TIPS with Fidelity through HSA

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nyinca
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TIPS with Fidelity through HSA

Post by nyinca » Sat May 11, 2013 1:43 pm

I have an HSA and live in California. Through research and this board, TIPS has been a recommendation given CA's view of HSAs and taxing growth. I am in 39% tax bracket and highest CA state tax bracket.

Please help with the following:

1) If I invest into TIPS through my HSA, am I exempt from all taxes of growth (being that I live in CA) or only a portion? I understand federal tax is not an issue, Im referring to state tax from CA. How is this reported for yearly taxes?

2) I have an HSA through Fidelity, is there a typical mutual fund or "TIPS fund" that one recommends? Ideally one with low expenses.

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grabiner
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Re: TIPS with Fidelity through HSA

Post by grabiner » Sun May 12, 2013 10:22 am

nyinca wrote:1) If I invest into TIPS through my HSA, am I exempt from all taxes of growth (being that I live in CA) or only a portion? I understand federal tax is not an issue, Im referring to state tax from CA. How is this reported for yearly taxes?
In CA, dividends on Treasury bonds (including TIPS) are exempt from tax, but capital gains are taxable. TIPS don't usually have much in capital gains because the inflation adjustment is taxed as income. You will also need to check with the fund provider how much of the income is actually state tax exempt; a TIPS fund might have a small amount of income from non-TIPS, and that would be reported.

You report adjustemnts due to your HSA on the same Schedule CA where you report any other adjustments: California Schedule CA instructions

Thus, you would report contributions to the HSA as increases in salary (if paid by the employer) or reductions in adjustments (if paid by you), capital gains or losses in the HSA as adjustments to capital gains, and it appears to me that you would not report the TIPS dividends anywhere because they are taxed neither by the IRS or CA (but under different rules).
2) I have an HSA through Fidelity, is there a typical mutual fund or "TIPS fund" that one recommends? Ideally one with low expenses.
Do you have a brokerage account? If so, there are several ETFs for TIPS, depending on the duration you want; STPZ for short-term, TIP or TIPZ for intermediate-term, LTPZ for long-term. If not, you'll have to check the Fidelity fund options.
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Re: TIPS with Fidelity through HSA

Post by #Cruncher » Sun May 12, 2013 1:21 pm

grabiner wrote:
nyinca wrote:2) I have an HSA through Fidelity, is there a typical mutual fund or "TIPS fund" that one recommends? Ideally one with low expenses.
Do you have a brokerage account? If so, there are several ETFs for TIPS, depending on the duration you want; STPZ for short-term, TIP or TIPZ for intermediate-term, LTPZ for long-term. If not, you'll have to check the Fidelity fund options.
Fidelity offers a low expense TIPS mutual fund:
Spartan® Inflation-Protected Bond Index Fund - Investor Class - FSIQX : 0.20% Expense Ratio with $2,500 minimum
Spartan® Inflation-Protected Bond Index Fund - Advantage Class - FSIYX : 0.10% Expense Ratio with $10,000 minimum
It appears to have the same broad based holdings as many TIPS funds, such as the largest TIPS ETF: iShares TIPS Bond ETF - TIP.

If you want a short-term TIPS fund, I'd suggest the Vanguard 0-5 Year TIPS ETF - VTIP over the iShares 0-5 Year TIPS ETF - STIP or the PIMCO 1-5 Year TIPS ETF - STPZ since it has a slightly lower expense ratio (0.10% vs 0.20%).

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Re: TIPS with Fidelity through HSA

Post by mervinj7 » Mon Sep 10, 2018 1:11 pm

I know this is an old thread but is there an update on recommended TIPS funds to use in a CA HSA held in Fidelity? I have been using FSIYX this year. However, I was wondering if I should switch to a commission-free short term TIPS ETF like STIP since the yields are very similar but the duration is far shorter (and thus less riskier). I keep $1000 of this HSA in the Core Position and rest is invested in a TIPS fund to avoid having to deal with CA's weird taxation of HSAs.

iShares 0-5 Year TIPS ETF - STIP: ER 0.06% Duration: 2.71 Years, 2.28% SEC Yield
Fidelity® Inflation-Protected Bond Index Fund - Advantage Class - FSIYX : 0.05% ER, Duration: 5.39 Years, 2.58% SEC Yield

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grabiner
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Re: TIPS with Fidelity through HSA

