HSA's as pure retirement investment vehicle

[trirod]

One of my medical insurance options at work is a high deductible plan that qualifies me for an HSA. I am thinking about taking up this option for 2008 to enable me to contribute the $2,700 per year to an HSA and not touching this for any medical expenses until after retirement (I am currently 39) - just using it as an IRA, in effect.

The dollar amounts aren't huge compared to my 401(k) deferrals, but providing I am comfortable with the medical insurance side of the equation, is there any reason not to just treat this as an additional tax efficient retirement investment (I max out my 401(k) and am ineligible for a Roth)? Also, are there any recommendations for good low cost HSA providers out there?

Thanks
Rod

[grabiner]

I have a high-deductible health plan and view it the same way. My HSA withdrawals will be tax-free whenever I use them, and I expect to have a lot of health-care costs when I am retired and can no longer contribute to the HSA, so I might as well get the benefit of tax-deferral and pay my current medical bills from my taxable funds.

If you are in the position to benefit from extra tax deferral, the HSA health plan probably makes good economic sense for you as well. You don't need to insure against a $1000 doctor bill, since you have $1000 easily available; it's not worth the cost to you of a $500 deductible. You do need to insure against a $50,000 cancer bill, and your high-deductible health plan will limit that bill to probably $5000 out of pocket, just as most other health plans will.

[jebmke]

If you are in the position to benefit from extra tax deferral,

I am not certain but I think the benefit of the HSA is more than tax deferral. If I am not mistaken, when you withdraw from the HSA to pay a medical bill you don't pay tax on this withdrawal. If that is true, it is more than just a tax deferral ... it is a tax avoidance. This could be a big deal, especially if you can do a one time rollover from IRA to HSA. You'd escape the tax entirely.

Perhaps others here know for sure.

[grabiner]

If you are in the position to benefit from extra tax deferral,

I am not certain but I think the benefit of the HSA is more than tax deferral. If I am not mistaken, when you withdraw from the HSA to pay a medical bill you don't pay tax on this withdrawal. If that is true, it is more than just a tax deferral ... it is a tax avoidance. This could be a big deal, especially if you can do a one time rollover from IRA to HSA. You'd escape the tax entirely.

Perhaps others here know for sure.

HSA withdrawals are tax-free if used for medical expenses, but once the money is there, it doesn't matter whether you paid tax on it first (as in a Roth IRA) or not (as in an HSA). Either way, it's part of your tax-sheltered asset allocation, which is why it is a good deal.

The original poster's question was whether it made sense to pay current medical expenses out of pocket and let the HSA grow as a tax-free investment account.

[LH]

Ok,

So money in an HSA if left in there, grows tax free, and then if used for medical expenses at any point, comes out tax free.

1)Could one pay ones insurance premiums with HSA money in the future, does that qualify as a medical expense?

2)Now, I think I have read about that one can withdraw it for any reason after a certain age. Would one pay tax on it then? Or is it completely tax free like a Roth ira?

I may have to reevaluate my HSA usage, as we have been simply using the HSA money up each year.....

Nice thread,

LH

[michaelc55]

LH,
1) The short answer is No. Premiums for other insurance is not considered a "qualified medical expense" and therefore you can not take a distribution for those purposes. I think there are some specific circumstances when you can use it for premiums - I believe COBRA premiums is one instance.

2) Once you hit age 65 you can use any money in the HSA for non-medical purposes. This money is considered taxable income though (but there are no other penalties.

Hope this helps.

