What next: HSA or taxable?

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Topic Author
bmay
Posts: 61
Joined: Tue Mar 12, 2013 5:35 pm

What next: HSA or taxable?

Post by bmay »

I'm in my early 20s and am earning (and saving) a good amount of money and am wondering what to "move onto" next.

Salary: 60k
Roth IRA: ~$11,000 (contributing $5,500/yr to VFFVX)
401k: ~$19,000 (contributing $17,500/yr to 80/20 s/b index funds)
Emergency fund: 8k "fully funded" (probably even have more than I need)

I have a HDHP and some money in an HSA account and have been reading about HSAs and the tax benefits of contributing to them and using them as investment vehicles.

What are your thoughts on what I should contribute money to next? Should I start maxing out my HSA? Or should I start a small taxable account? I know the big question is whether or not I will be in a higher tax bracket in retirement than I am in right now. I definitely have 2k or so I could put somewhere in the next few months and would like to maximize my savings.

Please let me know if there's any other information about me that would help.

Thanks.
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tainted-meat
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Re: What next: HSA or taxable?

Post by tainted-meat »

HSA is the best after you have contributed enough to get the company match.

HSA contributions are not taxed at all - this includes FICA tax if taken directly from your payroll. Withdrawals for eligible healthcare expenses are not taxable. You can also withdraw at age 65 for non-healthcare related expenses without penalty - although it would be taxable as income.

HSA is the BEST retirement savings vehicle in my opinion.
Last edited by tainted-meat on Wed Dec 18, 2013 9:14 pm, edited 1 time in total.
alwayshedge
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Re: What next: HSA or taxable?

Post by alwayshedge »

Once I max my 401k and Roth, I finish up with my HSA before saving in taxable. I recently switched to HSA Bank so I can take advantage of the Vanguard funds they offer as I don't use the HSA for medical expenses.
Topic Author
bmay
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Re: What next: HSA or taxable?

Post by bmay »

tainted-meat wrote:HSA is the best after you have contributed enough to get the company match.

HSA contributions are not taxed at all - this includes FICA tax. Withdrawals for eligible healthcare expenses are not taxable. You can also withdraw at age 65 for non-healthcare related expenses without penalty - although it would be taxable as income.

HSA is the BEST retirement savings vehicle in my opinion.
So you're saying max out the HSA if I have to put a little less into my 401k? Keep in mind the HSA is not offered through my current employer.
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tainted-meat
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Re: What next: HSA or taxable?

Post by tainted-meat »

Since the HSA is not through your employer, you will not save on FICA tax which is a bummer. If an HSA was offered through your employer you could save on FICA tax if contributions were taken directly from your paycheck. It's still a great savings vehicle though and I would definitely utilize it before taxable.
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grabiner
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Re: What next: HSA or taxable?

Post by grabiner »

bmay wrote:
tainted-meat wrote:HSA is the best after you have contributed enough to get the company match.

HSA contributions are not taxed at all - this includes FICA tax. Withdrawals for eligible healthcare expenses are not taxable. You can also withdraw at age 65 for non-healthcare related expenses without penalty - although it would be taxable as income.

HSA is the BEST retirement savings vehicle in my opinion.
So you're saying max out the HSA if I have to put a little less into my 401k? Keep in mind the HSA is not offered through my current employer.
Yes, this is correct. 401(k) contributions are deductible when made, and withdrawals are taxed. Roth contributions are non-deductible when made, and withdrawals are tax-free in retirement. HSA contributions are deductible when made, and withdrawals are tax-free if used for medical expenses, so you get the tax benefits at both ends.
Wiki David Grabiner
Topic Author
bmay
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Joined: Tue Mar 12, 2013 5:35 pm

Re: What next: HSA or taxable?

Post by bmay »

tainted-meat wrote:Since the HSA is not through your employer, you will not save on FICA tax which is a bummer. If an HSA was offered through your employer you could save on FICA tax if contributions were taken directly from your paycheck. It's still a great savings vehicle though and I would definitely utilize it before taxable.
Great.

I saw that the yearly contribution limit is $3,250 for individuals or $6,450 for families. Since I am part of a family health insurance plan, which of those is my limits?
natureexplorer
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Re: What next: HSA or taxable?

Post by natureexplorer »

bmay wrote:
tainted-meat wrote:HSA is the best after you have contributed enough to get the company match.

HSA contributions are not taxed at all - this includes FICA tax. Withdrawals for eligible healthcare expenses are not taxable. You can also withdraw at age 65 for non-healthcare related expenses without penalty - although it would be taxable as income.

HSA is the BEST retirement savings vehicle in my opinion.
So you're saying max out the HSA if I have to put a little less into my 401k? Keep in mind the HSA is not offered through my current employer.
bmay, thanks for sharing this advice! Is it the Boglehead consensus that HSA contributions always beat 401k (assuming the same fund options exist)? What are some of the downsides of an HSA vs a 401k?
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tadamsmar
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Re: What next: HSA or taxable?

