Feels Impossible to Invest with HSA in California?

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sweeden22
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Feels Impossible to Invest with HSA in California?

Post by sweeden22 » Fri Nov 18, 2016 6:54 am

These past few months I have had a HSA, which I put the max amount in each month. Sadly, I am in California which makes the investing difficult. The bank is Optum, and I'm under an odd program with pretty much only expensive Wells Fargo funds.

The only decent one is one S&PF Index that has expense ratio of .25.

However, it seems if I do that, it will be very difficult to keep track of income from the investing especially if I was buying into it regularly, several times a year like I would like.

I've read of special funds that are not taxed, but those are not available under my HSA program.

What would be the best thing to do? Just once a year buy a set amount of the S&P index fund? Or would I need to change which fund I buy each year to keep the book keeping clear? If in year one I bought 26 shares at $66.64 and year two I bought 50 share at $70.00.

If in year 3, I needed to turn 35 shares into cash, would 26 of the shares come from the first year and 9 from the second year buy? How do you know which ones you're selling if it's the same fund?

Thanks!!

b42
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Re: Feels Impossible to Invest with HSA in California?

Post by b42 » Fri Nov 18, 2016 8:14 am

Welcome to the forums!

I am a little unclear with what exactly you are asking.

Normally with an HSA account, there should be some sort of transaction history that you could download or copy down.

You mention keeping track of the cost basis of each share. For tax-defferred accounts like an HSA you do not need to keep track of the cost basis as long as the funds are used for qualified expenses, since the earnings are tax-free.

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dodecahedron
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Re: Feels Impossible to Invest with HSA in California?

Post by dodecahedron » Fri Nov 18, 2016 8:24 am

b42 wrote:You mention keeping track of the cost basis of each share. For tax-defferred accounts like an HSA you do not need to keep track of the cost basis as long as the funds are used for qualified expenses, since the earnings are tax-free.


This statement would be true in most places, but the OP lives in California, where income generated by HSA investments is subject to state income taxes.

To the OP: if your investment policy statement calls for any inflation protected fixed income component, you might consider a Bank of America (BoA) HSA, which offers the option to invest in Vanguard's Treasury Inflation Protected fund (VIPSX). Since it is invested in US Treasury debt, there would be no state taxes to worry about and your tax bookkeeping would be simplified. There is a monthly fee of $4.50/month but that fee can be waived for BoA Platinum customers (relatively easy to qualify for with many other benefits much discussed elsewhere on this forum.)

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grabiner
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Re: Feels Impossible to Invest with HSA in California?

Post by grabiner » Fri Nov 18, 2016 11:10 pm

dodecahedron wrote:To the OP: if your investment policy statement calls for any inflation protected fixed income component, you might consider a Bank of America (BoA) HSA, which offers the option to invest in Vanguard's Treasury Inflation Protected fund (VIPSX). Since it is invested in US Treasury debt, there would be no state taxes to worry about and your tax bookkeeping would be simplified.


But not eliminated; you would still need to keep track of your basis, as any capital gains or losses would be subject to CA tax. (This also applies in AL, but not in NJ, which does not tax capital gains on Treasury funds.)

You could also use any HSA with a brokerage option, and buy Treasury or TIPS ETFs.

sweeden22 wrote:What would be the best thing to do? Just once a year buy a set amount of the S&P index fund? Or would I need to change which fund I buy each year to keep the book keeping clear? If in year one I bought 26 shares at $66.64 and year two I bought 50 share at $70.00.

If in year 3, I needed to turn 35 shares into cash, would 26 of the shares come from the first year and 9 from the second year buy? How do you know which ones you're selling if it's the same fund?


When you sell, there are several rules for identifying which shares you sold; see Cost basis methods on the wiki. (Brokerages might not allow you to use specific identification for an HSA.)
David Grabiner

jusden
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Re: Feels Impossible to Invest with HSA in California?

Post by jusden » Fri May 19, 2017 10:21 pm

I am in a similar issue as the OP in this post. I'm in California and have a Bank of America HSA. It looks like fund options have changed and they no longer offer Vanguard funds, since dodecahedron's recommendation last year of using (VIPSX) to minimize California state taxes. Is using IUTIX Columbia US Treasury Index Fund (Z) tax exempt in a California HSA?

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grabiner
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Re: Feels Impossible to Invest with HSA in California?

Post by grabiner » Fri May 19, 2017 10:48 pm

Welcome to the forum!
jusden wrote:I am in a similar issue as the OP in this post. I'm in California and have a Bank of America HSA. It looks like fund options have changed and they no longer offer Vanguard funds, since dodecahedron's recommendation last year of using (VIPSX) to minimize California state taxes. Is using IUTIX Columbia US Treasury Index Fund (Z) tax exempt in a California HSA?
Any Treasury income is exempt from CA tax, as long as the fund holds at least 50% Treasuries. And at 0.2% expenses, this isn't too expensive, so it's a good choice if an intermediate-term Treasury fund fits your investment needs. (You could adjust your portfolio for having Treasuries here by holding more corporate bonds in your IRA.)

