HSA

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Whsy
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HSA

Post by Whsy » Sat Jan 20, 2018 2:24 pm

I'm a little confused about HSA investment. I just started contributing last year and have been contributing the maximum possible. My employer also contributes. I haven't invested any of the money in there. If you anticipate upcoming medical bills (e.g., for regular medical check up and dentist visits etc.), should you save it as cash and not invest it?

TwstdSista
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Re: HSA

Post by TwstdSista » Sat Jan 20, 2018 3:05 pm

This is a personal question. Can you afford to pay out of pocket for medical expenses? If so, you can invest it if you choose. However, if you need the money in that account for medical expenses, then it should be kept in cash. Some people keep one year's worth of deductions in cash and invest the rest.

It really depends on your own personal financial position.

aristotelian
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Re: HSA

Post by aristotelian » Sat Jan 20, 2018 4:30 pm

If you are already maxing other accounts, it is pretty clearly a win to invest it.

If you are not maxing your other accounts, then it is more like six of one, half dozen of the other. You will end up with the same net amount invested, since investing it would take away from other investments.

youngpleb
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Re: HSA

Post by youngpleb » Sat Jan 20, 2018 5:15 pm

aristotelian wrote:
Sat Jan 20, 2018 4:30 pm
If you are already maxing other accounts, it is pretty clearly a win to invest it.

If you are not maxing your other accounts, then it is more like six of one, half dozen of the other. You will end up with the same net amount invested, since investing it would take away from other investments.
You might end up with the same amount invested, but you wouldn't end up with the same amount when it comes time for withdrawing funds during retirement. HSA contributions are pre-tax, enjoy tax-free growth, and once you hit 65 years old are tax-free withdrawals for whatever you want to spend it on. Therefore, especially if you aren't planning to retire until your 60s, HSA should pretty much be prioritized second right after the 401k match. It's why some people call it a "super IRA."
27. Always learning.

aristotelian
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Re: HSA

Post by aristotelian » Sat Jan 20, 2018 5:23 pm

youngpleb wrote:
Sat Jan 20, 2018 5:15 pm
aristotelian wrote:
Sat Jan 20, 2018 4:30 pm
If you are already maxing other accounts, it is pretty clearly a win to invest it.

If you are not maxing your other accounts, then it is more like six of one, half dozen of the other. You will end up with the same net amount invested, since investing it would take away from other investments.
You might end up with the same amount invested, but you wouldn't end up with the same amount when it comes time for withdrawing funds during retirement. HSA contributions are pre-tax, enjoy tax-free growth, and once you hit 65 years old are tax-free withdrawals for whatever you want to spend it on. Therefore, especially if you aren't planning to retire until your 60s, HSA should pretty much be prioritized second right after the 401k match. It's why some people call it a "super IRA."
Right, but he is already maxing it and already has the deduction. The question is whether to invest it or use it to reimburse expenses.

If he is unable to max his other accounts, then keeping it invested is just means less money to invest in other accounts. I don't see the upside either way. Assuming 20% tax bracket, he can reimburse himself $100 and either contribute $100 to Roth or $120 pretax to his 401k. Or he can keep $100 in the HSA. How is any of these better than the other? Since investing the HSA generally requires additional fees, I would probably lean toward using the HSA for expenses and increasing contributions to existing investment accounts.

Ideally, he is already maxing his investment accounts, and in that case I would cash flow the expenses and use the HSA to increase his investments.

Spirit Rider
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Re: HSA

Post by Spirit Rider » Sat Jan 20, 2018 8:20 pm

aristotelian: Is basically correct with one caveat. When you have qualified medical expenses, you have have already netted the pre-tax/pre-FICA to tax-free gain.

The simplest to see is if your next investment priority is a Roth contributions. If you take the HSA withdrawal to fund the Roth IRA you are converting assets that "could" potentially have tax free gains to assets that will have tax free gains. With no worrying about keeping the receipts for more than three years. Advantage Roth contributions. Slight access disadvantage if not Roth IRA.

Available traditional contribution space. This is similar to the determination between other traditional vs. Roth contributions. If you would be making traditional contributions, advantage there. If you would be making Roth contributions and that space is filled up, advantage HSA.

Helo80
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Re: HSA

Post by Helo80 » Sat Jan 20, 2018 8:40 pm

Whsy wrote:
Sat Jan 20, 2018 2:24 pm
I'm a little confused about HSA investment. I just started contributing last year and have been contributing the maximum possible. My employer also contributes. I haven't invested any of the money in there. If you anticipate upcoming medical bills (e.g., for regular medical check up and dentist visits etc.), should you save it as cash and not invest it?
Fair question and that is something only you can decide for yourself. My HSA requires a $1000 minimum cash balance that pays an abysmal 0.05% interest rate. The rest, I am allowed to invest in several decent Vanguard and American Funds (low ER classes).

