Worth the hassle to open an HSA in California?

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yosemite_mountain
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Worth the hassle to open an HSA in California?

Post by yosemite_mountain »

I live in CA. Is it worth the hassle to open an HSA? My employer contributes $750 a year to the plan.

Stats
Tax Filing Status: Single, no kids
Tax Rate: 35% Federal, 9.3% State
State of Residence: California
Age: 31
Asset allocation: 80% stocks / 20% bonds all in a three fund portfolio consisting of Vanguard Total Stock, Vanguard Total International, Vanguard Total Bond, invested across 401k, Roth IRA and Taxable accounts.

Questions:
1.Should I invest the HSA in treasuries to avoid CA state tax, or should I invest the HSA in equities to maximize growth?

2.If invested in equites: $3500 contribution a year at a 6% return yields $440k after 35 years, which is equivalent to $155k in todays dollars using 3% inflation.

3.If invested in treasuries: $3500 contribution a year at a 2% return yields $185k after 35 years, which is equivalent to $66k in todays dollars using 3% inflation.
Last edited by yosemite_mountain on Mon Oct 21, 2019 12:03 pm, edited 8 times in total.
lakpr
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Re: Worth the hassle to open an HSA in California?

Post by lakpr »

California (and New Jersey too, where I live) does not recognize HSAs. Even if you don't withdraw from the HSA, you will still owe state taxes on the contribution and the growth.

The usual advice is to load HSA into Treasuries / Treasury funds, so both the contribution and growth is exempt from state taxation. Treat is as part of your bond allocation.
SDLinguist
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Re: Worth the hassle to open an HSA in California?

Post by SDLinguist »

You might not be saving the 9.3% state tax on the $2,750 but you are saving the 35% federal and 7.5% SS tax if doing contributions via payroll deductions.

Given that you realistically need maybe 10 minutes a year extra add up all the dividend payments made by the funds in the HSA (assuming you didn't sell anything) to report them as taxable income in CA, is that time worth $1,168.75 going into an account you control vs going to the federal government?
Big Dog
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Re: Worth the hassle to open an HSA in California?

Post by Big Dog »

definitely worth it, particularly since your employer puts in the first $750.

I'm in CA, and as noted above, put my HSA investments into Treasury funds (Fido) and count it as part of my bond AA. Our employer funds options weren't great, so I rolled the HSA balance out to Fido at the end of the year.

In answer to your question: CA requires that you pay tax on any gain every year. (Thats why folks recommend Treasuries so they are not taxable in CA.) Since you don't get a tax beak when you put the money in, and you pay tax on any gain every year, there is no tax when you take it out. (other than the last year of cap gains)
lakpr
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Re: Worth the hassle to open an HSA in California?

Post by lakpr »

SDLinguist wrote: Fri Oct 18, 2019 8:01 pm You might not be saving the 9.3% state tax on the $2,750 but you are saving the 35% federal and 7.5% SS tax if doing contributions via payroll deductions.
The first $128k only is subject to SS taxation. So, given that the OP said he/she is in 35% tax bracket, is earning more than this. As such, there is no SS tax savings n HSA contributions.
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yosemite_mountain
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Re: Worth the hassle to open an HSA in California?

Post by yosemite_mountain »

lakpr wrote: Fri Oct 18, 2019 7:54 pm California (and New Jersey too, where I live) does not recognize HSAs. Even if you don't withdraw from the HSA, you will still owe state taxes on the contribution and the growth.

The usual advice is to load HSA into Treasuries / Treasury funds, so both the contribution and growth is exempt from state taxation. Treat is as part of your bond allocation.
Thanks. The plan custodian, Optum bank, does not have treasuries as an investment option
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yosemite_mountain
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Re: Worth the hassle to open an HSA in California?

Post by yosemite_mountain »

SDLinguist wrote: Fri Oct 18, 2019 8:01 pm You might not be saving the 9.3% state tax on the $2,750 but you are saving the 35% federal and 7.5% SS tax if doing contributions via payroll deductions.

Given that you realistically need maybe 10 minutes a year extra add up all the dividend payments made by the funds in the HSA (assuming you didn't sell anything) to report them as taxable income in CA, is that time worth $1,168.75 going into an account you control vs going to the federal government?
I'm only saving the 35% federal, which works out to be $962.5
Last edited by yosemite_mountain on Fri Oct 18, 2019 10:35 pm, edited 1 time in total.
Topic Author
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Re: Worth the hassle to open an HSA in California?

Post by yosemite_mountain »

Big Dog wrote: Fri Oct 18, 2019 8:45 pm definitely worth it, particularly since your employer puts in the first $750.

I'm in CA, and as noted above, put my HSA investments into Treasury funds (Fido) and count it as part of my bond AA. Our employer funds options weren't great, so I rolled the HSA balance out to Fido at the end of the year.

In answer to your question: CA requires that you pay tax on any gain every year. (Thats why folks recommend Treasuries so they are not taxable in CA.) Since you don't get a tax beak when you put the money in, and you pay tax on any gain every year, there is no tax when you take it out. (other than the last year of cap gains)
Wait, I have to pay tax on any unrealized gain every year even if I don't sell? I was under the impression that I only pay tax on dividends, interest or capital gains?
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Re: Worth the hassle to open an HSA in California?

Post by MotoTrojan »

yosemite_mountain wrote: Fri Oct 18, 2019 10:18 pm
Big Dog wrote: Fri Oct 18, 2019 8:45 pm definitely worth it, particularly since your employer puts in the first $750.

I'm in CA, and as noted above, put my HSA investments into Treasury funds (Fido) and count it as part of my bond AA. Our employer funds options weren't great, so I rolled the HSA balance out to Fido at the end of the year.

