Investing in HSA for Retirement Purpose?

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southpaw328
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Investing in HSA for Retirement Purpose?

Post by southpaw328 » Thu Dec 21, 2017 1:48 am

I was talking to a family friend who is owner of his own financial group (ChFC, CLU). I don't have any money with him anymore since I like managing it on my own. I asked him what he thought about putting money into an HSA, investing the money, and holding it there with the idea of it being for retirement one day or medical emergencies. In his opinion, it would be risky to expect to use it as retirement money and would be more productive and cheaper to invest in my 401k/IRA. And as time passes, tax codes and loopholes like using an HSA as an IRA are likely to close in the future. These are his words.

I currently have a HSA through my company's healthcare and they even provide me with $750 of the max contribution per year even if I put $0 in to it myself. I take advantage of that but haven't put much of my own money into it yet essentially because of this conversation. However, on these forums and the MrMoneyMustache forums the HSA seems to *very* popular means of saving for retirement.

How do you all feel about this?

mhalley
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Re: Investing in HSA for Retirement Purpose?

Post by mhalley » Thu Dec 21, 2017 2:23 am

Any current tax advantaged plan can be revoked at any time, there is no guarantee on any of it. All you can do is attempt to take advantage of the current options available to you. As for taxable account advantages, that could also go away. They could change capital gains tax rates, do away with capital losses, etc.

https://www.whitecoatinvestor.com/retir ... ealth-ira/

angler-39
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Re: Investing in HSA for Retirement Purpose?

Post by angler-39 » Thu Dec 21, 2017 6:44 am

I use HSA at my megacorp as a stealth IRA. Pretax for FICA and income tax! So when it comes time for withdrawals I will use to reimburse myself for past medical expenses taxfree. Or I can withdraw post age 65 as a traditional IRA. If tax law changes I will adapt my strategy.
Note: inherited HSAs to a non-spouse beneficiary are a bad idea since they are fully taxable at that time.
I respectfully disagree with your friend's conclusion. Good luck!
George M.

deltaneutral83
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Re: Investing in HSA for Retirement Purpose?

Post by deltaneutral83 » Thu Dec 21, 2017 8:58 am

angler-39 wrote:
Thu Dec 21, 2017 6:44 am
I use HSA at my megacorp as a stealth IRA. Pretax for FICA and income tax!
Be sure to analyze the "bend" points for social security regarding your HSA contributions being Pre-FICA.

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marti038
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Re: Investing in HSA for Retirement Purpose?

Post by marti038 » Thu Dec 21, 2017 9:23 am

southpaw328 wrote:
Thu Dec 21, 2017 1:48 am
In his opinion, it would be risky to expect to use it as retirement money and would be more productive and cheaper to invest in my 401k/IRA. And as time passes, tax codes and loopholes like using an HSA as an IRA are likely to close in the future.
I don't think using an HSA for retirement is a loophole. It was designed that way to make it attractive for people to use. I also don't know why congress would be any more likely to change the rules for HSA's than IRA's and 401k's. The voter response is probably not one they'd want to face.

I did have a friend who advised me last Fall to step out of the market before Hillary got elected. At the time he told me he had moved 100% to cash. Hope he didn't wait too long to jump back into the water.

Thankfully, I ignored my friend's advice. I'd ignore your friend too.

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PaddyMac
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Re: Investing in HSA for Retirement Purpose?

Post by PaddyMac » Thu Dec 21, 2017 11:52 am

Considering the recent tax bill almost nuke the 401k deduction, I would also ignore your friend.

The HSA is NOT a huge advantage if you only use it for an IRA, but it's fabulous if you use it for what it's for - paying for health care! Thanks to the Bogleheads book, I learned that we didn't need to spend the contributions but could invest them. We've now got over $40K in the HSA, plus 2018 will make it $50K. Very handy just as we retire to have tax free emergency fund for big medical expenses. You can also pay some Medicare premiums with it afaik.

The HSA is the first thing we fund as it's tax free going in and out.

LeSpy
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Re: Investing in HSA for Retirement Purpose?

