Are We in a Recession? What the Data Says—and How to Protect Your Finances

Summary

NerdWallet's Smart Money Podcast

Episode: Are We in a Recession? What the Data Says—and How to Protect Your Finances
Release Date: May 8, 2025
Hosts: Sean Pyles, CFP®, Elizabeth Ayoola
Guest Expert: Elizabeth Renter, Economist; Kate Ashford, Medicare and Health Insurance Authority

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Introduction

In this episode of NerdWallet's Smart Money Podcast, hosts Sean Pyles and Elizabeth Ayoola delve into the pressing question on many listeners' minds: Are we in a recession? Through an insightful discussion backed by economic data and expert analysis, the episode explores the current state of the economy, the indicators pointing towards potential recession, and strategies to protect personal finances amidst economic uncertainty.

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Economic Overview and GDP Analysis

The episode opens with a discussion on the latest Gross Domestic Product (GDP) figures, revealing a contraction of -0.3% in the first quarter of 2025. Elizabeth Renter, NerdWallet's resident economist, provides context to this decline.

• Elizabeth Renter [03:03]: "Most economic data is released on at least a one-month lag... it's a matter of making sense of all of these different snapshots of various parts of the economy at various times."

Renter explains that the negative GDP figure primarily stems from a surge in imports due to tariff-induced behavior, rather than a broad-based decline in economic activity.

• Sean Pyles [01:10]: "Say you get into a car accident... How are you paying for them?"

Quote Highlight:
“The primary cause of this negative number is the effect of a rush to import goods ahead of tariffs...” ([03:03])

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Labor Market Dynamics

The discussion shifts to the labor market, where Renter highlights a balance between labor supply and demand compared to previous years.

• Elizabeth Renter [06:14]: "The labor market is healthy, but there are increasing risks to that health."

She notes that while the labor market has normalized from the previously employer-favored conditions, there are signs of potential instability due to economic pressures.

• Quote Highlight:
  “Normalization has looked like lower hiring rates, fewer job openings, and slightly higher, but still okay unemployment rate.” ([06:14])

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Inflation Trends

Inflation remains a critical topic, with the Core Personal Consumption Expenditures (PCE) index increasing by 2.3% over the past year, a deceleration from previous months.

• Elizabeth Renter [07:37]: "Inflation continues to slow... it's really within spitting distance of the Fed's 2%."

Renter emphasizes that while inflation is decreasing, factors like recent tariff implementations could reignite price growth in upcoming months.

• Quote Highlight:
  “Overall inflation is at a much better place now than it was a few years ago...” ([07:37])

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Consumer Sentiment and Confidence

Consumer sentiment is a leading indicator of economic health. Recent data shows a decline in consumer confidence, with the Conference Board's Expectations Index falling below the critical threshold of 80 for three consecutive months.

• Elizabeth Renter [09:23]: "Consumer sentiment data... can serve as leading indicators for the direction of the actual economy."

This decline, coupled with 87% of Americans planning to change their financial strategies in response to tariffs, signals potential shifts in spending and saving behaviors that could affect the broader economy.

• Quote Highlight:
  “87% of Americans say they're planning to change their financial strategy over the next 12 months in response to tariffs.” ([10:16])

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Impact of Tariffs and Trade War

A significant focus is on President Trump's tariffs and the escalating trade war, which are beginning to manifest in both hard and soft economic data.

• Elizabeth Renter [10:28]: "We're seeing it in the hard data, too, in imports and purchases ahead of tariffs."

The tariffs are expected to lead to higher prices, constrained supply chains, and subsequent effects on the labor market and household debt levels.

• Quote Highlight:
  “Higher prices and constrained supply chains... potentially even further downstream in things like debt levels and delinquencies.” ([10:28])

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Recession Status and Future Outlook

Addressing the central question, Elizabeth Renter asserts that the economy is not currently in a recession, but warns of increasing risks.

• Elizabeth Renter [11:23]: "I can say pretty confidently that we are not in a recession right now."

However, she cautions that prolonged trade tensions and delayed economic impacts could heighten the risk of entering a recession.

• Quote Highlight:
  “There is a definite risk of one on the horizon, and that risk increases the longer this trade war continues.” ([11:23])

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Key Indicators to Watch

Renter identifies consumer debt as a crucial indicator for future economic health, noting that elevated debt levels could strain households if a recession materializes.