Post by tadamsmar »

natureexplorer wrote:
bmay wrote:
tainted-meat wrote:HSA is the best after you have contributed enough to get the company match.

HSA contributions are not taxed at all - this includes FICA tax. Withdrawals for eligible healthcare expenses are not taxable. You can also withdraw at age 65 for non-healthcare related expenses without penalty - although it would be taxable as income.

HSA is the BEST retirement savings vehicle in my opinion.
So you're saying max out the HSA if I have to put a little less into my 401k? Keep in mind the HSA is not offered through my current employer.
bmay, thanks for sharing this advice! Is it the Boglehead consensus that HSA contributions always beat 401k (assuming the same fund options exist)? What are some of the downsides of an HSA vs a 401k?
I think the downsides vs 401K are pretty minor.

You need to keep all your qualified expense records (qualified to be paid by tax-free HSA withdrawals) possibly for the rest of your life or at least all those needed if your tax-free withdrawals are audited. In some scenarios the executor of your will could make good use of them. My HDHP keeps 18 months of past EOBs and drug purchase records online and I downloaded them once per year to keep a permanent computer record of the info when I had a HSA. (My HSA never got very large and I chose to liquidate it.)
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hand
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Re: What next: HSA or taxable?

Post by hand »

Congrats on your job and focus on saving. If I understand correctly, of your $60k of annual income, you are saving $23k / yr (maxing your IRA & 401(k)).

While I agree that the math would suggest HSA before taxable for additional savings, I would like to propose some alternatives based on my experiences with and dislike of HSAs.

1) If you expect significant gains in salary in the future, have you considered Roth IRA or Roth 401(k) contributions or converting your existing IRA to a Roth?
a) Effectively increase retirement savings by paying tax now at your low rate
b) Preserve option of Backdoor Roth in the future
c) Roth IRA can be tapped in emergency for non-retirement goals if needed after waiting period expires

2) Have you considered longer term savings goals? Car? Engagement Ring? House? Furnishing a house? College for kids? All require longer term savings. Retirement Accounts / HSAs can't be used for these purposes.

3) Do you have any consumer debt? (Car Loans, Credit Card Balances, School loans?) Pay it off.

In my experience, if you continue to max your retirement accounts, the amount you'll be able to save in an HSA will be immaterial, and likely not worth the hassle / paperwork / fees to maintain. If I had the choice, I would cash in my dinky little HSA today to be done with the complexity, paperwork, extra set of online passwords, account fees etc. Possible tax benefits just aren't worth it to me.
Topic Author
bmay
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Joined: Tue Mar 12, 2013 5:35 pm

Re: What next: HSA or taxable?

Post by bmay »

hand wrote:1) If you expect significant gains in salary in the future, have you considered Roth IRA or Roth 401(k) contributions or converting your existing IRA to a Roth?
a) Effectively increase retirement savings by paying tax now at your low rate
b) Preserve option of Backdoor Roth in the future
c) Roth IRA can be tapped in emergency for non-retirement goals if needed after waiting period expires
I'm not sure what you're getting at here... I'm already maxing my Roth IRA, why would I convert it to anything else?
hand wrote:2) Have you considered longer term savings goals? Car? Engagement Ring? House? Furnishing a house? College for kids? All require longer term savings. Retirement Accounts / HSAs can't be used for these purposes.
I have considered some of these things - mostly a car I am leasing that I plan on buying outright after the lease is up in two years. What would your suggestions be for something like that?
hand wrote:3) Do you have any consumer debt? (Car Loans, Credit Card Balances, School loans?) Pay it off.
No debt. I paid off all my student loans last year.

Thanks for your advice thus far.
ddj
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Re: What next: HSA or taxable?

Post by ddj »

grabiner wrote:
bmay wrote:
tainted-meat wrote: HSA contributions are deductible when made, and withdrawals are tax-free if used for medical expenses, so you get the tax benefits at both ends.
True. If you are considering using HSA instead of some 401k space: HSAs can have higher administrative/maintenance costs. My employer uses WF HSA who charges, I think, $2.50/mo. My employer pays this fee. If I leave my employer, I may/will be on the hook for that. Still, there's lots to like about an HSA: it's tax-advantaged space which I've used to bring me into a lower tax bracket and harvest tax gains.

http://www.bogleheads.org/wiki/Health_savings_account

Also, as "hand" asks: consider your mid-term goals. House down payment, engagement ring, $$ to pay cash for your next car, travel, etc. I blew 5 grand on a 6-week trip to Europe in my mid 20s. I thought then and think now: money well spent.
letsgobobby
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Re: What next: HSA or taxable?

Post by letsgobobby »

You can't leave HSA to your kids, which is a drawback compared to 401k. So plan to use it up before you, and your surviving spouse, die.
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