Post by LeSpy » Thu Dec 21, 2017 12:11 pm

At first I used my company sponsored HSA as a savings vehicle for retirement but I changed my mind and now only use it as savings for some health expenses. I changed my mind because:

1. The taxable, 401k and IRA accounts I have will be more than enough savings for retirement and other purposes.
2. I severely dislike my MegaCorp Blue Cross Blue Shield health insurance plan. The coverage leaves me exposed for alot of expenses before it kicks in. I also really dislike that it utilizes an HSA account where Wall Street can collect even more rent off of me. I and my company put a bit in there for expenses for the year and any leftover that grows is a bonus.
3. (Long Term Speculation) What your friend suggested is interesting, but if the HSA were to be undermined it could also come from the direction of health care reform if this country moves toward universal healthcare one day. This also seems far fetched, but we are dealing with such a long time frame where a lot can happen.

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Re: Investing in HSA for Retirement Purpose?

Post by furikake » Thu Dec 21, 2017 12:22 pm

I think using HSA for retirement is a stretch since there is a limit on how much you can put in it every year, and it is very little, not enough for retirement obviously. But using it for the tax deduction/tax free distribution before 65 or withdraw it like an IRA when we turn 65 is what we use it for. We pay from the HSA as we incur medical expenses. It's not worth the time and money to track all the expenses and keep receipts every year, the gain is too little to make a difference.

aristotelian
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Re: Investing in HSA for Retirement Purpose?

Post by aristotelian » Thu Dec 21, 2017 12:23 pm

Ideally, you would be able to contribute or even max all three. If you can't, HSA has the biggest tax benefit so many people max the HSA first.

That said, I would be hesitant to make HSA the top priority if that meant leaving the your conventional retirement accounts unfunded. Your friend is correct that it is less established than Roth or 401k. Moreover, Roth and 401k also have established rules for penalty free withdrawals in early retirement scenarios (even with 401k's you can do Roth conversion ladders or SEPP plans). I am not aware of any way to get money out of the HSA penalty free for non-health purposes in early retirement scenarios before age 59.5.

Long story short, ideally you should diversify and take advantage of HSA and retirement accounts, and plan to use the HSA for health and retirement accounts for retirement.

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grabiner
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Re: Investing in HSA for Retirement Purpose?

Post by grabiner » Thu Dec 21, 2017 10:30 pm

Holding the HSA for retirement savings only makes sense if you can max out your other retirement accounts.

Say that you have $1000 in your bank account, a $1000 medical bill, and $1000 in your HSA. If you aren't maxing out your Roth IRA, you can pay the bill from the HSA, and contribute $1000 to your Roth IRA. The Roth IRA, like the HSA, will grow tax-free. In addition, you can spend the Roth IRA on anything in retirement with no penalty, while the growth in the HSA can be spent only on medical costs.

However, suppose you are already maxing out your IRA and 401(k). Now, if you pay the medical bill from your HSA, you have $1000 to invest in a taxable account, where you will pay tax on any gains. If you leave the money in the HSA, you can get more tax-free growth, as long as you spend the money on health care.
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Re: Investing in HSA for Retirement Purpose?

Post by honduranhurricane » Thu Dec 21, 2017 10:41 pm

deltaneutral83 wrote:
Thu Dec 21, 2017 8:58 am
angler-39 wrote:
Thu Dec 21, 2017 6:44 am
I use HSA at my megacorp as a stealth IRA. Pretax for FICA and income tax!
Be sure to analyze the "bend" points for social security regarding your HSA contributions being Pre-FICA.
Hi Delta, What do you mean by this? I plan to use my HSA for retirement healthcare and your comment caught my attention. Do you mean the deferrals possibly lowering ones income below the FICA limits? For me, I am lucky to earn well over the limits so its not an issue, but if there is something I am missing, just want to check.

Thanks,
HH

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grabiner
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Re: Investing in HSA for Retirement Purpose?