• Elizabeth Renter [12:20]: "Consumer debt... higher debt obligations mean less wiggle room in the budget to absorb financial and economic stressors."

She also underscores the importance of monitoring debt delinquencies as a possible sign of broader financial distress among households.

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Strategies to Navigate Economic Uncertainty

In response to economic uncertainty, Renter offers practical advice:

• Elizabeth Renter [13:26]: "People should really focus on what's within their control, namely their saving and their spending."

She emphasizes the importance of maintaining an emergency fund to safeguard against unexpected financial shocks.

• Quote Highlight:
  “Having easily accessible emergency savings can be useful whether you have an unexpected expense like a medical bill or something as serious as a job loss.” ([13:26])

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Listener Q&A: Managing Health Savings Accounts (HSA)

The latter part of the episode addresses a listener's query about managing and rolling over their Health Savings Account (HSA).

Understanding HSAs

• Kate Ashford [17:37]: "A health savings account in HSA is a savings account that lets you put money away pre-tax for medical expenses."

HSAs offer triple tax advantages: pre-tax contributions, tax-free investment growth, and tax-free withdrawals for qualified medical expenses.

Rollover Process

Vicki, the listener, is concerned about rolling over her HSA from Health Equity to Fidelity after her employer ceased matching contributions.

• Kate Ashford [19:28]: "There are three ways that this can happen: trustee to trustee transfer, basic account rollover, and in-kind transfer."

Renter advises that the trustee to trustee transfer is the most straightforward and minimizes the risk of tax penalties.

Tax Implications and Deadlines

• Kate Ashford [20:49]: "You're only going to owe capital gains taxes if you roll over your HSA."

Vicki must ensure the rollover is completed within 60 days to avoid taxes and potential penalties.

• Quote Highlight:
  “If you don't get the money deposited within 60 days, the IRS basically looks at that as you taking a taxable withdrawal.” ([21:35])

Avoiding Penalties

To minimize risks, Ashford recommends opting for a direct trustee to trustee transfer whenever possible.

• Kate Ashford [22:51]: "If you can do a trustee to trustee transfer directly from one company to the other company, the risk of penalties is low."

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Conclusion and Final Thoughts

The episode wraps up with a reminder for listeners to take proactive steps in managing their finances amidst economic uncertainty. Emphasis is placed on saving, spending wisely, and staying informed through reliable financial advice.

• Sean Pyles [24:40]: "Remember, listener, that we are here to answer your money questions. So turn to the Nerds and call or text us your questions..."

The hosts encourage ongoing engagement and reassure listeners of NerdWallet's commitment to providing clear, actionable financial guidance.

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Notable Quotes with Timestamps

• “Most economic data is released on at least a one-month lag...” ([03:03])
• “Normalization has looked like lower hiring rates, fewer job openings, and slightly higher, but still okay unemployment rate.” ([06:14])
• “Overall inflation is at a much better place now than it was a few years ago...” ([07:37])
• “87% of Americans say they're planning to change their financial strategy over the next 12 months in response to tariffs.” ([10:16])
• “There is a definite risk of one on the horizon, and that risk increases the longer this trade war continues.” ([11:23])
• “Having easily accessible emergency savings can be useful whether you have an unexpected expense like a medical bill or something as serious as a job loss.” ([13:26])
• “If you don't get the money deposited within 60 days, the IRS basically looks at that as you taking a taxable withdrawal.” ([21:35])

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Key Takeaways

1. Economic Status: The economy is currently not in a recession, but there are warning signs and risks due to factors like tariffs and consumer debt.
2. GDP Insights: The slight GDP contraction is influenced more by import behaviors related to tariffs than by a widespread economic downturn.
3. Labor Market: While the labor market is stable, it faces potential threats from ongoing economic pressures.
4. Inflation: Inflation is decreasing but remains susceptible to upward pressure from recent tariff implementations.
5. Consumer Sentiment: Declining consumer confidence indicates potential changes in spending and saving that could impact economic health.
6. Financial Strategies: Maintaining an emergency fund and prudent financial management are crucial in uncertain times.
7. HSA Management: Proper handling of Health Savings Accounts, especially during rollovers, is essential to avoid tax penalties.

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For more detailed insights and to stay updated on your financial well-being, follow NerdWallet's Smart Money Podcast on your preferred podcast platform.