Michael

[Angst]

I may have to reevaluate my HSA usage, as we have been simply using the HSA money up each year.....
LH

Yes, if you have the disposable income to pay your medical bills out of pocket and not out of your HSA savings, it's a no-brainer: The HSA offers the best of both the conventional IRA and the Roth IRA, simultaneously. The only problem has been the lack of good HSA administrators. (Get your HSA qualifying insurance in one place but you can use any HSA administrator.) The majority of them have a lot of fees and are set up primarily for people to use the savings to pay bills and not as a long term investment vehical. And although there are many that offer a wide range of mutual funds, read the fine print - they include lots of administrative fees, charges, etc. However, I noticed recently that Vanguard has partnered with two companies that have pretty good HSA account options using Vanguard funds. https://flagship.vanguard.com/VGApp/hnw/accounttypes/accountoptions/ATSHlthSvgsAcctMrktgContent.jsp (I just wish someone like Vanguard or Fido would administrate HSA's themselves, but they don't want to mess with customers that want to use an HSA account debit card to pay for their pills at Walgreens, etc.) Without going into the details, I believe I figured the minimum annual fees with one of the Vanguard "partners" could be kept down to a net of $48 a year. I've had mine set up with Saturna Brokerage http://www.saturna.com/hsa1.htm for several years now which I just invest annually in the Total Stock Market (VTI) ETF. The annual fee plus the fee for 1 trade/year nets at about $50. For a long time I've not been able to find a better deal anywhere. ($50 may sound like a lot, but as HSA administrators go, it's a good deal, and as the account grows the fee as a % drops quickly.) It took a lot of reading and searching websites. There are also a few funds out there that actually allow you to directly set up your HSA account with them. The Bruce Fund http://thebrucefund.com/ is the only one that comes to mind right now though. Hope this is helpful.

Angie

[Ted Valentine]

I started a thread on HSA's and there's some good info here:

http://www.diehards.org/forum/viewtopic.php?t=4473

[mbrasher1]

FWIW, I have my HSA through Patelco Credit Union. They charge fees of $1/month and it is waived for the first year. It seemed like a better deal, at least until the balance gets higher.

They give a competitive interest rate (currently 5.12% APY) and I just count the funds there as part of my bond allocation.

[trirod]

Good information here. So it sounds like it might make sense to go with a low cost credit union account to start with and then when the balance gets bigger, think about moving to an account where I could invest in Vanguard funds.

[daryll40]

This is one of the criticisms of HSAs from the left. And while I support HSA's as a way to help restore personal responsibility in making financial healthcare decisions, I must confess that I believe the lefties have a point.

Put another way, for those in the upper middle class and above, there is almost never a reason to take money out of an HSA before retirement. It's just fungible money. Pay the high deductible out of other income (that you have because you are upper middle class and above!!) and keep adding to the tax deferral of the HSA.

In fact, don't even think of it as anything do with health. It's an extra IRA! Of course if you do get hit with a catastrophic medical expense, then certainly taking that money out tax free is a good insurance policy.

And while I agree with the lefties that the HSA is just another IRA for "rich" people, it still doesn't change the fact that this STILL causes people to make better financial decisions with their health care dollars. Because any dollars saved then remains theirs, not the health insurance company's.

[grabiner]

This is one of the criticisms of HSAs from the left. And while I support HSA's as a way to help restore personal responsibility in making financial healthcare decisions, I must confess that I believe the lefties have a point.

Put another way, for those in the upper middle class and above, there is almost never a reason to take money out of an HSA before retirement. It's just fungible money. Pay the high deductible out of other income (that you have because you are upper middle class and above!!) and keep adding to the tax deferral of the HSA.

In fact, don't even think of it as anything do with health. It's an extra IRA! Of course if you do get hit with a catastrophic medical expense, then certainly taking that money out tax free is a good insurance policy.

And while I agree with the lefties that the HSA is just another IRA for "rich" people, it still doesn't change the fact that this STILL causes people to make better financial decisions with their health care dollars. Because any dollars saved then remains theirs, not the health insurance company's.

I agree with you here. The high-deductible health plan makes good economic sense. Even before HSAs existed, I would have been happy with such a plan: pay the PPO-negotiated rates for your first $2500 in medical bills, then pay little or nothing beyond that. This makes just as much sense as the collision insurance on my car: I pay $2000 out of pocket if I have a crash ($1000 deductible, and $1000 in rate increases if I file a claim), but no more than $2000 even if my car is totaled.

