Can someone in layman’s terms tell my why I should have a HSA?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
jb1
Posts: 446
Joined: Sun Nov 27, 2016 8:33 am
Location: NC

Can someone in layman’s terms tell my why I should have a HSA?

Post by jb1 » Sat Jan 04, 2020 8:26 am

Hey BH family. I am always seeing the term “HSA” used here, however I have no idea what the benefits of it are etc. I contribute a lot to a taxable account, but how/why would a HSA be different? Is the money strictly used for health expenses only?

SCb&b
Posts: 58
Joined: Thu Jan 18, 2018 5:45 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by SCb&b » Sat Jan 04, 2020 8:29 am

It's tax free forever and always (deductible now, tax-free growth, tax-free distributions) if you use it for medical expenses, including medicare premiums. Worst case scenario it's a traditional IRA if you choose to withdraw from it later in life and use it for non-medical expenses.

Topic Author
jb1
Posts: 446
Joined: Sun Nov 27, 2016 8:33 am
Location: NC

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by jb1 » Sat Jan 04, 2020 8:33 am

SCb&b wrote:
Sat Jan 04, 2020 8:29 am
It's tax free forever and always (deductible now, tax-free growth, tax-free distributions) if you use it for medical expenses, including medicare premiums. Worst case scenario it's a traditional IRA if you choose to withdraw from it later in life and use it for non-medical expenses.
Interesting, never seen it that way. I luckily get 100% medical and dental covered by employer now, but this could be a supplement to use for health expenses etc.

Ive been depositing a lot into a taxable account and it has grown quite substantially as a result (after maxing roth ira etc). The only thing that doesnt seem appealing is the penalty associated with withdrawing before age 65

RubyTuesday
Posts: 469
Joined: Fri Oct 19, 2012 11:24 am

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by RubyTuesday » Sat Jan 04, 2020 8:37 am

You have to be covered by an eligible high deductible healthcare plan (HDHP) in order to contribute to an HSA. Is the 100% company-sponsored plan an HDHP? Since you don’t know what an HSA plan is you probably don’t have a healthcare plan which is eligible.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu

SCb&b
Posts: 58
Joined: Thu Jan 18, 2018 5:45 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by SCb&b » Sat Jan 04, 2020 8:37 am

You must have a high deductible health plan to be eligible. It's also best if the contributions come directly as a payroll deduction as you also save FICA taxes in that situation.

In general, if you have a good insurance plan that meets your health needs through your employer don't change things up just to get HSA benefit.

Topic Author
jb1
Posts: 446
Joined: Sun Nov 27, 2016 8:33 am
Location: NC

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by jb1 » Sat Jan 04, 2020 8:38 am

RubyTuesday wrote:
Sat Jan 04, 2020 8:37 am
You have to be covered by an eligible high deductible healthcare plan (HDHP) in order to contribute to an HSA. Is the 100% company-sponsored plan an HDHP? Since you don’t know what an HSA plan is you probably don’t have a healthcare plan which is eligible.
That, and it’s not like I will work for this employer forever.

aschafer1984
Posts: 16
Joined: Tue May 28, 2019 10:48 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by aschafer1984 » Sat Jan 04, 2020 8:38 am

Keep in mind that certain states such as mine (CA) do not differentiate between an HSA and a normal taxable account. My contributions in 2019 will not be deducted from my state income and all realized gains, dividends and interest earned are taxed as well. It gets annoying during tax time bc my HSA provider does not produce end of year tax documents that breaks this information out. For this reason my HSA is entirely treasury bills/bonds bought at auction since these are exempt from state tax.

For those who reside in states that do not have this problem, funding an HSA is often their top priority after taking advantage of any employer-match in their 401k since it is the only account that can potentially provide the hat trick of tax benefits: tax-free contribution, tax-fee growth, tax-free withdrawal. Make sure you have a qualifying health care plan as others above have mentioned.

FI4LIFE
Posts: 499
Joined: Sun Apr 28, 2019 9:27 am

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by FI4LIFE » Sat Jan 04, 2020 8:44 am

It's really not worth worrying about until you work for an employer that offers a high deductible health plan.

livesoft
Posts: 71912
Joined: Thu Mar 01, 2007 8:00 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by livesoft » Sat Jan 04, 2020 8:52 am

An HSA is designed for someone with a High-Deductible Health Plan (HDHP) to put money tax-free (including FICA/medicare taxes) away in order to pay for the high deductible.