If you do want TIPS, you can move your money to a different HSA provider who offers a TIPS fund, or a brokerage account in which you can buy TIPS ETFs.
David Grabiner

jusden
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Re: Feels Impossible to Invest with HSA in California?

Post by jusden » Thu Jun 01, 2017 9:32 pm

Thanks, David!! All the information and users on this site are incredibly helpful!

billthecat
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Re: Feels Impossible to Invest with HSA in California?

Post by billthecat » Thu Jun 01, 2017 10:35 pm

dodecahedron wrote:
b42 wrote: You mention keeping track of the cost basis of each share. For tax-defferred accounts like an HSA you do not need to keep track of the cost basis as long as the funds are used for qualified expenses, since the earnings are tax-free.
This statement would be true in most places, but the OP lives in California, where income generated by HSA investments is subject to state income taxes.
What I got out of this thread is that there is yet another way I'm screwed by California. I knew HSA contributions were not pre-tax in California, didn't know but could get past gains being taxed when withdrawn, but in fact the earnings are taxed every year all along? So the federal triple benefit is matched by California's triple screw. Holy cow.

Is an HSA worth it in California?

Big Dog
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Re: Feels Impossible to Invest with HSA in California?

Post by Big Dog » Thu Jun 01, 2017 10:49 pm

the other option is to target an equity fund with small dividend payouts.

Don't forget that, while you may have to pay taxes on the earnings now, no state tax will be due on them when you cash out years later, as long as you are still a California resident. (tax just any new gain.)

But it gets worse if you retire to a state that will tax all of the earnings, even if you've paid tax on them in California.

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dodecahedron
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Re: Feels Impossible to Invest with HSA in California?

Post by dodecahedron » Fri Jun 02, 2017 4:04 pm

billthecat wrote:
Is an HSA worth it in California?
If your IPS calls for TIPS or other US Treasury debt somewhere in your portfolio, then an HSA can be a good vehicle for a California taxpayer to hold them in, though you would need to worry about capital gains on those instruments if you sell prior to maturity as David noted above.

Glad I don't live in California.

billthecat
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Re: Feels Impossible to Invest with HSA in California?

Post by billthecat » Fri Jun 02, 2017 6:37 pm

dodecahedron wrote:
billthecat wrote:
Is an HSA worth it in California?
If your IPS calls for TIPS or other US Treasury debt somewhere in your portfolio, then an HSA can be a good vehicle for a California taxpayer to hold them in, though you would need to worry about capital gains on those instruments if you sell prior to maturity as David noted above.

Glad I don't live in California.
It seems like I should just treat it like a regular brokerage account. I don't have one yet - just trying to prepare for this fall.

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Artsdoctor
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Re: Feels Impossible to Invest with HSA in California?

Post by Artsdoctor » Fri Jun 02, 2017 8:46 pm

billthecat wrote:
dodecahedron wrote:
b42 wrote: You mention keeping track of the cost basis of each share. For tax-defferred accounts like an HSA you do not need to keep track of the cost basis as long as the funds are used for qualified expenses, since the earnings are tax-free.
This statement would be true in most places, but the OP lives in California, where income generated by HSA investments is subject to state income taxes.
What I got out of this thread is that there is yet another way I'm screwed by California. I knew HSA contributions were not pre-tax in California, didn't know but could get past gains being taxed when withdrawn, but in fact the earnings are taxed every year all along? So the federal triple benefit is matched by California's triple screw. Holy cow.

Is an HSA worth it in California?
People usually don't live in California because the cost of living is so low. We are a high personal income tax state and there's really not much you can do about it. Think of it this way: when we invest in California bonds, our after-tax income is relatively high compared to other states!

You're limited by how much you can contribute to your HSA so you're not going to break the bank by paying taxes on your dividends and capital gains in your HSA. If you're familiar with tax-loss harvesting, you can also do that in your HSA so you actually have carryover losses which are added to anything you're amassing on the federal side. Our HSA accounts are easily in the six digits and the amount of personal income tax that is owed each year is relatively small so I wouldn't lose sleep over this. It's still a very good deal to have federal tax-free options available to you.

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grabiner
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Re: Feels Impossible to Invest with HSA in California?

Post by grabiner » Fri Jun 02, 2017 10:17 pm

billthecat wrote:Is an HSA worth it in California?
The federal benefit is still worth it.

I lived in NJ a few years ago. NJ also taxes HSAs, but the 28% savings on federal tax was still very valuable, as was the opportunity to increase my tax-deferred savings (I max out my employer plan and Roth IRA). I hold a stock index ETF in my HSA, so I paid a small amount of tax on the dividends. Now that I have moved to MD, I can sell without a capital gain; if I should choose to move back to NJ, or to AL or CA, I can sell the ETF in my HSA before moving, so that the capital gain will be realized in a state which doesn't tax it.
David Grabiner

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