In answer to your question: CA requires that you pay tax on any gain every year. (Thats why folks recommend Treasuries so they are not taxable in CA.) Since you don't get a tax beak when you put the money in, and you pay tax on any gain every year, there is no tax when you take it out. (other than the last year of cap gains)
Wait, I have to pay tax on any unrealized gain every year even if I don't sell? I was under the impression that I only pay tax on dividends, interest or capital gains?
You are correct. I hold the S&P500 in mine and simply report the dividends. I am careful not to sell.
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Re: Worth the hassle to open an HSA in California?

Post by sreynard »

I hold total stock market fund in mine. Quicken tracks dividend reinvestments just fine.

To the feds it's an IRA going in and a ROTH coming out. To CA it’s a brokerage account.

Pay raise from employer.

What’s not to love? :confused
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Re: Worth the hassle to open an HSA in California?

Post by Spirit Rider »

yosemite_mountain wrote: Fri Oct 18, 2019 7:29 pm 1. In CA, if you withdraw after 65 for non-medical expenses, do you pay state tax on the entire withdrawal, or just pay state tax on the earnings?
You never received a deduction from CA for the contribution, so that is not taxed by CA upon withdrawal. You paid CA taxes each year for interest, dividend and capital gains distributions, so those earnings are not taxed upon withdrawal. The only CA tax you will be liable for are any capital gains on security sales.

Regardless if you are in CA or not, you should almost never take non-qualified HSA distributions >= age 65 unless you have no other pre-tax retirement account assets.. You are turning future federal tax-free distributions into distributions subject to federal ordinary income taxes.

Just because you can do something, does not mean you should do something.
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Re: Worth the hassle to open an HSA in California?

Post by FiveK »

yosemite_mountain wrote: Fri Oct 18, 2019 9:58 pm Thanks. The plan custodian, Optum bank, does not have treasuries as an investment option
You don't have to keep your money with the custodian your employer uses. Consider transferring it to Fidelity or Lively (or whoever you prefer).
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Re: Worth the hassle to open an HSA in California?

Post by CFM300 »

FiveK wrote: Sat Oct 19, 2019 2:49 am You don't have to keep your money with the custodian your employer uses. Consider transferring it to Fidelity or Lively (or whoever you prefer).
This. Set up an HSA at Fidelity, which has no fees. Once a year, transfer money from Optum to Fidelity. You can use FDLXX (FIDELITY TREASURY ONLY MONEY MARKET) for your margin account and FUAMX (FID INTER TREASURY BOND INDEX FUND) as your investment fund.
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Re: Worth the hassle to open an HSA in California?

Post by whodidntante »

You shouldn't care what Optum offers for investment options because your money shouldn't be at Optum. I also have Optum as my employer blessed account. Here's what I do.

1) Contact payroll or use the online tool they provide to request 50% of your salary go to your HSA. This will probably cause you to hit the annual limit in the first paycheck. For some, it will take more paychecks. This will at least save you the Medicare tax on that money. You are going to hit the social security contribution limit regardless.
2) Wait for the company contribution to post.
3) Move all of the money to Fidelity, except for 0.02*. I like to use my once per year indirect rollover for this because it leaves no chance for Optum to screw it up. What I actually do is take a distribution via ACH, which even Optum can get right.
4) Then I follow the instructions on Fidelity's website to complete the rollover within 60 days. Actually it's more like within 60 minutes after I receive the funds.
5) Invest the money any way I like at Fidelity.

Alternatively, you can do a custodian to custodian transfer from Optum to Fidelity, but then you are subject to Optum's fees, slovenly speed, and lack of competency.

Once the money is a Fidelity, you can buy Treasuries at no cost, or buy a Treasury bond index fund that has lower expenses than the closest bond fund offering at Vanguard. Not that it matters because Vanguard doesn't offer HSAs. Sorry, I had to work in that dig for the Vanguard fanbois.

*-The two cents I leave at Optum is so I can say I gave them my two cents.
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Re: Worth the hassle to open an HSA in California?

Post by howdy007 »

Big Dog wrote: Fri Oct 18, 2019 8:45 pm definitely worth it, particularly since your employer puts in the first $750.

I'm in CA, and as noted above, put my HSA investments into Treasury funds (Fido) and count it as part of my bond AA. Our employer funds options weren't great, so I rolled the HSA balance out to Fido at the end of the year.

In answer to your question: CA requires that you pay tax on any gain every year. (Thats why folks recommend Treasuries so they are not taxable in CA.) Since you don't get a tax beak when you put the money in, and you pay tax on any gain every year, there is no tax when you take it out. (other than the last year of cap gains)
What treasury funds are good at Fido that are not taxable in CA, can you provide some ticker symbols. TIA
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yosemite_mountain
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Re: Worth the hassle to open an HSA in California?

Post by yosemite_mountain »

FiveK wrote: Sat Oct 19, 2019 2:49 am You don't have to keep your money with the custodian your employer uses. Consider transferring it to Fidelity or Lively (or whoever you prefer).
Thanks for the advice! I was not aware that the HSA can be transferred out of the employer custodian to Fidelity.
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Re: Worth the hassle to open an HSA in California?

Post by grabiner »

SDLinguist wrote: Fri Oct 18, 2019 8:01 pm You might not be saving the 9.3% state tax on the $2,750 but you are saving the 35% federal and 7.5% SS tax if doing contributions via payroll deductions.
The payroll deduction tax savings is only 1.45% (Medicare only) since the 35% federal tax rate implies that you are over the SS wage cap.