Transcript

[Elizabeth Ayola]

Today's episode is sponsored by LinkedIn. As a small business owner, you don't exactly get to clock out at 5pm in fact, you probably can't remember the last time you used the phrase out of office. And your business is on your mind 24 7. So when you're hiring, you need a partner that's as relentless as you are. LinkedIn jobs can be that partner. LinkedIn makes it easy to post your job for free, share it with your network, and manage qualified candidates all in one place. Here's how it works. First, post your job. You can post your job for free, or you can promote it for extra visibility. Then get qualified candidates. Because at the end of the day, it's not just about filling a role. It's about finding the right person. Finally, spread the word. Share your job with your network and you can even add a hiring frame to your profile picture to attract twice as many qualified candidates. It's like putting a help wanted sign on your forehead, but, you know, way more professional. Post your job for [e-mail] smartmoney that's LinkedIn.com smartmoney to post your job for free, terms and conditions apply.

[Sean Pyles]

Say you get into a car accident, get pretty banged up, and are left with some steep hospital bills. How are you paying for them?

[Elizabeth Ayola]

Well, I'm hoping my insurance covers most of it since I give them my hard earned money every month. But whatever is left, I'm paying for it with my emergency savings investment account and a hope and a prayer.

[Sean Pyles]

Well, this episode we're going deep into a unique kind of account that can help you cover medical costs and how to fund it. Welcome to NerdWallet's Smart Money podcast where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Pyles.

[Elizabeth Ayola]

And I'm Elizabeth Ayola.

[Sean Pyles]

This episode, we answer a listener's questions about how to manage their health savings account. But first, our weekly Money news roundup where we break down the latest in the world of finance to help you be smarter with your money.

[Elizabeth Ayola]

Today, we're digging into what's going on with the economy at large right now. The latest GDP numbers are showing that the economy actually shrunk in the first quarter of 2025. And we've been hearing from listeners with questions about whether we're on the cusp of a recession or if we're already in one.

[Sean Pyles]

Our news colleague Ana Helhoski is here with more details. Hey, Ana.

[Ana Helhoski]

Hey, Sean. Hey, Elizabeth. There is a lot of Uncertainty when it comes to how the economy is actually doing. There's data, including recent stats on growth, unemployment and inflation. And then there's how people feel about the economy and how it's affecting their actions. Since the state of economy is looking a little blurry right now, I've asked Neurwald's resident economist, Elizabeth Renter to help create a clearer picture. Elizabeth, welcome back to Smart Money.

[Elizabeth Renter]

Hey, thanks for having me.

[Ana Helhoski]

Ana, I'm hoping you can first talk a little about why there's some uncertainty about how the economy is doing at this particular moment. I am referring mainly to the lag in data. What is it and how does it shape economists perception?

[Elizabeth Renter]

Most economic data is released on at least a one month lag. So last week, for instance, we learned about April's unemployment rate and the size of the labor force that month. But we also learned about hiring and layoffs in March and economic production or the GDP for the entire first quarter. So when we talk about the health of the overall economy, it's a matter of making sense of all of these different snapshots of various parts of the economy at various times. But then you're also putting them together with what we know about how the economy has behaved in history and the impact of things that are happening right now. So things that we don't even have data for yet, or in some cases historic precedents like the current tariffs. So it can make for a very complex recipe.

[Ana Helhoski]

All right, so we've had a few pieces of data trickle out in the last few weeks. If you put them together, what story are they telling?

[Elizabeth Renter]

Well, the economy is holding up, but consumers and businesses are being cautious. So a quick rundown is that the unemployment rate is at a moderate level, wages are growing in a sustainable way, and prices aren't increasing dramatically. However, hiring continues to slow and we know people are trying to get ahead of the impact of tariffs. Over the past few months, for example, imports surged and so did vehicle sales. So we're beginning to see in the hard data, but also in sentiment data or consumer surveys that people are preparing for potentially tougher economic times in the form of higher prices.

[Ana Helhoski]

For instance, I want to talk more about economic growth now. About a month ago, we started to hear murmurings that GDP for the first quarter could be negative. Can you talk a little bit about how GDP has behaved over the last few years and what last week's data means for the economy?