If one doesn't have the HDHP, then where does the money come from to pay health care providers? Often one's health care plan will pay most of the cost out of the premiums of all the plan participants. But if one isn't getting ill enough to go to a health care provider, then one might think all that money paid into the health care plan went to waste and pay for everybody else.

In contrast, with the HDHP, the premiums are lower because the decision was made to not pay the health insurance company and pay it out to the clients (patients) who then have a choice of what to do with the money themselves. The health care providers seem to still get their money from the folks using the services and needing health care.

But don't fool yourself and think you don't need health care.
Wiki This signature message sponsored by sscritic: Learn to fish.

aristotelian
Posts: 7579
Joined: Wed Jan 11, 2017 8:05 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by aristotelian » Sat Jan 04, 2020 8:58 am

jb1 wrote:
Sat Jan 04, 2020 8:33 am

Interesting, never seen it that way. I luckily get 100% medical and dental covered by employer now, but this could be a supplement to use for health expenses etc.
If your company does not offer an HDHP, then HSA does not apply to you. Not even an option. In addition to tax free growth and withdrawal for health expenses, it is also pre-tax and (unlike 401k) avoids FICA. It is I believe the only way to shelter money that is truly tax free on the contribution side and withdrawal side.

MMLC3
Posts: 93
Joined: Sat Jul 08, 2017 6:49 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by MMLC3 » Sat Jan 04, 2020 10:05 am

aschafer1984 wrote:
Sat Jan 04, 2020 8:38 am
Keep in mind that certain states such as mine (CA) do not differentiate between an HSA and a normal taxable account. My contributions in 2019 will not be deducted from my state income and all realized gains, dividends and interest earned are taxed as well. It gets annoying during tax time bc my HSA provider does not produce end of year tax documents that breaks this information out. For this reason my HSA is entirely treasury bills/bonds bought at auction since these are exempt from state tax.

For those who reside in states that do not have this problem, funding an HSA is often their top priority after taking advantage of any employer-match in their 401k since it is the only account that can potentially provide the hat trick of tax benefits: tax-free contribution, tax-fee growth, tax-free withdrawal. Make sure you have a qualifying health care plan as others above have mentioned.
I was not aware of this - I am from CA and started contributing to HSA last year, after I found out about the HDHP plan.
Do you know if Turbotax handles this? or do you manually enter somehow?

aschafer1984
Posts: 16
Joined: Tue May 28, 2019 10:48 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by aschafer1984 » Sat Jan 04, 2020 5:44 pm

MMLC3 wrote:
Sat Jan 04, 2020 10:05 am
I was not aware of this - I am from CA and started contributing to HSA last year, after I found out about the HDHP plan.
Do you know if Turbotax handles this? or do you manually enter somehow?
On my W2 provided by my employer, the contributed HSA amount was deducted in box 1 (federal wages). However the amount was added back in on box 16 (state). The difference between the two will be treated as an adjustment to income for the state of CA. I forget how I’ve recorded taxable dividends before I discovered this, hence my preference towards treasury securities so I can avoid that mess.

bhsince87
Posts: 2655
Joined: Thu Oct 03, 2013 1:08 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by bhsince87 » Sat Jan 04, 2020 6:00 pm

aristotelian wrote:
Sat Jan 04, 2020 8:58 am
jb1 wrote:
Sat Jan 04, 2020 8:33 am

Interesting, never seen it that way. I luckily get 100% medical and dental covered by employer now, but this could be a supplement to use for health expenses etc.
If your company does not offer an HDHP, then HSA does not apply to you. Not even an option. In addition to tax free growth and withdrawal for health expenses, it is also pre-tax and (unlike 401k) avoids FICA. It is I believe the only way to shelter money that is truly tax free on the contribution side and withdrawal side.

Yep. I'm 54 and have never been eligible for an HSA, across multiple employers.

I would absolutely take advantage of one if I had the opportunity, though.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

MathWizard
Posts: 4142
Joined: Tue Jul 26, 2011 1:35 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by MathWizard » Sat Jan 04, 2020 6:57 pm

jb1 wrote:
Sat Jan 04, 2020 8:38 am
RubyTuesday wrote:
Sat Jan 04, 2020 8:37 am
You have to be covered by an eligible high deductible healthcare plan (HDHP) in order to contribute to an HSA. Is the 100% company-sponsored plan an HDHP? Since you don’t know what an HSA plan is you probably don’t have a healthcare plan which is eligible.
That, and it’s not like I will work for this employer forever.
Having your employer pay for 100% coverage is much preferable to a HDHP and an HSA.