The HSA is just a gimmick to make these plans attractive, and plan contributions allow the apparent cost to be reduced. If you have a high-deductible plan with a $2000 deductible and your plan kicks in $1200 to your HSA, you won't pay more than $800 out of pocket before the deductible kicks in. However, you are actually paying that $1200 in insurance costs for the insurance company to pay back to you. (It could be made even more attractive if your employer subsidizes the $1200.)

[dual]

The way I interpret it, you can withdraw tax free for medical bills incurred in previous years, so long as they occurred in years when you had the HSA and HDHP.

So when you decide to start withdrawing you can match up with the previous bills and withdraw larger amounts.

I have decided that I am NOT going to have large medical bills when I retire

Bob

[stebul]

Has anyone enrolled in the FEHB HDHP through GEHA? Is everything going OK? It appears they are using HSABank as the administrator, and that there is a self-directed investment option through TD Ameritrade. It does appear there are no fees other than $15/trade commissions once your money gets to TD. However, you get hit with $2.25/month in fees if your HSABank savings account balance is less than $3000 so it would take you at least 13 months (2 years of contributions) to be able to use the investment option without incurring fees.

I'll have to think about this for the November open season. I'm not sure its worth what appears to be a whole lot of bureacracy (at least the way FEHB and GEHA have implemented the HDHP with HSA option).

[LH]

thanks, the replies were all very helpful.

[dual]

[quote="mbrasher1"]FWIW, I have my HSA through Patelco Credit Union. They charge fees of $1/month and it is waived for the first year. It seemed like a better deal, at least until the balance gets higher.

They give a competitive interest rate (currently 5.12% APY) and I just count the funds there as part of my bond allocation.[/quote]

Perhaps I am being overly cautious, but I closed my Patelco accounts when they dropped NCUA (i.e. federal government) insurance for a private company.

Bob

[Easy Rhino]

I've had mine set up with Saturna Brokerage http://www.saturna.com/hsa1.htm for several years now which I just invest annually in the Total Stock Market (VTI) ETF. The annual fee plus the fee for 1 trade/year nets at about $50.

I'm bumping this ancient thread to point out that the Saturna Brokerage account seems like it's a pretty decent option, and one I had not seen mentioned as often as HSA Bank or HSA Administrators. In fact, I don't even think they have an annual fee any more, so you'd just be looking at a single $15 ETF trade per year to avoid an inactivity fee. Not too shabby. Of course, they don't offer banklike services like debit cards or checks, so you'd probably need to combo with a bank-based HSA if you want to use the account for spending.

[grabiner]

I've had mine set up with Saturna Brokerage http://www.saturna.com/hsa1.htm for several years now which I just invest annually in the Total Stock Market (VTI) ETF. The annual fee plus the fee for 1 trade/year nets at about $50.

I'm bumping this ancient thread to point out that the Saturna Brokerage account seems like it's a pretty decent option, and one I had not seen mentioned as often as HSA Bank or HSA Administrators. In fact, I don't even think they have an annual fee any more, so you'd just be looking at a single $15 ETF trade per year to avoid an inactivity fee. Not too shabby. Of course, they don't offer banklike services like debit cards or checks, so you'd probably need to combo with a bank-based HSA if you want to use the account for spending.

Thanks for reviving the thread; it predates the wiki, so the Health Savings Account page did not mention Saturna. I have now added Saturna to the list of HSA providers. If you only make one or two trades per year, you'll lose more to the cost of having a separate bank account at HSA Bank than you will to the higher commissions at Saturna. For a fee of $15, you can deposit your full annual contribution once a year, and then use it to buy a mutual fund or a single block of an ETF.

[alisa4804]

Has anyone enrolled in the FEHB HDHP through GEHA? Is everything going OK? It appears they are using HSABank as the administrator, and that there is a self-directed investment option through TD Ameritrade. It does appear there are no fees other than $15/trade commissions once your money gets to TD. However, you get hit with $2.25/month in fees if your HSABank savings account balance is less than $3000 so it would take you at least 13 months (2 years of contributions) to be able to use the investment option without incurring fees.