Post by grabiner » Tue Sep 11, 2018 8:49 pm

mervinj7 wrote:
Mon Sep 10, 2018 1:11 pm
I know this is an old thread but is there an update on recommended TIPS funds to use in a CA HSA held in Fidelity? I have been using FSIYX this year. However, I was wondering if I should switch to a commission-free short term TIPS ETF like STIP since the yields are very similar but the duration is far shorter (and thus less riskier). I keep $1000 of this HSA in the Core Position and rest is invested in a TIPS fund to avoid having to deal with CA's weird taxation of HSAs.

iShares 0-5 Year TIPS ETF - STIP: ER 0.06% Duration: 2.71 Years, 2.28% SEC Yield
Fidelity® Inflation-Protected Bond Index Fund - Advantage Class - FSIYX : 0.05% ER, Duration: 5.39 Years, 2.58% SEC Yield
TIPS are less volatile than nominal bonds of the same duration, so you don't need as much extra yield to compensate for the extra duration. I would prefer the intermediate-term TIPS fund since the TIPS aren't intended for a short-term need.
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Re: TIPS with Fidelity through HSA

Post by #Cruncher » Wed Sep 12, 2018 9:48 am

grabiner wrote:
Tue Sep 11, 2018 8:49 pm
TIPS are less volatile than nominal bonds of the same duration, …
This is probably a good assumption since nominal Treasury yields reflect both real yields and inflation expectations, while TIPS yields reflect only the former. The history since 2004 sort of backs this up. The following chart shows the one-year change in yields of constant maturity 10-Year TIPS and 10-Year Nominal Treasuries.

Image
(Click the graph to open an interactive page at the FRED website.)

grabiner, continuing in same post, wrote:... so you don't need as much extra yield to compensate for the extra duration.
But at the moment there is no "compensation". Some short-term TIPS funds are now actually yielding a touch more. E.g., 0,80% SEC yield for Vanguard's Short-Term Inflation-Protected Securities Index Fund Admiral Shares (VTAPX) versus only 0.72% for its Inflation-Protected Securities Fund Admiral Shares (VAIPX). At these rates the only reason to prefer the intermediate term fund would be to mitigate the reinvestment risk of TIPS yields falling.

grabiner, continuing in same post, wrote:I would prefer the intermediate-term TIPS fund since the TIPS aren't intended for a short-term need.
A couple of points:
  • Inflation can have a significant impact even over the short term. E.g., The CPI rose 22% in just two years from 42.5 in December 1972 to 51.9 in December 1974 -- after rising less than 7% the previous two years. (See CPI-U since 1961.)
  • Just because one wants to use TIPS for protection against inflation over the long term, doesn't mean one needs to hold long-term TIPS. All TIPS, short, intermediate, and long term have exactly the same inflation protection.

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Re: TIPS with Fidelity through HSA

Post by mervinj7 » Wed Sep 12, 2018 11:19 am

grabiner wrote:
Tue Sep 11, 2018 8:49 pm
TIPS are less volatile than nominal bonds of the same duration, so you don't need as much extra yield to compensate for the extra duration. I would prefer the intermediate-term TIPS fund since the TIPS aren't intended for a short-term need.
That makes sense. I will continue to use the intermediate-term TIPS (FIPDX after November).
#Cruncher wrote:
Wed Sep 12, 2018 9:48 am
[*]Just because one wants to use TIPS for protection against inflation over the long term, doesn't mean one needs to hold long-term TIPS. All TIPS, short, intermediate, and long term have exactly the same inflation protection.[/list]
To be honest, I just wanted to simplify my holdings in my HSA in CA. A TIPS fund still gives some marginal long-term growth while minimizing any tax related filings for CA state taxes. That's good enough for me since it's a small part of my overall portfolio.

As a follow-up, I was also planning on moving my $1500 "cash" component of the HSA from the CORE fund to FDLXX (Fidelity Treasury Only Money Market Fund). That will also reduce any state taxable distributions from this account while still maintaining a small cash fund for withdrawals.

Fidelity HSA Investment Plan
  • $1.5K (maintain at this min level) --> FDLXX, Fidelity Treasury Only Money Market Fund, ER 0.42%,7 Day Yield: 1.61%
  • $6.5K and growing --> FIPDX, Inflation-Protected Bond Index Fund, ER 0.05%, 30 Day Yield: 2.58%
  • Disable automatic investments, dividend and capital gains reinvestment turned off in order to minimize tax lot tracking
  • Maintain records for tax lots since broker will not send out a 1099-B for this HSA
  • Lump sum invest 2x/year into FIPDX. HSA contributions are monthly.

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