[Elizabeth Renter]

So GDP is the standard way that we measure economic production or growth. It's a formula that tries to capture most everything that an economy produces. So when the change in real GDP is positive, the economy is said to be growing or expanding. And when it's negative, we call that a contraction. Generally, the long term average of real GDP is about 3%. So in 2024, for instance, it was around 2.5%. And in the whole of 2023 it was 3.2%. So there's some bounc. However, this last week we learned that real GDP for the first quarter was negative 0.3%, which is just slightly negative. But it does indicate a contraction. And at first blush, this could be alarming. But a look at what goes into the calculation provides some clarity. So the primary cause of this negative number is the effect of a rush to import goods ahead of tariffs, household and government spending, business investments and exports. All of those are added together in gdp. But imports aren't produced here, so they aren't counted in the same way. If enough goods are imported, but not counted as inventory on store shelves or consumed in the same time period, it can result in a negative number. And that's likely what happened with the first quarter number. So while the GDP reflected a contraction, it wasn't really a broad based decline in economic activity, rather the big effect of this one big number.

[Ana Helhoski]

Now, are we continuing to see softening in employment? Is the labor market cooling? Is it normalizing? What's happening there?

[Elizabeth Renter]

Well, coming into this year, I think it's safe to say the labor market was really coming into balance, if not fully balanced or normalized. And this is relative to where it was a few years ago. Back then, workers really had the upper hand as labor demand or employers seeking workers outpaced supply or workers themselves. And while this was really great for workers, it helped drive high inflation. So the Fed raising rates, among other things, has helped bring that labor supply and demand into better balance. You know, that feels less great to workers, but it's far more sustainable right now. I think the labor market is at a potential precipice though. So normalization has looked like lower hiring rates, fewer job openings, and slightly higher, but still okay unemployment rate. Unfortunately, the current pressures on the economy and the labor force could tip these things from where they are now, which is stable, into a trouble zone. So I think the labor market is healthy, but there are increasing risks to that health.

[Ana Helhoski]

We got fresh inflation data last week, and the Core PCE increased by 2.3% in the past 12 months. Now, for those who don't know, Core PCE is a measure of prices for goods and services, minus volatile food and energy. And it's the Federal Reserve's preferred indicator of inflation. Elizabeth, is inflation still coming down compared to previous months or are we in sticky territory?

[Elizabeth Renter]

Well, yes, inflation continues to slow. As of March, which was the latest data we received then headline inflation or Overall inflation was 2.3%, which is down from 2.7% in February and down from over 7% in 2022 before the Fed began raising interest rates. And I want to reiterate that this percentage we use to discuss the PCE index is a measure of price growth. So when we say it's decreasing, it means that prices are growing more slowly, not that price levels are coming down. But overall inflation is at a much better place now than it was a few years ago and it's really within spitting distance of the Fed's 2%. The big question now is whether it will hit that target. And I think not. Going back to what we were discussing earlier, this data is on a lag. So the 2.3% is the March growth rate and the biggest tariff announcements were saved for April. So if prices were increased in anticipation of tariffs or as the initial tariffs started to take place, we're likely to begin seeing that when we get April data, followed by months of potential increases as various tariffs take effect, if in fact they do.

[Ana Helhoski]

Let's shift over to consumer sentiment. Now that's a measure of how people feel about the economy or the vibes. We've seen some seriously low figures in the past couple of readings. Last week the Conference Board released its consumer confidence indexes and its expectations index fell to the lowest level in nearly 14 years. Now that index measures consumers short term outlook for income, business and labor market conditions. Whenever the expectations index falls below a threshold of 80, it signals a recession may be ahead. The index for the past three months have been well below 80. What's worrying consumers right now?

[Elizabeth Renter]

Consumer sentiment data like the index you just mentioned can serve as leading indicators for the direction of the actual economy. In other words, how people feel can signal both things they're experiencing that haven't yet made it into the hard data, but also how they might be changing their behaviors, which will ultimately impact the hard data too. So sentiment data from several sources, including the Conference Board and the University of Michigan has been declining. And it's likely a solid warning sign to pay attention to. We do our own sentiment research at NerdWallet, working closely with the Harris Poll. That's a partnership we've had for over a decade now. And recently we found 87% of Americans say They're planning to change their financial strategy over the next 12 months in response to tariffs. So when these strategies involve changes to spending, investing and saving, it can have dramatic impacts on the economy overall.

[Ana Helhoski]

Now, as you mentioned, the big economic news story over the last three months has been President Trump's tariffs and the trade war that's increasingly heating up. But are we seeing the effects of those tariffs showing up in the data yet?