Still, the benefit is worthwhile, When I lived in NJ, I maxed out my HSA for the 28% federal tax savings, plus 1.45% Medicare because I was also over the wage cap, and invested the HSA in a low-dividend ETF so that the NJ tax on the ETF dividend was minimal. I switched ETFs last year, but I no longer live in NJ, so the capital gain on the sale was not taxable.
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Re: Worth the hassle to open an HSA in California?

Post by yosemite_mountain »

grabiner wrote: Sat Oct 19, 2019 3:02 pm I switched ETFs last year, but I no longer live in NJ, so the capital gain on the sale was not taxable.
So if I'm not living in CA after age 65, I will not owe any capital gain state taxes on the sale as long as its for qualified medical expenses, right?
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Re: Worth the hassle to open an HSA in California?

Post by eye.surgeon »

yosemite_mountain wrote: Sat Oct 19, 2019 4:28 pm
grabiner wrote: Sat Oct 19, 2019 3:02 pm I switched ETFs last year, but I no longer live in NJ, so the capital gain on the sale was not taxable.
So if I'm not living in CA after age 65, I will not owe any capital gain state taxes on the sale as long as its for qualified medical expenses, right?
That's what a lot of us Californian bogleheads are counting on as soon as we retire and get the heck out of here.
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Re: Worth the hassle to open an HSA in California?

Post by Big Dog »

howdy007 wrote: Sat Oct 19, 2019 12:12 pm
Big Dog wrote: Fri Oct 18, 2019 8:45 pm definitely worth it, particularly since your employer puts in the first $750.

I'm in CA, and as noted above, put my HSA investments into Treasury funds (Fido) and count it as part of my bond AA. Our employer funds options weren't great, so I rolled the HSA balance out to Fido at the end of the year.

In answer to your question: CA requires that you pay tax on any gain every year. (Thats why folks recommend Treasuries so they are not taxable in CA.) Since you don't get a tax beak when you put the money in, and you pay tax on any gain every year, there is no tax when you take it out. (other than the last year of cap gains)
What treasury funds are good at Fido that are not taxable in CA, can you provide some ticker symbols. TIA
Here's a list from Fidelity. I think I have one of those listed as 99.9% state tax exempt. (Intermediate Treasury Bond Index - FUAMX)

https://www.fidelity.com/bin-public/060 ... 18-gse.pdf
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Re: Worth the hassle to open an HSA in California?

Post by ssel »

I know that distributions from a treasury mutual fund aren't taxable in California. But when the fund is sold, are the capital gains taxable?
If so then a treasury money market has a bit of an advantage there, including less bookkeeping. Though perhaps at the cost of slightly lower returns (?)
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Re: Worth the hassle to open an HSA in California?

Post by grabiner »

ssel wrote: Sat Oct 19, 2019 9:58 pm I know that distributions from a treasury mutual fund aren't taxable in California. But when the fund is sold, are the capital gains taxable?
If so then a treasury money market has a bit of an advantage there, including less bookkeeping. Though perhaps at the cost of slightly lower returns (?)
In CA, capital gains on a Treasury fund are taxable. However, they aren't likely to be very large, and there could just as easily be losses. Therefore, the main advantage over a Treasury money market fund over a bond fund is the book-keeping.

In NJ, which also does not recognize HSAs, capital gains on a Treasury fund are not taxable. (MD is the only other state I know which does not tax capital gains on Treasury bonds.)
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Re: Worth the hassle to open an HSA in California?

Post by howdy007 »

Big Dog wrote: Sat Oct 19, 2019 5:26 pm
howdy007 wrote: Sat Oct 19, 2019 12:12 pm
Big Dog wrote: Fri Oct 18, 2019 8:45 pm definitely worth it, particularly since your employer puts in the first $750.

I'm in CA, and as noted above, put my HSA investments into Treasury funds (Fido) and count it as part of my bond AA. Our employer funds options weren't great, so I rolled the HSA balance out to Fido at the end of the year.

In answer to your question: CA requires that you pay tax on any gain every year. (Thats why folks recommend Treasuries so they are not taxable in CA.) Since you don't get a tax beak when you put the money in, and you pay tax on any gain every year, there is no tax when you take it out. (other than the last year of cap gains)
What treasury funds are good at Fido that are not taxable in CA, can you provide some ticker symbols. TIA
Here's a list from Fidelity. I think I have one of those listed as 99.9% state tax exempt. (Intermediate Treasury Bond Index - FUAMX)

https://www.fidelity.com/bin-public/060 ... 18-gse.pdf
Thanks for the link, very helpful. How did you navigate thru to get to this link, want to bookmark it to refer for upcoming years.

Now that buying ETFs is no cost at fidelity, Is VGIT (exp 0.07%) better option than FUAMX(0.03%)?
Pure exp ratio wise FUAMX seems to be better
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Re: Worth the hassle to open an HSA in California?

Post by Big Dog »

howdy007 wrote: Sun Oct 20, 2019 12:02 pm
Big Dog wrote: Sat Oct 19, 2019 5:26 pm
howdy007 wrote: Sat Oct 19, 2019 12:12 pm
Big Dog wrote: Fri Oct 18, 2019 8:45 pm definitely worth it, particularly since your employer puts in the first $750.

I'm in CA, and as noted above, put my HSA investments into Treasury funds (Fido) and count it as part of my bond AA. Our employer funds options weren't great, so I rolled the HSA balance out to Fido at the end of the year.

