to leverage the power of compounding early, as time is the main component of wealth.
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After reading the “HSA Owner’s Manual,” I immediately started formulating a plan to build my son an HSA when he turned 18. However, to my dismay, HSAs don’t work if he joins the military.
What are Health Savings Accounts? HSAs are healthcare-based accounts that allow you to invest in capital markets. The magic of HSAs is that they are triple tax-advantaged.
The first tax advantage is that you can deduct them from your annual taxes, lowering your tax burden for that year.
The second tax advantage is that they grow tax-deferred. Other products that grow tax-deferred are 401ks and Roth IRAs.
Finally, the final tax advantage is that you don’t pay taxes on withdrawals if you use the proceeds for qualified medical purposes.
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The major drawback of an HSA is the process of enrolling in the program. Your employer must offer an HSA-approved high-deductible health plan. I could never enroll because I have been covered under Tricare since I was 18.
The second drawback is that HSAs have annual limits—this year, they are $8,550 for family HSAs. So these programs work best if you max out contributions early in life and let them compound.
What are Series “I” Bonds? It will be tough for any product to beat an HSA, but let’s try anyway. Series “I” Bonds are savings bonds from the US government.
Series “I” Bonds adjust their interest payments twice a year based on inflation metrics. You have a standard interest rate and an inflation-adjusted metric that combine to give you your six-month rates.
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Series “I” Bonds also have an annual limit—$10,000 annually per social security. However, parents can begin investing in Series “I” bonds as soon as their kids have a social security number.
Series “I” Bonds accumulate interest tax-free for 30 years, and you pay tax upon redemption. However, you won’t pay taxes if you use the proceeds for qualified educational purposes.
Series “I” Bonds vs. Health Savings Accounts. Now it is time to put these titans to the test. HSAs have a strong advantage because you can invest in capital markets; however, you can invest 18 years earlier with Series “I” Bonds. This should be quite interesting.
Let’s start with Josh, an 18-year-old who will invest in an HSA for 12 years. When he turns 30, he joins a corporation that doesn’t have an HSA; however, his HSA account continues to grow and compound.
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Josh will accumulate $200,000 in his HSA from age 18 to 30. Without adding more, he will end up with $5.6 million at age 65 (at 10% annual returns). These are awe-inspiring numbers.
Susan’s parents invest in Series “I” Bonds for her from age zero to 18, accumulating $220,000. She continues to add money to the Series “I” account until she reaches 30 when she has $360,000.
Susan reinvests her maturing bonds and turns 65 with $1.4 million (at 4% annual returns). These are great numbers because she held zero capital risk for those 65 years.
The magic of parents. Both cases are extreme because they require capital investments from the parents. Without the parents, I doubt these youngsters would have much cash flow to save and invest.
Thus, the idea, no matter the scenario, is for parents to learn and leverage these financial products. Obviously, HSAs are the best option for building wealth, but they are rare.
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Also, HSAs have high deductibles ($3,000) and out-of-pocket limits (a family is $16,600). Therefore, you must have money in the bank to effectively utilize HSAs. You must be a planner and saver.
If you start a family at 21 with an HSA as your health coverage, you could be on the hook for $16,600 in out-of-pocket costs for the year.
When I was 21, I didn’t have two pennies to rub together. Therefore, these exciting plans quickly fall apart without my parents’ guidance, wisdom, and cash flow.
Series “I” Bonds can provide much better relief because they are akin to certificates of deposit. Even better, you don’t pay state tax upon redemption.
Deciding what’s best for your family. Every family can start Series “I” Bonds for their kids. The smallest amount you can invest is $25, so everyone can do that.
I invested in Series “I” Bonds for my kids until I started custodial brokerage accounts. However, I am getting back on the Series “I” train this year.
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A good technique would be to invest in Series “I” Bonds for your kids until they open an HSA. You can cover any gap in their contribution limits by redeeming Series “I” Bonds.
Let’s say someone invested $10,000 annually in Series “I” Bonds from age zero to 65 at 4%. That account would be $3 million at age 65 without taking any capital risk.
The idea of maxing out an HSA for 20 to 30 years is exciting; however, how realistic is it? I have a lawyer friend who maxes out her HSA every year, but she earns $350,000 per year. Being a very high earner allows her this privilege.
Coming back to reality, Series “I” Bonds offer zero-risk returns with the chance of tax-free withdrawals.
Even if you have to enroll in a college course in your 60s, that wouldn’t be so bad. Especially, if you can save a ton of money on tax-free withdrawals.
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Conclusion. So what’s the final verdict? Series “I” Bonds should be in everyone’s playbook. I am currently investing $350 monthly in Series “I” Bonds in my personal account.
Health Savings Accounts are financially sophisticated products for thinkers, planners, and savers. You can’t randomly get HSAs to work wonders for you, they take work.
If you have a lot of money in Series “I” Bonds, say $50,000, it could be a good idea to open an HSA if you get a chance.
I would plan to have access to HSA coverage for 10 years of your life. If you get access to an HSA, max it out every year.
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Whatever money you get into a HSA will grow tax-deferred and will be waiting for you later in life. As you age, more products and services will be HSA eligible, meaning you can purchase them without paying taxes.
Every time I go to CVS, I see the “HSA eligible” label and cry a little inside. I want to purchase these things tax-free.
The final tally is that HSAs are the dream and Series “I” Bonds are the reality. Plan for Series “I” Bonds, and if given the chance, jump all over HSAs.
I missed the HSA train, but I have the information ready if my sons get the chance. Make no mistake: Leveraging HSAs effectively is a family affair. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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