[Elizabeth Renter]

Definitely, yes, in the soft data, which is what we often call sentiment data, as I was just discussing. But we're seeing it in the hard data, too, in imports and purchases ahead of tariffs. This is just the tip of the iceberg, though. We'll first see things that people are doing in anticipation of the potential economic change. Then we'll see reactions to the actual economic change. In the case of tariffs, this is higher prices and constrained supply chains. Further, we'll continue to see reverberating effects of this in the labor market as businesses deal with higher costs and lower consumer demand and potentially even further downstream in things like debt levels and delinquencies.

[Ana Helhoski]

I'm going to open the hood up here a bit on how we do things at NerdWallet. Now, I've been keeping an eye on search traffic, as in how many people are typing the same search into Google. And it looks like there's a real uptick in people asking, are we in a recession? So are we or are we headed for one?

[Elizabeth Renter]

Well, I can say pretty confidently that we are not in a recession right now. You know, something to keep in mind with all of the recession talk that is bound to increase in volume is that the official dating or declaration of a recession comes from the National Bureau of Economic Research. And generally they announce an official recession after it's already begun and sometimes not until it's over. So this space between where a recession begins and when it's officially called is when you look to the experts for their educated opinion on whether we'll look back at the current moment as being in a recession. And with all of the data and information I have available to me today, I would say no, we are not in a recession. And I am not alone in that statement. But for many of the reasons we've discussed today, there is a definite risk of one on the horizon, and that risk increases the longer this trade war continues.

[Ana Helhoski]

All right, Elizabeth, is there anything specific that you're keeping an eye on in the coming months? Anything you're watching that others might be overlooking?

[Elizabeth Renter]

Well, I really wish I had more eyes for all of the things I'M trying to keep an eye on. But really, I think we've discussed many of the primary indicators that I watch on a regular basis to get a read on the overall health of the economy. One thing that we haven't touched on that I keep my eye on is consumer debt. And this is less of a predictive recession indicator and more of a way to look at how a recession might impact households. So we know debt levels are higher now than they were just a few years ago, and higher debt obligations mean less wiggle room in the budget to absorb financial and economic stressors. So that's concerning to think about in the context of a potential recession. And when you begin to see higher rates of debt delinquencies, you know, households are really struggling. One of my many concerns right now is that should we find ourselves in a situation where a growing number of households are in financial dire straits? Are there resources to help them? And with federal grants being cut for community services like food pantries, for instance, I'm not sure the answer is yes.

[Ana Helhoski]

And finally, any advice for people on how to navigate all the uncertainty right now?

[Elizabeth Renter]

It might sound a little bit cliche, but people should really focus on what's within their control, namely their saving and their spending. I think most of us, myself included, have varying levels of anxiety about the future of the economy and our place within it. But there's really only so much we as individuals can do do in this moment. So the primary thing I would recommend is to revisit your emergency fund. And I know that's something you guys talk about a lot on the podcast. But having easily accessible emergency savings can be useful whether you have an unexpected expense like a medical bill or something as serious as a job loss. You know, ideally you have several months of living expenses saved up, but this can be a tall order, especially if you're starting with nothing. So don't be afraid to start small. Focusing on this safeguard doesn't only result in real insulation from financial shocks, but it can provide a sense of control in this time when everything feels a little chaotic.

[Ana Helhoski]

Thank you for your help as always, Elizabeth.

[Elizabeth Renter]

Absolutely. Thanks for having me back.

[Sean Pyles]

And thank you, Ana.

[Ana Helhoski]

Sure thing.

[Elizabeth Ayola]

Up next, we answer listener's question about managing their health savings account. But before we get into that, a reminder listener to send us your money. Questions do you want to know the smartest way to budget for your summer vacation? Or are you in the market for a new credit card but aren't sure how to find one that's best for you? Leave us a voicemail or text us on the Nerd hotline at 901-730-6373, that's 901-730-Nerd. Or email [e-mail] now let's get to.

[Sean Pyles]

This episode's money question that's coming up in a moment. Stay with us.

[Elizabeth Ayola]

Today's episode is sponsored by the Best One Yet, a podcast from Wondery. Did you know that Netflix borrowed a growth hack from Ludacris? Or that the White Lotus Effect has the power to boost tourism by 20%? Or how women postponing hair appointments is an economic indicator? Watch out for Recession Brunettes. Every morning on the Best One yet podcast, best friends and ex Wall street guys Nick and Jack break down the three most interesting business stories in just 20 minutes. They call it Pop Biz, where pop culture meets business news. Their show was formerly known as Robinhood Snacks Daily and it delivers takeaways and laughs in a digestible 20 minute episode. To start your day, whether you're aiming for that promotion, launching the next big thing, or just want to be the most interesting friend at brunch who spots a recession brunette, start every morning with business news from the Best One Yet, Follow the Best One yet on the Wondery app or wherever you get your podcast. Or you can listen ad free right now on Wondery Plus.