In answer to your question: CA requires that you pay tax on any gain every year. (Thats why folks recommend Treasuries so they are not taxable in CA.) Since you don't get a tax beak when you put the money in, and you pay tax on any gain every year, there is no tax when you take it out. (other than the last year of cap gains)
What treasury funds are good at Fido that are not taxable in CA, can you provide some ticker symbols. TIA
Here's a list from Fidelity. I think I have one of those listed as 99.9% state tax exempt. (Intermediate Treasury Bond Index - FUAMX)

https://www.fidelity.com/bin-public/060 ... 18-gse.pdf
Thanks for the link, very helpful. How did you navigate thru to get to this link, want to bookmark it to refer for upcoming years.

Now that buying ETFs is no cost at fidelity, Is VGIT (exp 0.07%) better option than FUAMX(0.03%)?
Pure exp ratio wise FUAMX seems to be better
Just googled Fidelity state tax exempt funds. Sorry, I'm not an ETF guy, so haven't investigated them.
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yosemite_mountain
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Re: Worth the hassle to open an HSA in California?

Post by yosemite_mountain »

I think I might go ahead and invest the HSA in equities. Investing the HSA in treasuries will not yield a significant amount that is enough to pay for medical expenses. Thoughts?
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Re: Worth the hassle to open an HSA in California?

Post by grabiner »

yosemite_mountain wrote: Mon Oct 21, 2019 12:01 pm I think I might go ahead and invest the HSA in equities. Investing the HSA in treasuries will not yield a significant amount that is enough to pay for medical expenses. Thoughts?
View everything as one portfolio. If your HSA doesn't cover your medical expenses in retirement, you can pay them from your IRA or 401(k), with no additional loss.

Thus, as long as you are going to hold Treasuries somewhere, it makes sense to hold them in the most tax-friendly place. But if you don't hold Treasuries at all (100% stock allocation, or an unusually good fixed-income holding in your employer plan such as the TSP G fund or TIAA Traditional Annuity), then a tax-efficient stock index fund in the HSA is also reasonable.
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Re: Worth the hassle to open an HSA in California?

Post by BogleBulldawg »

Another California resident here, seeking California applicable perspective.

So, is it best to put into treasury bonds, etc. in lieu of equities only in the case that one wants bonds? If one really wanted to clear the portfolio of bonds, is it worth rethinking that for the California HSA account because the future tax implications from capital gains sales are that important? There is always a complex and nebulous calculus to these types of decisions IMO.

If one is on the fence between investing in VTSAX/equities vs. bonds due to CA state income tax on future returns as one is in their late 30's...would not the gains over decades of compounding outweigh the income tax on the capital gains in the future vs. lower returns from bonds?

I understand that bonds are tax advantageous to place in this fund if one holds them for placement purposes, but how does one run the numbers including the tax implications?

Is it fair to think of the HSA as another ROTH retirement fund (assuming one does not withdraw large amounts for healthcare expenses)?

Thanks in advance all, It seems like HSAs are underutilized and I know that my level of knowledge on these accounts is low and would benefit from the perspective of those much more familiar.
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Re: Worth the hassle to open an HSA in California?

Post by FoolStreet »

BogleBulldawg wrote: Wed Aug 12, 2020 2:25 am Another California resident here, seeking California applicable perspective.

So, is it best to put into treasury bonds, etc. in lieu of equities only in the case that one wants bonds? If one really wanted to clear the portfolio of bonds, is it worth rethinking that for the California HSA account because the future tax implications from capital gains sales are that important? There is always a complex and nebulous calculus to these types of decisions IMO.

If one is on the fence between investing in VTSAX/equities vs. bonds due to CA state income tax on future returns as one is in their late 30's...would not the gains over decades of compounding outweigh the income tax on the capital gains in the future vs. lower returns from bonds?

I understand that bonds are tax advantageous to place in this fund if one holds them for placement purposes, but how does one run the numbers including the tax implications?

Is it fair to think of the HSA as another ROTH retirement fund (assuming one does not withdraw large amounts for healthcare expenses)?

Thanks in advance all, It seems like HSAs are underutilized and I know that my level of knowledge on these accounts is low and would benefit from the perspective of those much more familiar.
I think of it as another Roth, but that’s easy because the market is going up. If the market were to go down, I might react emotionally along the lines of, “but that is my emergency healthcare money!”

Regardless, many suggest treasuries to avoid the tax headache. Others are unaware and just don’t pay CA tax on dividends. I’m in the latter and don’t know how to report taxes for these things.
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Re: Worth the hassle to open an HSA in California?

Post by sailaway »

FoolStreet wrote: Wed Sep 02, 2020 3:19 pm Others are unaware and just don’t pay CA tax on dividends. I’m in the latter and don’t know how to report taxes for these things.
Well, clearly you are aware, and having participated in this thread you have been pointed to the how. So now you can avoid tax fraud!
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Re: Worth the hassle to open an HSA in California?

Post by FoolStreet »

sailaway wrote: Wed Sep 02, 2020 3:24 pm
FoolStreet wrote: Wed Sep 02, 2020 3:19 pm Others are unaware and just don’t pay CA tax on dividends. I’m in the latter and don’t know how to report taxes for these things.
Well, clearly you are aware, and having participated in this thread you have been pointed to the how. So now you can avoid tax fraud!
Sorry, no, call me dense, but I still don’t get it.
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Re: Worth the hassle to open an HSA in California?

Post by Spirit Rider »

FoolStreet wrote: Wed Sep 02, 2020 3:32 pm
sailaway wrote: Wed Sep 02, 2020 3:24 pm Well, clearly you are aware, and having participated in this thread you have been pointed to the how. So now you can avoid tax fraud!
Sorry, no, call me dense, but I still don’t get it.
I'm not buying it and neither will the CA Franchise Tax Board. This is simply; no pre-tax and/or deductible contributions and all earnings are treated as if they occurred in a taxable account.
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Re: Worth the hassle to open an HSA in California?