Post by grabiner » Thu Dec 21, 2017 11:00 pm

honduranhurricane wrote:
Thu Dec 21, 2017 10:41 pm
deltaneutral83 wrote:
Thu Dec 21, 2017 8:58 am
angler-39 wrote:
Thu Dec 21, 2017 6:44 am
I use HSA at my megacorp as a stealth IRA. Pretax for FICA and income tax!
Be sure to analyze the "bend" points for social security regarding your HSA contributions being Pre-FICA.
Hi Delta, What do you mean by this? I plan to use my HSA for retirement healthcare and your comment caught my attention. Do you mean the deferrals possibly lowering ones income below the FICA limits? For me, I am lucky to earn well over the limits so its not an issue, but if there is something I am missing, just want to check.
See Payroll Deduction: Health Savings Account on the wiki. If you have relatively low income (below the second bend point for Social Security), the reduced Social Security tax on your HSA contribution is less than the value of the Social Security you lose for having a lower income; therefore, it is better not to use payroll deduction. If you are over the second bend point, it is close to break-even. If you are over the SS maximum, payroll deduction saves you only on Medicare tax, but you get the full benefit of the tax reduction because paying more Medicare tax does not give you any more Medicare benefit.
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GreatOdinsRaven
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Re: Investing in HSA for Retirement Purpose?

Post by GreatOdinsRaven » Fri Dec 22, 2017 1:13 am

"The greatest enemies of the equity investor are expenses and emotions." -John C. Bogle, Little Book of Common Sense Investing. | | "Winter is coming." Lord Eddard Stark.

deltaneutral83
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Re: Investing in HSA for Retirement Purpose?

Post by deltaneutral83 » Fri Dec 22, 2017 8:35 am

grabiner wrote:
Thu Dec 21, 2017 11:00 pm
honduranhurricane wrote:
Thu Dec 21, 2017 10:41 pm


Hi Delta, What do you mean by this? I plan to use my HSA for retirement healthcare and your comment caught my attention. Do you mean the deferrals possibly lowering ones income below the FICA limits? For me, I am lucky to earn well over the limits so its not an issue, but if there is something I am missing, just want to check.
See Payroll Deduction: Health Savings Account on the wiki. If you have relatively low income (below the second bend point for Social Security), the reduced Social Security tax on your HSA contribution is less than the value of the Social Security you lose for having a lower income; therefore, it is better not to use payroll deduction. If you are over the second bend point, it is close to break-even. If you are over the SS maximum, payroll deduction saves you only on Medicare tax, but you get the full benefit of the tax reduction because paying more Medicare tax does not give you any more Medicare benefit.
Grab gave you the details, and right now, I believe the second bend point (which I think you are well over) is about $63,000 but I would have to double check. So if you're 35 year average is inflation re-adjusted above 63,000 it's going to be fine to take the FICA deduction. If your personal SS 35 year calculation was less than that second bend point, it makes mathematical sense to NOT take the FICA deduction on HSA contributions.

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Re: Investing in HSA for Retirement Purpose?

Post by honduranhurricane » Fri Dec 22, 2017 10:57 am

Thank you Grabiner and Delta.

n00b
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Re: Investing in HSA for Retirement Purpose?

Post by n00b » Fri Dec 22, 2017 1:40 pm

Thank you for bringing up the expected value of missed Social Security wages due to HSA exemption but I am having trouble squaring the recommendation with my calculations.

If SS pays a percentage of the top-35 years then each dollar contributed needs to be divided by 35 to represent the value added to SS, no?

SS-Bend1 = 90%(AVG(Top35Years) = AnnualBenefit(2.57%) <-- Sign me up
SS-Bend2 = 32%(AVG(Top35Years) = AnnualBenefit(0.91%) <-- Better returns available elsewhere
SS-Bend3 = 15%(AVG(Top35Years) = AnnualBenefit(0.43%) <-- No thank you

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Re: Investing in HSA for Retirement Purpose?

Post by FinancialDave » Fri Dec 22, 2017 1:56 pm

PaddyMac wrote:
Thu Dec 21, 2017 11:52 am
Considering the recent tax bill almost nuke the 401k deduction, I would also ignore your friend.

The HSA is NOT a huge advantage if you only use it for an IRA, but it's fabulous if you use it for what it's for - paying for health care! Thanks to the Bogleheads book, I learned that we didn't need to spend the contributions but could invest them. We've now got over $40K in the HSA, plus 2018 will make it $50K. Very handy just as we retire to have tax free emergency fund for big medical expenses. You can also pay some Medicare premiums with it afaik.

The HSA is the first thing we fund as it's tax free going in and out.
I agreed with you right up until the point you said the HSA is the first thing you fund because of its tax treatment.

IMHO you must fund your retirement first before worrying about the tax advantage on a few medical expenses. If you don't you may just be eating ALPO in retirement as the saying goes.