Yes, I have a year in with GEHA HDHP, and linked HSA Bank. You'll see that GEHA both contributes to your HSA and pays all monthly fees - so the employee using GEHA HDHP with HSA Bank pays no fees. There are 2 deposits monthly, one from GEHA and the other from employee monthly payroll deduction. You get a few cents each month earned interest. There is easy online access to check your HSA deposits and balance. HSA Bank sends you a credit card to use for medical expenses - if you use it as a credit card (with your signature required, not as a debit card) there is no charge. I tried it on a small pharmacy purchase - it worked.

I'm not sure its worth what appears to be a whole lot of bureacracy (at least the way FEHB and GEHA have implemented the HDHP with HSA option).

Signing up for GEHA HDHP is a little different than the other FEHBs, but just follow the instructions closely. I recall having to sign up for the HDHP before I could set up the HSA, but that went pretty smoothly as well. If your agency uses Employee Express, that is one way to set up your HSA payroll deductions. Next year I will set up the linked TD Ameritrade account and make a lump sum transfer to it. There are Vanguard ETFs available at no fee, but may be some other fees. The whole package sounds like one of the better HSAs discussed on this forum. Good luck!

PS Now I look back and see that stebel's comments are from 2007 - probably resolution has been reached by now!

[VictoriaF]

Yes, I have a year in with GEHA HDHP, and linked HSA Bank. You'll see that GEHA both contributes to your HSA and pays all monthly fees - so the employee using GEHA HDHP with HSA Bank pays no fees. There are 2 deposits monthly, one from GEHA and the other from employee monthly payroll deduction.

I usually make my portion of the HSA contributions over the first few pay-periods of the year. My initial reason was to reach HSA Bank's thresholds faster, but now it's a habit.

HSA Bank sends you a credit card to use for medical expenses - if you use it as a credit card (with your signature required, not as a debit card) there is no charge. I tried it on a small pharmacy purchase - it worked.

A few years ago I have looked into using HSA Bank's card for medical expenses but then decided that it was not worth it. HSA money is at its best when it just sits there.

Next year I will set up the linked TD Ameritrade account and make a lump sum transfer to it. There are Vanguard ETFs available at no fee, but may be some other fees. The whole package sounds like one of the better HSAs discussed on this forum.

I have been procrastinating with moving money out of HSA Bank. After I make my contributions in early 2013, I should start using TD Ameritrade. Comments from those who are already using it are welcome.

Victoria

[tadamsmar]

Concerning the GEHA HDHP, remember that you have the LEXFSA available for more tax savings.

Not sure what is meant by related bureaucracy. We had one till my wife aged out and I don't recall any extra bureaucracy over what was required to manage any HSA.

[grabiner]

I have been procrastinating with moving money out of HSA Bank. After I make my contributions in early 2013, I should start using TD Ameritrade. Comments from those who are already using it are welcome.

I use HSA Bank, and the brokerage transaction was easy. I had accumulated five years of HSA money in 2011, which was enough to make TD Ameritrade worthwhile. It was easy to transfer all my cash to the brokerage, buy an ETF with a single transaction, and then hold it. I will make another single transfer in 2013 when I have enough cash to buy another 100 shares of whatever ETF I want to buy.

A side benefit is that TD Ameritrade is better set up for traders; when I want to buy an illiquid ETF, regardless of whether I buy it in my Vanguard or TD Ameritrade account, I can check the Level 2 quotes on TD Ameritrade. I don't trade enough to make paying for Level 2 quotes worthwhile, but they can be useful when they are free.

There is the extra record-keeping issue; since I live in NJ, I have to track the HSA as if it were a taxable account and pay NJ taxes on the dividends. Neither HSA Bank nor TD Ameritrade provides 1099 forms, since the HSA is exempt from federal tax.