Post by FoolStreet »

Spirit Rider wrote: Wed Sep 02, 2020 10:20 pm
FoolStreet wrote: Wed Sep 02, 2020 3:32 pm
sailaway wrote: Wed Sep 02, 2020 3:24 pm Well, clearly you are aware, and having participated in this thread you have been pointed to the how. So now you can avoid tax fraud!
Sorry, no, call me dense, but I still don’t get it.
I'm not buying it and neither will the CA Franchise Tax Board. This is simply; no pre-tax and/or deductible contributions and all earnings are treated as if they occurred in a taxable account.
What should I do then?
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Re: Worth the hassle to open an HSA in California?

Post by grabiner »

FoolStreet wrote: Wed Sep 02, 2020 10:22 pm
Spirit Rider wrote: Wed Sep 02, 2020 10:20 pm
FoolStreet wrote: Wed Sep 02, 2020 3:32 pm
sailaway wrote: Wed Sep 02, 2020 3:24 pm Well, clearly you are aware, and having participated in this thread you have been pointed to the how. So now you can avoid tax fraud!
Sorry, no, call me dense, but I still don’t get it.
I'm not buying it and neither will the CA Franchise Tax Board. This is simply; no pre-tax and/or deductible contributions and all earnings are treated as if they occurred in a taxable account.
What should I do then?
Report the adjustments on Schedule CA, just as you would report any other adjustments. If you received $100 in interest on a Treasury bond, you report $100 in interest in the "subtractions" column for the "interest" line, since this interest is not taxable in CA. Similarly, if your HSA paid $100 in interest, report $100 in the "additions" column for the "interest" line.

If you contributed $2500 to your HSA, report $2500 in the "subtractions" column for the "Health savings account" line; you are subtracting a federal adjustment to income, which means that you don't take this subtraction in computing your CA adjusted gross income.

If your employer contributed $1000 to your HSA, report $1000 in the "additions" column for the "wages" line. (If you are a CA resident, the difference will appear on your W-2 as well, since your employer reports CA wages according to CA law.)
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Re: Worth the hassle to open an HSA in California?

Post by FoolStreet »

grabiner wrote: Wed Sep 02, 2020 11:04 pm
FoolStreet wrote: Wed Sep 02, 2020 10:22 pm
Spirit Rider wrote: Wed Sep 02, 2020 10:20 pm
FoolStreet wrote: Wed Sep 02, 2020 3:32 pm
sailaway wrote: Wed Sep 02, 2020 3:24 pm Well, clearly you are aware, and having participated in this thread you have been pointed to the how. So now you can avoid tax fraud!
Sorry, no, call me dense, but I still don’t get it.
I'm not buying it and neither will the CA Franchise Tax Board. This is simply; no pre-tax and/or deductible contributions and all earnings are treated as if they occurred in a taxable account.
What should I do then?
Report the adjustments on Schedule CA, just as you would report any other adjustments. If you received $100 in interest on a Treasury bond, you report $100 in interest in the "subtractions" column for the "interest" line, since this interest is not taxable in CA. Similarly, if your HSA paid $100 in interest, report $100 in the "additions" column for the "interest" line.

If you contributed $2500 to your HSA, report $2500 in the "subtractions" column for the "Health savings account" line; you are subtracting a federal adjustment to income, which means that you don't take this subtraction in computing your CA adjusted gross income.

If your employer contributed $1000 to your HSA, report $1000 in the "additions" column for the "wages" line. (If you are a CA resident, the difference will appear on your W-2 as well, since your employer reports CA wages according to CA law.)
Thanks grabiner, I will check my account to se if they document dividends. Then check my return tomorrow and see if I can follow along your instructions and loop back with questions.
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Re: Worth the hassle to open an HSA in California?

Post by grabiner »

FoolStreet wrote: Wed Sep 02, 2020 11:09 pm
grabiner wrote: Wed Sep 02, 2020 11:04 pm Report the adjustments on Schedule CA, just as you would report any other adjustments. If you received $100 in interest on a Treasury bond, you report $100 in interest in the "subtractions" column for the "interest" line, since this interest is not taxable in CA. Similarly, if your HSA paid $100 in interest, report $100 in the "additions" column for the "interest" line.

If you contributed $2500 to your HSA, report $2500 in the "subtractions" column for the "Health savings account" line; you are subtracting a federal adjustment to income, which means that you don't take this subtraction in computing your CA adjusted gross income.

If your employer contributed $1000 to your HSA, report $1000 in the "additions" column for the "wages" line. (If you are a CA resident, the difference will appear on your W-2 as well, since your employer reports CA wages according to CA law.)
Thanks grabiner, I will check my account to se if they document dividends. Then check my return tomorrow and see if I can follow along your instructions and loop back with questions.
You won't have a 1099, but your account statements will show interest (from a bank account) or dividends (from stocks or mutual funds); these are the amounts you would report as adjustments. (Exception: if you have a fund which is at least 50% Treasuries, the portion of the interest from Treasuries is not taxable in CA; check with your fund provider for the appropriate fraction which is taxable.)
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Re: Worth the hassle to open an HSA in California?

Post by babystep »

yosemite_mountain wrote: Fri Oct 18, 2019 7:29 pm I live in CA. Is it worth the hassle to open an HSA? My employer contributes $750 a year to the plan.

Stats
Tax Filing Status: Single, no kids
Tax Rate: 35% Federal, 9.3% State
State of Residence: California
Age: 31
Asset allocation: 80% stocks / 20% bonds all in a three fund portfolio consisting of Vanguard Total Stock, Vanguard Total International, Vanguard Total Bond, invested across 401k, Roth IRA and Taxable accounts.