For your retirement I believe the proper fund order is:
1. IRA or Roth
2. HSA
3. Taxable account

Sure its nice to have some of each but the priority should be on the IRA and Roth as present law stands.

Most will probably have enough money to fund both items 1 & 2 above so it doesn't really matter, just don't put all your eggs in that one HSA basket, which is my point.

The HSA will have serious consequences to a non-spousal beneficiary which could happen at any time as we all know.

I agree the HSA is handy to have, especially if you plan to retire early, but it should not usurp regular retirement planning by putting all (or most) of your retirement money in that basket alone.

Dave
Last edited by FinancialDave on Fri Dec 22, 2017 1:59 pm, edited 1 time in total.
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n00b
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Re: Investing in HSA for Retirement Purpose?

Post by n00b » Fri Dec 22, 2017 1:58 pm

https://www.bogleheads.org/wiki/Payroll_deduction#Social_Security wrote: Social Security

Most benefits are also exempt from Social Security and Medicare tax. Exemption from Social Security tax is not necessarily a benefit; if you pay less in Social Security tax, you will have lower Social Security benefits. As a result, if the only tax savings from payroll deduction is the 7.65% reduction in Social Security and Medicare tax, payroll deduction is close to break-even if you have high income, and a loss if you have low income.

To estimate the difference in the benefit, you need to check the Social Security benefit formula. Your Averaged Indexed Monthly Earnings (AIME) is your average monthly salary over your 35 highest-earning years, adjusted for wage growth over time; therefore, a $420 payroll deduction reduces your AIME by $1 (adjusted for wage growth).

If you have high AIME (over $5336 in 2017, corresponding to an annual $64,032; over $5399 in 2018, corresponding to an annual $64,788),[1] your Primary Insurance Amount (the monthly benefit you receive at full retirement age) is reduced by 15 cents (indexed for inflation after you start receiving benefits) if your AIME is decreased by $1. The $420 benefit saves you $32.13 in Social Security and Medicare tax, so it takes 214 months (about 18 years) of benefits to break even if the reduced Social Security and Medicare tax is all you save. The actual break-even time is slightly longer because 85% of the benefit will probably be taxed; however, the reduced benefit also reduces your potential disability benefit, and your spousal and widow(er)'s benefit if you are married.

If you have lower AIME, your PIA is reduced by 32 cents if your AIME is decreased by $1, so it takes 100 months (about 8 years) to break even with the Social Security and Medicare tax reduction. The payroll deduction for Social Security is probably a net loss.

If you are over the maximum earnings taxed by Social Security ($118,500 in 2016 $127,200 in 2017), payroll deduction does not affect your Social Security tax or benefits, but it does save you the 1.45% Medicare tax.
I guess the keyword is highlighted above. The calculation discusses the tax vs. SS benefit but not the opportunity cost.

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Re: Investing in HSA for Retirement Purpose?

Post by southpaw328 » Fri Dec 22, 2017 4:36 pm

GreatOdinsRaven wrote:
Fri Dec 22, 2017 1:13 am
Vanguard has had a couple of interesting white papers and blogs on this issue as well as a 12 minute podcast:

White paper: https://personal.vanguard.com/pdf/ISGHSA.pdf

Podcast: https://advisors.vanguard.com/VGApp/iip ... avingsTool

https://vanguardblog.com/2017/10/04/hea ... eeper-hit/

https://vanguardadvisorsblog.com/2017/1 ... eeper-hit/
Wow, these are great. Thank you for providing these links :sharebeer

I'm curious if I should open up an HSA for my wife. I have one because my employer pays the monthly fees to Optum Bank and puts $750 of their money into it for me. If I opened up one for my wife it would be independent from her employer and we would pay the monthly fee. Is that something worth looking into? She has enough take home savings to fully fund her Roth IRA with some excess money, probably around 3-5k/year, to invest/save which would currently go into our taxable 3 fund portfolio at Vanguard.

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Re: Investing in HSA for Retirement Purpose?

Post by TwstdSista » Fri Dec 22, 2017 5:04 pm

An HSA is an individual account. Only the person who carries a HDHP can also contribute to an HSA.

