HSA, Please Help!

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Topic Author
RRA
Posts: 23
Joined: Sun Mar 30, 2014 9:47 pm

HSA, Please Help!

Post by RRA »

This is my first post. I've been a long time lurker for almost 2 years now. Actually, I am quite addicted and read the forum every day! I always learn something new. Before I ask my question, I want to first say thank you to the Bogleheads and to all of the members who participate in sharing their knowledge to help people they do not know. I am very appreciative and grateful.

On to my question, which has a slight twist to a similar topic posted recently on HSA in California. Currently, I have my HSA account with HSA bank. I plan to use the account as a stealth IRA for us. I transferred some money (leaving the minimum amount required in HSA Bank to avoid fees) to TD Ameritrade to invest. I purchased equal parts Vanguard LifeStrategy growth and moderate growth fund for 70:30 AA (probably should have purchased ETF instead?). I want to kick myself, I belatedly realized 2 days after making the purchase, that living in California I should have bought TIPS or CA muni bond (for state tax exemption). Should I sell them and purchase TIPS/CA muni bond or just keep as is?

Thanks!
sliu
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Joined: Fri Sep 26, 2014 10:42 pm

Re: HSA, Please Help!

Post by sliu »

You still get the federal tax advantage and growth potential with your funds currently as-is, it's just the CA state tax drags your net gains. If it makes sense in your overall AA to hold TIPS/CA muni bonds and you plan to stick with the HSA as a stealth IRA, then it might make sense to convert at some point to TIPS/CA munis. Just watch for short-term redemption and take it slowly with any sudden decisions or changes.
kaneohe
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Re: HSA, Please Help!

Post by kaneohe »

The goal is not necessarily to pay 0 CA tax but to earn the most after CA tax. What does your crystal ball tell you about the aftertax(CA) return of TIPs vs your funds?
Suppose TIPS returns are 3% and your funds return 5,6, or 7 % before tax. Won't the funds earn more aftertax(CA) than the TIPS? Of course, there is the added complexity of treating the funds as if they are in a taxable account so you (or your software) would have to deal with that so you'd have to balance those factors against each other.......unless your AA called for the TIPS anyway and it made sense to move the TIPS into HSA and buy the funds in a different account.
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grabiner
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Re: HSA, Please Help!

Post by grabiner »

Treat all your investments as one portfolio. If TIPS fit your portfolio, then you want to hold TIPS in the account with the biggest tax benefit, which is the HSA, and hold more stock in your IRA and 401(k) to get the correct overall allocation.

If you value simplicity over tax optimization and want to hold the same allocation in all your accounts, it's better to use Target Retirement rather than LifeStrategy funds in the HSA, because the LifeStrategy funds are likely to become inappropriately allocated later. If you plan to retire in 2035, then Target Retirement 2035 will have an appropriate stock allocation for you in 2035, while you would need to sell your LifeStrategy Growth and pay CA tax on the capital gain to get the right allocation with the LifeStrategy funds.

Don't use CA municipal bonds in an HSA; they are exempt from CA tax, but they will earn less than corporate bonds of the same risk after CA tax. (Typically, munis earn about the same as corporate bonds of the same risk in a 25% tax bracket, and your CA tax on the munis is much less than that.)
Wiki David Grabiner
Topic Author
RRA
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Joined: Sun Mar 30, 2014 9:47 pm

Re: HSA, Please Help!

Post by RRA »

Thank you all for replying. I treat my solo 401k, Backdoor Roth, and taxable account as one portfolio. I just started a high deductible health insurance with HSA 2 years ago. It wasn't until this year I had extra money in the account to invest. I thought it would be easier to treat the HSA as a separate portfolio and not worry about rebalancing by using LS. I guess I need to crunch some numbers to see if it's worth the hassle of selling. I have a hunch it may end up costing me the same either way, but just require more record-keeping with LS.
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