Questions:
1.Should I invest the HSA in treasuries to avoid CA state tax, or should I invest the HSA in equities to maximize growth?

2.If invested in equites: $3500 contribution a year at a 6% return yields $440k after 35 years, which is equivalent to $155k in todays dollars using 3% inflation.

3.If invested in treasuries: $3500 contribution a year at a 2% return yields $185k after 35 years, which is equivalent to $66k in todays dollars using 3% inflation.
You have a pretty good idea about this. If you calculate the impact of CA taxes then 2) above is still better. But if you are 80/20 anyway then you can easily buy the treasury in HSA and adjust in other accounts for AA.

I have S&P 500. It takes a bit of extra work for my CA taxes.
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Re: Worth the hassle to open an HSA in California?

Post by FoolStreet »

grabiner wrote: Wed Sep 02, 2020 11:21 pm
FoolStreet wrote: Wed Sep 02, 2020 11:09 pm
grabiner wrote: Wed Sep 02, 2020 11:04 pm Report the adjustments on Schedule CA, just as you would report any other adjustments. If you received $100 in interest on a Treasury bond, you report $100 in interest in the "subtractions" column for the "interest" line, since this interest is not taxable in CA. Similarly, if your HSA paid $100 in interest, report $100 in the "additions" column for the "interest" line.

If you contributed $2500 to your HSA, report $2500 in the "subtractions" column for the "Health savings account" line; you are subtracting a federal adjustment to income, which means that you don't take this subtraction in computing your CA adjusted gross income.

If your employer contributed $1000 to your HSA, report $1000 in the "additions" column for the "wages" line. (If you are a CA resident, the difference will appear on your W-2 as well, since your employer reports CA wages according to CA law.)
Thanks grabiner, I will check my account to se if they document dividends. Then check my return tomorrow and see if I can follow along your instructions and loop back with questions.
You won't have a 1099, but your account statements will show interest (from a bank account) or dividends (from stocks or mutual funds); these are the amounts you would report as adjustments. (Exception: if you have a fund which is at least 50% Treasuries, the portion of the interest from Treasuries is not taxable in CA; check with your fund provider for the appropriate fraction which is taxable.)
Looking at my 2019 statement, I started with 1k and ended with 5k. About 50c worth of interest, but that’s because I buy vanguard total stock with each months paycheck. It says that my stock gained about $600, but it is not clear if that is Market gain (which I presume is not taxable until realized) or dividends. For back of the envelope estimates, avg balance of $3k at 2% yield, gives $60.00 dividends. Or $60.50 total that should be claimed on my Ca taxes. Is this the right direction?
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Re: Worth the hassle to open an HSA in California?

Post by grabiner »

FoolStreet wrote: Thu Sep 03, 2020 11:12 am
grabiner wrote: Wed Sep 02, 2020 11:21 pm
FoolStreet wrote: Wed Sep 02, 2020 11:09 pm
grabiner wrote: Wed Sep 02, 2020 11:04 pm Report the adjustments on Schedule CA, just as you would report any other adjustments. If you received $100 in interest on a Treasury bond, you report $100 in interest in the "subtractions" column for the "interest" line, since this interest is not taxable in CA. Similarly, if your HSA paid $100 in interest, report $100 in the "additions" column for the "interest" line.

If you contributed $2500 to your HSA, report $2500 in the "subtractions" column for the "Health savings account" line; you are subtracting a federal adjustment to income, which means that you don't take this subtraction in computing your CA adjusted gross income.

If your employer contributed $1000 to your HSA, report $1000 in the "additions" column for the "wages" line. (If you are a CA resident, the difference will appear on your W-2 as well, since your employer reports CA wages according to CA law.)
Thanks grabiner, I will check my account to se if they document dividends. Then check my return tomorrow and see if I can follow along your instructions and loop back with questions.
You won't have a 1099, but your account statements will show interest (from a bank account) or dividends (from stocks or mutual funds); these are the amounts you would report as adjustments. (Exception: if you have a fund which is at least 50% Treasuries, the portion of the interest from Treasuries is not taxable in CA; check with your fund provider for the appropriate fraction which is taxable.)
Looking at my 2019 statement, I started with 1k and ended with 5k. About 50c worth of interest, but that’s because I buy vanguard total stock with each months paycheck. It says that my stock gained about $600, but it is not clear if that is Market gain (which I presume is not taxable until realized) or dividends. For back of the envelope estimates, avg balance of $3k at 2% yield, gives $60.00 dividends. Or $60.50 total that should be claimed on my Ca taxes. Is this the right direction?
That looks right. You would have 50 cents (which might round up to $1) of interest taxable by CA and not federal, and $60 of dividends, all reported on Schedule CA. The net tax cost would be about $5 if you didn't sell any stock. If you did sell stock, you have a capital gain which you report on CA Schedule D, and pay tax on that gain unless it is offset by capital losses.

Usual disclaimer: I am not your tax advisor; please do not treat anything on the Bogleheads forum as tax advice. (I am an investor in an HSA, and a former NJ resident, so I have had to make these adjustments myself even though my tax software didn't ask me about them.)
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Re: Worth the hassle to open an HSA in California?

Post by sailaway »

FoolStreet wrote: Thu Sep 03, 2020 11:12 am
grabiner wrote: Wed Sep 02, 2020 11:21 pm
FoolStreet wrote: Wed Sep 02, 2020 11:09 pm
grabiner wrote: Wed Sep 02, 2020 11:04 pm Report the adjustments on Schedule CA, just as you would report any other adjustments. If you received $100 in interest on a Treasury bond, you report $100 in interest in the "subtractions" column for the "interest" line, since this interest is not taxable in CA. Similarly, if your HSA paid $100 in interest, report $100 in the "additions" column for the "interest" line.