[Sean Pyles]

We are back and answering your money questions to help you make smarter financial decisions. This episode's question comes from Vicki, who left us a voicemail. Here it is.

[Vicki]

Hi Sean, My name is Vicki. I have an HSA through my employer. They were giving a 3% contribution to match. I matched and they recently stopped their contribution. So I am moving it over to Fidelity from the insurance company that holds the HSA and I have to sell the stock at Health Equity, make it all cash before they will move it to Fidelity. And Fidelity told me that it could take up to four weeks. I thought that I had 30 days to contribute that money back into our retirement account before I started to be penalized for selling it. If you could help me with anything on that, I would love it. I love your program. Thank you so much for all of the information. Have a great day. Bye.

[Elizabeth Ayola]

To help us answer this listener's money question, we have Kate Ashford, NerdWallet's Medicare and Health Insurance Authority. Welcome to Smart Money Kate.

[Kate Ashford]

Always happy to be here. Elizabeth.

[Elizabeth Ayola]

First of all, can you explain what a health savings account is for listeners who don't know much about it? I will say that I love HSAs for their triple tax benefit Absolutely.

[Kate Ashford]

A health savings account in HSA is a savings account that lets you put money away pre tax for medical expenses. To save. To an hsa, you have to have a high deductible health plan. So this isn't available to everyone. But for people with access, HSAs are super useful because as you mentioned, they have three tax advantages. You make your contributions pre tax. If you invest the money, any growth is potentially tax free. And as long as you're using that money for qualified medical expenses, the distributions you take are tax free. So it's a really good deal. And it rolls over year to year, so you don't have to use the money in the year that you save it.

[Sean Pyles]

I have an hsa and I'm effectively using it like a retirement account for medical expenses. That's how I'm planning to use it long term. I try to use it day to day if I can avoid it. Well, Vicki said that their employer stopped their matching contributions to their hsa, so they're moving over from the insurance company holding the HSA account to Fidelity. Sounds like Vicki wants to do an HSA rollover. Can you explain when that might be a good idea or necessary to do?

[Kate Ashford]

Sure. The nice thing about an HSA is that even when you leave your job, you take your HSA with you. So it can be a good idea to move your HSA money if you're changing jobs, either because you're consolidating it with your hsa, your new position, or you're rolling it into account with lower fees. Consolidating with another HSA makes it easier to keep track of your balance, and it can help minimize fees since you're only being charged for one hsa, not two accounts, which might each have their own administrative charges. And since HSAs usually require that you have a certain balance in order to invest the money, combining two HSAs can make it easier to reach that balance. And you may just want to roll over to a company that has better investment options. So those are all options for you.

[Sean Pyles]

And can you talk us through how the rollover process works? What are the options there?

[Kate Ashford]

So you're basically just moving funds from one HSA to another, presumably with another HSA provider. And there are three ways that this can happen. There is a trustee to trustee transfer, which is when your current HSA provider transfers the money to your new HSA provider. There's a basic account rollover where your current HSA provider sends you the check, and then you deposit that money into a new account. And then there is an in kind transfer, which works like the company to company transfer, except everything can be moved over in its current form. So cash is sent as cash and investments are transferred as investments.

[Elizabeth Ayola]

Vicki mentioned selling stock before doing the rollover. Now, Kate, why might they have to do that?

[Kate Ashford]

Of the three ways that I just mentioned to rollover an hsa, the first two are cash only. So if you do a trustee to trustee transfer or the kind of transfer where your money gets sent to you and you deposit it, those have to happen in cash. So you would have to liquidate investments before transferring. And so it sounds like that's what Vicki's doing here. There's a potential to do that. Third in kind transfer, where you can transfer investments directly. But not all HSA companies offer this, so it's not as common to do it that way. If you do have investments, you can ask your provider whether this is an option.

[Elizabeth Ayola]

What are the tax implications of doing this? I know depending on where they live, they might owe state taxes on capital gains.

