The Investment Scientist

Archive for December 2022

I am talking about an HSA – the Health Saving Account. Why is it the best? Because it is the only saving vehicle that gives you triple tax benefits. The money goes into the account pre-tax, the money inside can grow tax-free, and all health-related qualified withdrawals are tax-exempt. 

However, not everybody is qualified to open such an account. Only folks who have an HDHP – High Deductible Health Plan can contribute to such an account, and the contribution limits are relatively low. For 2022, the limits are $3650 for an individual or $7300 for a family; for 2023, the limits are $3850 and $7750 respectively. 

Who should have an HDHP in order to have an HSA? Folks who are young or very healthy. In my case, I am not that young, but I am super healthy and I plan to live a long life, so an HDHP makes sense for me. Not only can I pay a lower health insurance premium, but I can also open an HSA and begin to save for my future healthcare needs. 

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I have a 14-year-old son who has done some odd jobs for my business this year. What he did not know until now is that I actually paid him about $7000 in 2022 and put $6000 of that into a kiddy Roth IRA that I opened for him. 

This is how I told him.  I pulled him aside and announced: “Son, I just made you a millionaire!” That got his attention away from playing video games!  He asked: “How so?”

“Daddy just put $6000 into your Roth IRA. In a few days, when it’s 2023, daddy will put another $6500 into your Roth IRA. This type of account lets your money grow tax-free, and when you retire, lets you withdraw the money tax-free. Let’s say you have a very productive life and retire at 74. If you don’t touch the money until then, how much money will you have assuming the money grows at 8%?”

Being the smart boy that he is, my son quickly figured out he should use the compounding formula: 8% per year, compounding over (74-14) = 60 years will make the money 1.08^60 = 101 times over. Since he gets $6000+$6500 = $13,500 from daddy (actually by his own work.) $13,500*101 = $1,363,500! He broke out in a smile! 

I smiled as well since I taught him a lesson about investing: start early, stay disciplined and let compounding work its magic. 

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It has been a few months since I decided to write a newsletter about Health. As I get older, it is becoming clearer and clearer to me that health is the ultimate wealth and one can not talk about wealth in isolation of health.

However, I don’t know where to start. My own awareness of the importance of health has been a slow and gradual process. After I first became cognizant of its importance, there was a long process of knowledge acquisition as well as plenty of trial and error on myself.  Following that, there was yet another long process of habit formation. Truth be told, there was no “aha” moment and there was definitely no instant success. Instead, it has been a constant learning and many micro-adjustments over many years

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A new client of mine asked me to evaluate this situation. Last year, a so-called “financial advisor” who was actually an insurance agent got them to transfer all of their money from TSP (a fantastic retirement plan for federal employees) into an equity index annuity with an insurance company. 

The selling points often presented by these “advisors”  for products like these are that an index annuity can save them taxes and that the money is protected from market drops and will never go below its original value. The first selling point is bogus in this case! Since the money was in TSP where money grows tax-free anyway. The second selling point appears on the surface to be valid, but it is also bogus as I will show you in a moment. 

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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