If you contributed $2500 to your HSA, report $2500 in the "subtractions" column for the "Health savings account" line; you are subtracting a federal adjustment to income, which means that you don't take this subtraction in computing your CA adjusted gross income.

If your employer contributed $1000 to your HSA, report $1000 in the "additions" column for the "wages" line. (If you are a CA resident, the difference will appear on your W-2 as well, since your employer reports CA wages according to CA law.)
Thanks grabiner, I will check my account to se if they document dividends. Then check my return tomorrow and see if I can follow along your instructions and loop back with questions.
You won't have a 1099, but your account statements will show interest (from a bank account) or dividends (from stocks or mutual funds); these are the amounts you would report as adjustments. (Exception: if you have a fund which is at least 50% Treasuries, the portion of the interest from Treasuries is not taxable in CA; check with your fund provider for the appropriate fraction which is taxable.)
Looking at my 2019 statement, I started with 1k and ended with 5k. About 50c worth of interest, but that’s because I buy vanguard total stock with each months paycheck. It says that my stock gained about $600, but it is not clear if that is Market gain (which I presume is not taxable until realized) or dividends. For back of the envelope estimates, avg balance of $3k at 2% yield, gives $60.00 dividends. Or $60.50 total that should be claimed on my Ca taxes. Is this the right direction?
My quarterly statements show dividends and capital gains distributions, so I add them all up, rather than guessing.
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Re: Worth the hassle to open an HSA in California?

Post by FoolStreet »

sailaway wrote: Thu Sep 03, 2020 9:39 pm
FoolStreet wrote: Thu Sep 03, 2020 11:12 am
grabiner wrote: Wed Sep 02, 2020 11:21 pm
FoolStreet wrote: Wed Sep 02, 2020 11:09 pm
grabiner wrote: Wed Sep 02, 2020 11:04 pm Report the adjustments on Schedule CA, just as you would report any other adjustments. If you received $100 in interest on a Treasury bond, you report $100 in interest in the "subtractions" column for the "interest" line, since this interest is not taxable in CA. Similarly, if your HSA paid $100 in interest, report $100 in the "additions" column for the "interest" line.

If you contributed $2500 to your HSA, report $2500 in the "subtractions" column for the "Health savings account" line; you are subtracting a federal adjustment to income, which means that you don't take this subtraction in computing your CA adjusted gross income.

If your employer contributed $1000 to your HSA, report $1000 in the "additions" column for the "wages" line. (If you are a CA resident, the difference will appear on your W-2 as well, since your employer reports CA wages according to CA law.)
Thanks grabiner, I will check my account to se if they document dividends. Then check my return tomorrow and see if I can follow along your instructions and loop back with questions.
You won't have a 1099, but your account statements will show interest (from a bank account) or dividends (from stocks or mutual funds); these are the amounts you would report as adjustments. (Exception: if you have a fund which is at least 50% Treasuries, the portion of the interest from Treasuries is not taxable in CA; check with your fund provider for the appropriate fraction which is taxable.)
Looking at my 2019 statement, I started with 1k and ended with 5k. About 50c worth of interest, but that’s because I buy vanguard total stock with each months paycheck. It says that my stock gained about $600, but it is not clear if that is Market gain (which I presume is not taxable until realized) or dividends. For back of the envelope estimates, avg balance of $3k at 2% yield, gives $60.00 dividends. Or $60.50 total that should be claimed on my Ca taxes. Is this the right direction?
My quarterly statements show dividends and capital gains distributions, so I add them all up, rather than guessing.
How do you find capital gains? I plan to hold, so hope to minimize any capital gains. Not sure if the HSA plan administrator reports cap gains from minor fund movements?
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Re: Worth the hassle to open an HSA in California?

Post by grabiner »

FoolStreet wrote: Thu Sep 03, 2020 10:24 pm
sailaway wrote: Thu Sep 03, 2020 9:39 pm My quarterly statements show dividends and capital gains distributions, so I add them all up, rather than guessing.
How do you find capital gains? I plan to hold, so hope to minimize any capital gains. Not sure if the HSA plan administrator reports cap gains from minor fund movements?
If you hold a total-market fund, you probably don't have any capital gains distributions. But if you do have any, they would be reported on your statement, along with the dividends.
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Re: Worth the hassle to open an HSA in California?

Post by StrangePenguin »

grabiner wrote: Thu Sep 03, 2020 9:29 pm Usual disclaimer: I am not your tax advisor; please do not treat anything on the Bogleheads forum as tax advice. (I am an investor in an HSA, and a former NJ resident, so I have had to make these adjustments myself even though my tax software didn't ask me about them.)
I just moved to CA so this is newly relevant to me. Curious as to what tax software you have. TurboTax makes you fork over a bunch of extra money for the state version -- I would have hoped that they would ask about such things in order to get the tax bill right!
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Re: Worth the hassle to open an HSA in California?

Post by nalor511 »

StrangePenguin wrote: Thu Sep 03, 2020 11:39 pm
grabiner wrote: Thu Sep 03, 2020 9:29 pm Usual disclaimer: I am not your tax advisor; please do not treat anything on the Bogleheads forum as tax advice. (I am an investor in an HSA, and a former NJ resident, so I have had to make these adjustments myself even though my tax software didn't ask me about them.)
I just moved to CA so this is newly relevant to me. Curious as to what tax software you have. TurboTax makes you fork over a bunch of extra money for the state version -- I would have hoped that they would ask about such things in order to get the tax bill right!
Hr block deluxe+state download version handles HSA in CA just fine, around $20 on sale
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Re: Worth the hassle to open an HSA in California?