If you do not have a HDHP, look into flex benefits for health care (and dependent care if you have kids). It is a one year use it or lose it,
but any amount you contribute counts as benefits, and doesn't count as taxable income (though it does for SS taxes). So if you know something that is not covered by your health plan but is FSA eligible, like prescription eyeglasses, you can use flex dollars to pay for those with pre-tax dollars. Talk to your benefits office

MotoTrojan
Posts: 9923
Joined: Wed Feb 01, 2017 8:39 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by MotoTrojan » Sat Jan 04, 2020 7:09 pm

MMLC3 wrote:
Sat Jan 04, 2020 10:05 am
aschafer1984 wrote:
Sat Jan 04, 2020 8:38 am
Keep in mind that certain states such as mine (CA) do not differentiate between an HSA and a normal taxable account. My contributions in 2019 will not be deducted from my state income and all realized gains, dividends and interest earned are taxed as well. It gets annoying during tax time bc my HSA provider does not produce end of year tax documents that breaks this information out. For this reason my HSA is entirely treasury bills/bonds bought at auction since these are exempt from state tax.

For those who reside in states that do not have this problem, funding an HSA is often their top priority after taking advantage of any employer-match in their 401k since it is the only account that can potentially provide the hat trick of tax benefits: tax-free contribution, tax-fee growth, tax-free withdrawal. Make sure you have a qualifying health care plan as others above have mentioned.
I was not aware of this - I am from CA and started contributing to HSA last year, after I found out about the HDHP plan.
Do you know if Turbotax handles this? or do you manually enter somehow?
They will cover not deducting state tax for the contribution, but you'll have to manually tally up any capital gains and interest/dividends and add that to state return. This is a reason many people only use state-tax exempt holdings. I just used the S&P500 and paid CA tax on the dividends, but would only buy, never sell shares.

Old_Dollar
Posts: 98
Joined: Sun May 06, 2018 8:27 am

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by Old_Dollar » Sat Jan 04, 2020 7:43 pm

Why do I use the HSA?
1. It expands the pool of tax advantaged account types - Pre-Tax, Roth, and Taxable are the three main ones. HSAs are unique in that they can be completely tax free under the correct circumstances (contributions are tax deductible, growth is tax free, distributions for qualified health expenses is tax free).
2. It expands annual tax-advantaged contributions - If one has already maxed out the 401k and the IRA (Roth or Pre-tax) the HSA can be used for additional savings. In 2020 $19500 (401k) + $6000 (IRA) = $25500. If an HSA for a single person is included that overall tax-advantaged limit increases by $3550 (HSA) to a total of $29050.
3. Use as a quasi-IRA - If one is lucky and has minimal health care needs withdrawals can be used like a traditional IRA after a certain age (that age currently escapes me)

In short I use the phrase tax-diversity because the addition of a HSA could aid in helping to control ones tax liability. This has the ability to be very significant especially for younger individuals who have the potential to save in the HSA for decades. Imagine a 30 year old who maxes out a HSA for 20 years and invests that savings. That would be a sizable account with a significant balance.

There are cons and potential drawbacks

1. Some states do not offer the tax advantaged status to HSAs (mentioned by above posters)
2. Investment choices can be limited based on which HSA provider employers choose.
3. Potential to have smaller social security benefit based on how the account is funded (Payroll funding vs direct contribution)
4. Creditor protection is probably not nearly as strong as the 401k or IRA. I've seen little information regarding this topic.
5. Since HSAs are directly linked to health insurance there is much more legislative risk around HSAs than other account types. Speculating about future legislation is not allowed on bogleheads and I am not looking to break the forum rules by discussing anything beyond that statement.
6. Required HSA Eligible HDHP plan to have access to a HSA for contributions. This type of insurance plan may not be right for everyone.

Please correct me if any of the above information is not correct.
I am here solely to learn about investing.

User avatar
1789
Posts: 1476
Joined: Fri Aug 16, 2019 3:31 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by 1789 » Sat Jan 04, 2020 7:54 pm

livesoft wrote:
Sat Jan 04, 2020 8:52 am
An HSA is designed for someone with a High-Deductible Health Plan (HDHP) to put money tax-free (including FICA/medicare taxes) away in order to pay for the high deductible.

If one doesn't have the HDHP, then where does the money come from to pay health care providers? Often one's health care plan will pay most of the cost out of the premiums of all the plan participants. But if one isn't getting ill enough to go to a health care provider, then one might think all that money paid into the health care plan went to waste and pay for everybody else.