I do not use medical care that much, so it's basically a Super IRA for me, because of the triple tax advantages. If I do need to medical services, my emergency fund can cover the amount. Basically, my plan is not to use the HSA funds until retirement.

There is no legal requirement that you must use your HSA monies prior to your own piggy bank to cover healthcare expenses.

Seal the Deal
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Re: HSA

Post by Seal the Deal » Sat Jan 20, 2018 9:29 pm

You can do both, here is our plan. (1) Save deductible in cash to pay current expenses, replenish as necessary. (2) Invest difference between deductible and max OOP into diversified bond index fund. (3) Invest beyond max OOP into total stock market index. Use commission-free ETFs if available and re-balance annually.

Note that standard annual checkups will incur no charge. Check the details of your HDHP for additional benefits - ours includes 2x dental cleanings and one x-ray per person yearly at no charge.

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camillus
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Re: HSA

Post by camillus » Sat Jan 20, 2018 9:56 pm

I would keep it simple. This was mentioned above:

Keep your deductible (or 1.5 of your deductible - you might have a big health expense in January) within your HSA in cash. Invest the rest. Ideally, pick one cheap equity fund in the HSA and do your rebalancing elsewhere.

The HSA is a source of a lot of complexity around here, with some people having the idea that at some point in retirement they will pull a box out from under their bed with 40 years of health receipts, make a tax-free withdrawal out of their multi-million dollar HSA and buy a boat.

Keep it simple. Example: Within the HSA keep $4000 in cash/money market, invest the rest in Total Stock or SP500.

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powermega
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Re: HSA

Post by powermega » Sat Jan 20, 2018 10:48 pm

Every January, as part of our rebalancing event, we invest the amount of the HSA that exceeds the annual deductible. Then we make qualified withdrawals during the year. Not interested in keeping receipts for future use. We understand that keeping the receipts and paying 100% out of pocket is financially a better move, but we don't want to hassle the paperwork. Our deductible is $3k, so we get to sweep quite a bit into investments. The investment side of the HSA is invested like any of the other qualified accounts.

To each his own.
Even a stopped clock is right twice a day.

aristotelian
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Re: HSA

Post by aristotelian » Sun Jan 21, 2018 7:43 am

camillus wrote:
Sat Jan 20, 2018 9:56 pm
I would keep it simple. This was mentioned above:

Keep your deductible (or 1.5 of your deductible - you might have a big health expense in January) within your HSA in cash. Invest the rest. Ideally, pick one cheap equity fund in the HSA and do your rebalancing elsewhere.

The HSA is a source of a lot of complexity around here, with some people having the idea that at some point in retirement they will pull a box out from under their bed with 40 years of health receipts, make a tax-free withdrawal out of their multi-million dollar HSA and buy a boat.

Keep it simple. Example: Within the HSA keep $4000 in cash/money market, invest the rest in Total Stock or SP500.
You don't need to keep the receipts to invest it. Some of us plan to invest for future health care costs, including Medicare premiums and Long Term Care insurance, which are eligible in retirement.

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camillus
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Re: HSA

Post by camillus » Sun Jan 21, 2018 9:51 am

aristotelian wrote:
Sun Jan 21, 2018 7:43 am
You don't need to keep the receipts to invest it. Some of us plan to invest for future health care costs, including Medicare premiums and Long Term Care insurance, which are eligible in retirement.
That is in fact what I am doing. I only meant to parody those who are delaying reimbursement from an HSA for tax free withdrawals at some future date.

error
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Re: HSA

Post by error » Sun Jan 21, 2018 10:13 am

youngpleb wrote:
Sat Jan 20, 2018 5:15 pm
aristotelian wrote:
Sat Jan 20, 2018 4:30 pm
If you are already maxing other accounts, it is pretty clearly a win to invest it.

If you are not maxing your other accounts, then it is more like six of one, half dozen of the other. You will end up with the same net amount invested, since investing it would take away from other investments.
You might end up with the same amount invested, but you wouldn't end up with the same amount when it comes time for withdrawing funds during retirement. HSA contributions are pre-tax, enjoy tax-free growth, and once you hit 65 years old are tax-free withdrawals for whatever you want to spend it on. Therefore, especially if you aren't planning to retire until your 60s, HSA should pretty much be prioritized second right after the 401k match. It's why some people call it a "super IRA."
Correct me if I'm wrong, but HSA money cannot be spent tax free on whatever you want after 65. I believe it CAN be spent Penalty free though. This is unless you are "paying yourself back" for medical expenses you paid out of pocket for in the past.