Example -- for the past four years I have been the "owner" of a HDHP covering myself and the husband. So I was able to contribute to my HSA (up to the family maximum allowed for each year). For 2018, we are switching and the husband will carry our HDHP. Therefore we now need to open an HSA in his name and can only contribute to His HSA account.

However, we can pay medical expenses out of either HSA account. Also, he is an "authorized user" on my HSA account which means he can write checks and has a debit card attached to it. But only I can own my HSA account. I hope this makes sense....

southpaw328
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Re: Investing in HSA for Retirement Purpose?

Post by southpaw328 » Fri Dec 22, 2017 7:06 pm

TwstdSista wrote:
Fri Dec 22, 2017 5:04 pm
An HSA is an individual account. Only the person who carries a HDHP can also contribute to an HSA.

Example -- for the past four years I have been the "owner" of a HDHP covering myself and the husband. So I was able to contribute to my HSA (up to the family maximum allowed for each year). For 2018, we are switching and the husband will carry our HDHP. Therefore we now need to open an HSA in his name and can only contribute to His HSA account.

However, we can pay medical expenses out of either HSA account. Also, he is an "authorized user" on my HSA account which means he can write checks and has a debit card attached to it. But only I can own my HSA account. I hope this makes sense....
My wife and I both have separate HDHP. It's just that my HSA is provided through my employers HC plan - they cover the monthly fees and contribute a small portion of the max contribution per year.

My wife however has an even worse HDHP but her employer doesn't offer an HSA. We would have to open up a HSA for her. Or, could I make her an authorized user on my HSA and then she could contribute to it to also but just for the max amount of 1 person ($3400ish)? Not sure about that. Otherwise, would just open up her own. maybe put $1000 in it per year -- we are pretty healthy individuals.

TwstdSista
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Re: Investing in HSA for Retirement Purpose?

Post by TwstdSista » Fri Dec 22, 2017 7:10 pm

I think she can be an authorized user on your HSA (assuming this allowed by whomever administers your HSA), but you can only contribute the individual amount to your HSA. If she opens her own, she can then also contribute up to the individual amount.

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grabiner
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Re: Investing in HSA for Retirement Purpose?

Post by grabiner » Fri Dec 22, 2017 7:42 pm

southpaw328 wrote:
Fri Dec 22, 2017 7:06 pm
My wife and I both have separate HDHP. It's just that my HSA is provided through my employers HC plan - they cover the monthly fees and contribute a small portion of the max contribution per year.

My wife however has an even worse HDHP but her employer doesn't offer an HSA. We would have to open up a HSA for her. Or, could I make her an authorized user on my HSA and then she could contribute to it to also but just for the max amount of 1 person ($3400ish)? Not sure about that. Otherwise, would just open up her own. maybe put $1000 in it per year -- we are pretty healthy individuals.
She can find an HSA provider on her own, and contribute her appropriate amount as well. It's worth contributing the maximum because of the tax deduction; as this thread indicates, an HSA is better for retirement savings than a traditional IRA (withdrawals taxed) or a Roth IRA (no deduction on contributions).
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Re: Investing in HSA for Retirement Purpose?

Post by FinancialDave » Fri Dec 22, 2017 8:09 pm

One important item to consider when setting up for an HSA is what are your medical expenses going to be based on the high deductable plan of the HSA. HSA's have cheaper monthly fees because the deductable is higher, which means these higher medical deductions are eating into your tax savings in the HSA overtime and if you are paying your medical expenses with after-tax money currently, then this has to be one of the considerations as to whether this makes sense for you.

The math is complicated (or unknown), because it's hard to know these expenses. You can calculate the difference in deductable limits vs the difference in monthly payments, but it's hard to know how much of the deductible you will use.

Dave
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Re: Investing in HSA for Retirement Purpose?

Post by Pigeye Brewster » Fri Dec 22, 2017 9:42 pm

What I've settled on with regard to my HSA: 1) fully fund all retirement accounts first - 401(k), Roth, mega backdoor Roth, etc., 2) early on, I focused on transfers to HSA investments early on, which are invested for growth via Total Stock Market Index (VTSAX) (timing was good on this), 3) pay large medical bills from taxable for later reimbursement, 4) now I pay pharmacy and small bills like co-pays out of HSA checking to minimize long-term recordkeeping. Not sure if it's optimal, but it works okay for me.

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