In contrast, with the HDHP, the premiums are lower because the decision was made to not pay the health insurance company and pay it out to the clients (patients) who then have a choice of what to do with the money themselves. The health care providers seem to still get their money from the folks using the services and needing health care.

But don't fool yourself and think you don't need health care.
Well explained! Now or later, everyone living in USA will need it. We are spending these as we go but i always think whatever saved will be gone one day.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

Jablean
Posts: 506
Joined: Sat Jun 02, 2018 2:38 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by Jablean » Sat Jan 04, 2020 8:24 pm

You can buy bandaids with pretax money. Just like an FSA it covers more than just doctor's visits and will even pay for insurance premiums in some cases.

MMLC3
Posts: 93
Joined: Sat Jul 08, 2017 6:49 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by MMLC3 » Sat Jan 04, 2020 8:50 pm

MotoTrojan wrote:
Sat Jan 04, 2020 7:09 pm
MMLC3 wrote:
Sat Jan 04, 2020 10:05 am
aschafer1984 wrote:
Sat Jan 04, 2020 8:38 am
Keep in mind that certain states such as mine (CA) do not differentiate between an HSA and a normal taxable account. My contributions in 2019 will not be deducted from my state income and all realized gains, dividends and interest earned are taxed as well. It gets annoying during tax time bc my HSA provider does not produce end of year tax documents that breaks this information out. For this reason my HSA is entirely treasury bills/bonds bought at auction since these are exempt from state tax.

For those who reside in states that do not have this problem, funding an HSA is often their top priority after taking advantage of any employer-match in their 401k since it is the only account that can potentially provide the hat trick of tax benefits: tax-free contribution, tax-fee growth, tax-free withdrawal. Make sure you have a qualifying health care plan as others above have mentioned.
I was not aware of this - I am from CA and started contributing to HSA last year, after I found out about the HDHP plan.
Do you know if Turbotax handles this? or do you manually enter somehow?
They will cover not deducting state tax for the contribution, but you'll have to manually tally up any capital gains and interest/dividends and add that to state return. This is a reason many people only use state-tax exempt holdings. I just used the S&P500 and paid CA tax on the dividends, but would only buy, never sell shares.
Yes same here - so far I’ve only bought S&P funds in the past year that I’ve had an HSA. Nothing sold nor plan to.
So I just need to pay CA tax on dividends then.

MMLC3
Posts: 93
Joined: Sat Jul 08, 2017 6:49 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by MMLC3 » Sat Jan 04, 2020 8:53 pm

3. Potential to have smaller social security benefit based on how the account is funded (Payroll funding vs direct contribution)
[/quote]

Could you please elaborate on this?

catchinup
Posts: 143
Joined: Sun Dec 31, 2017 6:35 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by catchinup » Sat Jan 04, 2020 9:06 pm

MotoTrojan wrote:
Sat Jan 04, 2020 7:09 pm
MMLC3 wrote:
Sat Jan 04, 2020 10:05 am
aschafer1984 wrote:
Sat Jan 04, 2020 8:38 am
Keep in mind that certain states such as mine (CA) do not differentiate between an HSA and a normal taxable account. My contributions in 2019 will not be deducted from my state income and all realized gains, dividends and interest earned are taxed as well. It gets annoying during tax time bc my HSA provider does not produce end of year tax documents that breaks this information out. For this reason my HSA is entirely treasury bills/bonds bought at auction since these are exempt from state tax.

For those who reside in states that do not have this problem, funding an HSA is often their top priority after taking advantage of any employer-match in their 401k since it is the only account that can potentially provide the hat trick of tax benefits: tax-free contribution, tax-fee growth, tax-free withdrawal. Make sure you have a qualifying health care plan as others above have mentioned.
I was not aware of this - I am from CA and started contributing to HSA last year, after I found out about the HDHP plan.
Do you know if Turbotax handles this? or do you manually enter somehow?
They will cover not deducting state tax for the contribution, but you'll have to manually tally up any capital gains and interest/dividends and add that to state return. This is a reason many people only use state-tax exempt holdings. I just used the S&P500 and paid CA tax on the dividends, but would only buy, never sell shares.
I live in CA too. And this thread just added to my list of reasons for wanting to leave!

User avatar
vitaflo
Posts: 1270
Joined: Sat Sep 03, 2011 3:02 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by vitaflo » Sat Jan 04, 2020 9:22 pm

MMLC3 wrote:
Sat Jan 04, 2020 8:53 pm
3. Potential to have smaller social security benefit based on how the account is funded (Payroll funding vs direct contribution)
Could you please elaborate on this?
If you contribute to your HSA via your paycheck, it reduces your Social Security wages, which means you pay less SS (FICA) tax now, so you will receive a smaller benefit when you take SS.