This is how I understand HSA.
HSA:
-Money going in is pre-tax.
-Money grows tax free.
-You can spend money tax free for qualifying medical expenses at any age.
-You can take money out before 65 to pay for anything, but have to pay income tax and penalty, except on medical expenses, which are tax/penalty free.
-After 65 you can take money out to pay for anything, but have to pay income tax(but not penalty), except on medical expenses, which are tax/penalty free.
-You can pay out of pocket for medical today, letting your HSA grow, and pay yourself back that money after 65 tax free.

The last bullet point works like this:
-Assume you have a $1000 medical bill today.
-Pay that out of pocket today.
-Keep receipt of the transaction.
-After 65 you need $1000 for some non medical purpose
-After 65 withdraw $1000 to pay yourself back for a medical expense
-Because the money is to pay for medical expense it is income tax free.
-Now you have $1000 that was never taxed.

Why do this? Because it allows your HSA money to compound with time.
If you have 40 years to go until 65, and assuming ~%7 growth, you can expect that $1000 to double 4 times. This means the $1000 today will turn into $16,000 in retirement. lets be more realistic and assume you get half that because of inflation and a slightly flatter growth. That's still $8,000 in today's money.

Because you have to save receipts it can be a pain in the butt though. Also you basically have to prove you didn't deduct those medical expenses and that could be hard to do.
FYI

aristotelian
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Re: HSA

Post by aristotelian » Sun Jan 21, 2018 10:57 am

error wrote:
Sun Jan 21, 2018 10:13 am
Correct me if I'm wrong, but HSA money cannot be spent tax free on whatever you want after 65. I believe it CAN be spent Penalty free though. This is unless you are "paying yourself back" for medical expenses you paid out of pocket for in the past.
Correct. But my assumption is that I will have plenty of eligible expenses in old age so I don't need to save receipts now if I am investing the HSA.

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whodidntante
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Re: HSA

Post by whodidntante » Sun Jan 21, 2018 11:02 am

I think you should contribute the maximum each year if you can because it's a fantastic tax advantaged account. It's even better than a 401k once you exceed the match.

As far as when you spend it, if you have a lot of expenses in a given year and it puts a strain on your finances, then take the money out. If not, let it grow. I think most people will incur plenty of qualified medical expenses before they die to fully drain an HSA. You can also take the money out tax deferred once the public policy disincentives to work kick in, in the event that you can't use it for qualified expenses.

Spirit Rider
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Re: HSA

Post by Spirit Rider » Sun Jan 21, 2018 11:40 am

camillus wrote:
Sun Jan 21, 2018 9:51 am
aristotelian wrote:
Sun Jan 21, 2018 7:43 am
You don't need to keep the receipts to invest it. Some of us plan to invest for future health care costs, including Medicare premiums and Long Term Care insurance, which are eligible in retirement.
That is in fact what I am doing. I only meant to parody those who are delaying reimbursement from an HSA for tax free withdrawals at some future date.
Those who seek to diminish others only manage to diminish themselves.

I have never seen anyone on Bogleheads suggest anything remotely like your previous post. The true value of deferring withdrawals is not the value of that principal, but rather the gains on those amounts. This is not unlike the Backdoor Roth. It allows you to generate tax free gains on what amounts to thousands of dollars of what are essentially after-tax contributions. Are you suggesting people not do Backdoor Roths, because they are too complex?

Not to mention that there really is no more complexity to deferring withdrawals vs. immediate reimbursement. IRS regulations already require you to retain the receipts for a minimum of three years. So we are really only talking about the length of time to retain receipts that are already required. If you are still stuffing your receipts in a shoe box maybe an upgrade is in order.

You are perfectly entitled to manage your HSA any way you choose, However, studies show that an average couple 65 retiring in 2017 will spend $275K in their lifetimes on medical expenses, not including IRMAA, over-the-counter medication, most dental/vision care and long term care. Those people you are making fun of will be the ones laughing as they use their tax-free HSA account to pay those astronomical medical expenses.

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camillus
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Re: HSA

Post by camillus » Sun Jan 21, 2018 1:24 pm

Any jesting of mine was meant lightheartedly. For me personally, I would not want to store receipts for decades for a delayed reimbursement. I am specifically referring to the practice of incurring an eligible medical expense now for $300, and waiting 20 years to make the qualified tax-free withdrawal. This sort of record keeping scheme seems to me to violate the boglehead principle of simplicity. In any case, I am contributing to derailing this thread. For that I apologize!

Getting back to OP, keep it simple as I said above:

In the HSA, hold $4-5000 in cash for reimbursement, invest the rest. Make distributions or not - depending on your cash flow. Continue to contribute regularly.

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