[Kate Ashford]

You are correct. Selling investments can certainly have tax implications depending on where you live, because some states tax your capital gains. So this applies if there's been any growth on any of the contributions to your account. Capital gains treatment is state specific, so Vickie will need to check on the laws in their state to see how that would be handled. And to clarify, you're only going to owe capital gains taxes if you roll over your hsa. If you leave the account alone, those gains are tax free.

[Sean Pyles]

What opportunities, if any, would Vicki have to reduce tax liabilities on this?

[Kate Ashford]

Well, Sean, the good news is that HSA rollovers are tax free unless you're dealing with capital gains taxes, and that's going to depend on your state. So if you have investments and there's the option to do an in kind transfer, that would be the best way to avoid taxes on the rollover.

[Sean Pyles]

So the last part of Vicki's question relates to the time it will take to do a rollover and potential penalties if Vicki doesn't roll over the funds to a new provider fast enough. Can you talk us through the rules around HSA rollovers and the timelines involved? How long do people have to deposit funds with a new provider?

[Kate Ashford]

Well, Vicky is right to be keeping an eye on the timing, but the timing is only a worry if they're managing a transfer themselves. So if the HSA company is sending them a check and they have to deposit it with a new provider, they've got 60 days to make that happen. But if the HSA company is just moving that money directly to the new HSA company, they don't have to worry about a deadline.

[Sean Pyles]

And it is really important if Vicky is doing this rollover on their own, to not miss that 60 day deadline because that can leave them on the hook for expensive penalties. Kate, can you give us a quick rundown of what Vicki might face if they do miss that deadline?

[Kate Ashford]

If you are managing a transfer and you don't get the money deposited within 60 days, the IRS basically looks at that as you taking a taxable withdrawal. So you may owe income taxes plus there will be a 20% penalty. So we do not recommend missing that deadline.

[Elizabeth Ayola]

What are some potholes that people can avoid when doing an HSA rollover? What are some ways to minimize the potential of penalties?

[Kate Ashford]

In general, if you can do a trustee to trustee transfer directly from one company to the other company, the risk of penalties is low because the money never comes to you. So you don't risk missing any deadlines. So if that's an option, it is your best and easiest choice. And I also want to note that if you decide to do this on your own, you decide to roll over your HSA by having the money sent to you and then depositing with a new HSA provider, you can only do that kind of transfer once every 12 months.

[Elizabeth Ayola]

Well, Kate, is there anything else people need to know or the listeners should know that we haven't already covered?

[Kate Ashford]

It's a little hard to tell from the question, but it sounds as though the reader is rolling their HSA to another provider. Even though they're still employed with the same company, they've just stopped matching. So maybe they're not planning to contribute anything else to this hsa, in which case it wouldn't really matter. But it's worth noting that if your employer offers an HSA with your health plan, those contributions can be taken directly from your paycheck and you won't have to pay Social Security and Medicare taxes, which is not the case if you're saving to a non employer HSA with after tax money. So if they're going to continue making contributions, it may be better for them to keep their HSA where it is until they change jobs, even if their company is no longer matching. And it might be a good idea to consult a tax professional on all of this. The other thing to just repeat for the general public is that you can only contribute to an HSA if you have a high deductible health plan. So if you change jobs and you get a different type of health insurance, you can still roll over your HSA money into an account with lower fees or different investment options, but you won't be able to keep making contributions to it.

[Sean Pyles]

Well, Kate Ashford, thank you for coming on and answering our listener's question.

[Kate Ashford]

Of course. Thank you so much for having me.

[Elizabeth Ayola]

And if you're looking for more nerdy information about investing in an hsa, we'll link an article in the episode description that walks you through why and how you should invest in one of those accounts.

[Sean Pyles]

And that's all we have for this episode. Remember, listener, that we are here to answer your money questions. So turn to the Nerds and call or text us your questions at 901-730-6373. That's 901730, nerd. You can also email [e-mail] or if you're listening on Spotify, you can leave us a comment with your question or even just your thoughts on the episode. Come back next week when we'll talk with a listener trying to manage the financial fallout of losing a job. Follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes.

[Elizabeth Ayola]

And here's our brief disclaimer. We are not your financial or investment advisors. This nerdy information is provided for general educational and entertainment purposes and it may not apply to your specific circumstances.

[Sean Pyles]

This episode was produced by Hilary, Georgie and Anna Helhosky, Holly Carrie Helen with fact checking, Nick Kimi Mixer Audio and a big thank you to NerdWallet's editors for all their help. And with that said, until next time, turn to the Nerds.