If you contribute to your HSA on your own, you pay more in SS (FICA) tax (because it's not deducted from your paycheck). This gives you a larger SS benefit when you take SS. Note that in this example you are still able to deduct the contributions at tax time, but this only ends up applying to your income tax, not FICA tax paid, whereas in the paycheck example it applies to both.

MotoTrojan
Posts: 9923
Joined: Wed Feb 01, 2017 8:39 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by MotoTrojan » Sun Jan 05, 2020 12:18 am

catchinup wrote:
Sat Jan 04, 2020 9:06 pm
MotoTrojan wrote:
Sat Jan 04, 2020 7:09 pm
MMLC3 wrote:
Sat Jan 04, 2020 10:05 am
aschafer1984 wrote:
Sat Jan 04, 2020 8:38 am
Keep in mind that certain states such as mine (CA) do not differentiate between an HSA and a normal taxable account. My contributions in 2019 will not be deducted from my state income and all realized gains, dividends and interest earned are taxed as well. It gets annoying during tax time bc my HSA provider does not produce end of year tax documents that breaks this information out. For this reason my HSA is entirely treasury bills/bonds bought at auction since these are exempt from state tax.

For those who reside in states that do not have this problem, funding an HSA is often their top priority after taking advantage of any employer-match in their 401k since it is the only account that can potentially provide the hat trick of tax benefits: tax-free contribution, tax-fee growth, tax-free withdrawal. Make sure you have a qualifying health care plan as others above have mentioned.
I was not aware of this - I am from CA and started contributing to HSA last year, after I found out about the HDHP plan.
Do you know if Turbotax handles this? or do you manually enter somehow?
They will cover not deducting state tax for the contribution, but you'll have to manually tally up any capital gains and interest/dividends and add that to state return. This is a reason many people only use state-tax exempt holdings. I just used the S&P500 and paid CA tax on the dividends, but would only buy, never sell shares.
I live in CA too. And this thread just added to my list of reasons for wanting to leave!
I’m on my way out :).

MMLC3
Posts: 93
Joined: Sat Jul 08, 2017 6:49 pm

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by MMLC3 » Sun Jan 05, 2020 11:12 am

vitaflo wrote:
Sat Jan 04, 2020 9:22 pm
MMLC3 wrote:
Sat Jan 04, 2020 8:53 pm
3. Potential to have smaller social security benefit based on how the account is funded (Payroll funding vs direct contribution)
Could you please elaborate on this?
If you contribute to your HSA via your paycheck, it reduces your Social Security wages, which means you pay less SS (FICA) tax now, so you will receive a smaller benefit when you take SS.

If you contribute to your HSA on your own, you pay more in SS (FICA) tax (because it's not deducted from your paycheck). This gives you a larger SS benefit when you take SS. Note that in this example you are still able to deduct the contributions at tax time, but this only ends up applying to your income tax, not FICA tax paid, whereas in the paycheck example it applies to both.
Understood! Didn't know about this - learnt something new :happy

Outer Marker
Posts: 569
Joined: Sun Mar 08, 2009 8:01 am

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by Outer Marker » Sun Jan 05, 2020 1:10 pm

I have been wondering about this same question...

I have a high deductable/HSA option.

I am currently on a very good "Cadillac Plan" with most of the premium paid for by employer, but not insubstantial premiums paid for by me.

I'm in decent heath, but probably higher than average costs going forward, due to a cardiac condition.

My gut tells me I'd be better off not trying to "bundle" heath care costs with investements. (Having learned the hard way in buying term life).

User avatar
grabiner
Advisory Board
Posts: 27120
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Can someone in layman’s terms tell my why I should have a HSA?

Post by grabiner » Mon Jan 06, 2020 9:02 pm

MMLC3 wrote:
Sat Jan 04, 2020 8:53 pm
3. Potential to have smaller social security benefit based on how the account is funded (Payroll funding vs direct contribution)
Could you please elaborate on this?
If you contribute to an HSA by payroll deduction, the contribution is not included in your wages. Therefore, you do not pay SS or Medicare tax on this amount, getting back an extra 7.65% of the contribution. However, this is not a true gain, as the reduced SS wages also reduce your SS benefit. If you have high income, it is close to break-even; if you have low income, it is better to avoid payroll deduction, as $100 in SS taxes saved costs you $1 per month at full retirement age, adjusted for inflation, and that is a benefit worth more than $100.
Wiki David Grabiner

Post Reply