Post by fwellimort »

As long as you never sell funds in HSA, I think it is worth opening HSA in California.

Just buy and never sell something like the US total market index fund. Or if you don't want any headaches, treat it like a bond fund with US Treasury only bond fund.

Note that California treats pretty much all kind of dividends/capital gains (short/long), etc. as just income.
So at end of each year, just add up all dividends/capital gains (cause California doesn't differentiate any of this regardless of short/long) and that's it.

At least that's my perspective. That said, it's annoying that California asks so much tax money even after such high state taxes: there's probably quite a bit of money being mismanaged at the state level.
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Re: Worth the hassle to open an HSA in California?

Post by FoolStreet »

fwellimort wrote: Thu Sep 03, 2020 11:57 pm As long as you never sell funds in HSA, I think it is worth opening HSA in California.

Just buy and never sell something like the US total market index fund. Or if you don't want any headaches, treat it like a bond fund with US Treasury only bond fund.

Note that California treats pretty much all kind of dividends/capital gains (short/long), etc. as just income.
So at end of each year, just add up all dividends/capital gains (cause California doesn't differentiate any of this regardless of short/long) and that's it.

At least that's my perspective. That said, it's annoying that California asks so much tax money even after such high state taxes: there's probably quite a bit of money being mismanaged at the state level.
Great minds think alike when it comes to taking advantage of tax advantaged saving opportunities. Thanks for sharing. I’m still trying to figure it out and slowly getting there.

(However...there are Pros/cons and lots of opinions on why taxes are what they are. As a general rule, best to leave comments like your last sentence that could lead to political debate out of the Bogleheads discussions.).

Many suggest either using treasury funds so that dividends are State tax exempt, or index funds with low fund turnover for negligible capital gains. A target date retirement fund or a managed mutual fund would generate more capital gains taxes and more record keeping headache. I hope I’m starting to get it!
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Re: Worth the hassle to open an HSA in California?

Post by grabiner »

StrangePenguin wrote: Thu Sep 03, 2020 11:39 pm
grabiner wrote: Thu Sep 03, 2020 9:29 pm Usual disclaimer: I am not your tax advisor; please do not treat anything on the Bogleheads forum as tax advice. (I am an investor in an HSA, and a former NJ resident, so I have had to make these adjustments myself even though my tax software didn't ask me about them.)
I just moved to CA so this is newly relevant to me. Curious as to what tax software you have. TurboTax makes you fork over a bunch of extra money for the state version -- I would have hoped that they would ask about such things in order to get the tax bill right!
I used both TurboTax and TaxAct as a NJ resident. Both knew about my HSA because it was reported on my federal form, but neither one asked the specific question, "Did you have any interest income in your HSA?" TaxAct 2011 and 2013 were unable to handle interest in an HSA (reported on my NJ form but nowhere on my federal form); they required an override. TurboTax 2012 and TaxAct 2014 allowed me to manually enter the correct number on my NJ form, but couldn't get the correct information in the interview. More details in my post Went back to TaxACT, OK but a few problems (2014 update)
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Re: Worth the hassle to open an HSA in California?

Post by sailaway »

fwellimort wrote: Thu Sep 03, 2020 11:57 pm Note that California treats pretty much all kind of dividends/capital gains (short/long), etc. as just income.
So at end of each year, just add up all dividends/capital gains (cause California doesn't differentiate any of this regardless of short/long) and that's it.

At least that's my perspective. That said, it's annoying that California asks so much tax money even after such high state taxes: there's probably quite a bit of money being mismanaged at the state level.
Oh, yeah. I always know that at tax time, but when these discussions come up mid year, I always think "I am just lazy and doing the best I can with limited information."

As for the information, it really irks me that our HSA bank opened an office on Megacorp campus, but they still don't actually summarize this information for us on the year end statement :(
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Re: Worth the hassle to open an HSA in California?

Post by Spirit Rider »

sailaway wrote: Fri Sep 04, 2020 11:37 pm As for the information, it really irks me that our HSA bank opened an office on Megacorp campus, but they still don't actually summarize this information for us on the year end statement
As big as California is, they still represent a small fraction of HSA Bank's or any other nationwide HSA custodian's account owners. I wouldn't be surprised if even CA only banks or credit unions providing HSA accounts don't provide such information.

Short of CA mandating reporting of HSA account earnings, there is very little motivation for HSA custodians to do so.
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Re: Worth the hassle to open an HSA in California?

Post by tj »

I will be moving to California next year. I've had my hsa in FZROX since fidelity came out with HSAs. Should I exchange it to something else or not worry about it?
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Re: Worth the hassle to open an HSA in California?

Post by terran »

tj wrote: Sun Oct 04, 2020 9:29 am I will be moving to California next year. I've had my hsa in FZROX since fidelity came out with HSAs. Should I exchange it to something else or not worry about it?
Just like I wouldn't hold FZROX in a taxable account, I wouldn't hold it in a taxable HSA. Either go with treasuries as discussed in this thread if you want to hold treasuries anywhere in your overall asset allocation or switch to an etf since that won't distribute capital gains (it will still pay dividends). ITOT or VTI would be good alternatives to FZROX.

I don't know how CA part year resident taxation works, but if transactions completed before you're a resident aren't taxed then harvesting the gains in FZROX before you're a resident wouldn't be a bad idea anyway since they won't be taxable in your current state (unless you're moving from NJ).
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