We don't treat my HSA as an investment vehicle (we're not currently maxing our other tax-advantaged space). My employer contributes $1,200 per year to my HSA and we use a fair amount of it for medical expenses (multiple sick visits per year for two young children). We also contributed our own money prior to the birth of each of our children in order to get the deduction. Our total medical expenses are below the deductible threshold, so this seems like the best way to minimize taxes.
My old job's HSA was through Wells Fargo, which started charging me $4/mo maintenance after I left the job (like another poster's experience). I was glad I hadn't socked away tons of money in it.
Spirit Rider wrote:It doesn't have to be all or nothing. You could pay small bills with the HSA and large bills with taxable. This minimizes the number of receipts to keep long term, while deferring the majority of the assets long term.
For someone who doesn't have the funds to contribute to their HSA and also pay all qualified medical expenses out of pocket, they can do the opposite. Pay the large bills with the HSA and the small bills with taxable. This might allow them to maximize the tax/FICA benefits and use those savings to defer some amount.
Or any other scheme that might fit someone's goals. Remember, not everyone can afford to make the max contribution and not everyone can then afford to pay all expenses out of taxable.
This forum has the tendency to advocate taking the maximum advantage of all tax deferred opportunities. We need to keep in mind that not everyone has the resources to do so. However, the tax/FICA benefit is so great, that should be the first priority, with long term accrual for those with the resources and willingness to do so.
Interesting. I guess I don't know enough about my HSA to fully understand what you are talking about, though, or how to apply it in my situation.
For your situation, if you're not maximizing contributions to all your tax-advantaged accounts, then there's a good argument to be made that you should invest in this priority order:
1. Contribute to 401(k) plan(s) up to the point you get the maximum employer match(es).
2. If you can save more, then contribute to the HSA until you max it out.
3. If you can contribute more, then either:
3a. Contribute more to 401(k) if you want to prioritize pre-tax contributions, or
3b. Contribute to Roth IRA if you want to prioritize Roth contributions (and if you're eligible)
See this for more:
Why Fund an HSA Instead of an IRA or 401k
For example, suppose you are contributing $100 to retirement accounts in this manner, and also spending $50 for medical expenses:
Option A: Spend down HSA and contribute to Roth IRA
+$50 to HSA
-$50 from HSA to pay medical bills
+$100 to Roth IRA
NET: $100 in IRA, $0 in HSA
Option B: Spend down HSA and contribute to 401(k) (similar to Option A)
+$50 to HSA
-$50 from HSA to pay medical bills
+$100 to 401(k)
NET: $100 in 401(k), $0 in HSA
Instead, do this:
Option C: Prioritize HSA over IRA/401(k) and pay medical bills with cash:
+$100 to HSA, but leave it there - don't reimburse yourself for medical bills
-$50 to pay for medical bills, from regular cash flow and NOT from HSA reimbursement
NET: $0 in IRA/401(k), $100 in HSA
Option C (HSA) is better than Option A (Roth) because when you direct your contributions to your HSA over the Roth IRA, you get to lower your taxes today and you still get all the same benefits of the Roth IRA, which is tax-free distributions (if used for medical expenses).
Option C (HSA) is also better than Option B (401(k)) because HSA contributions lower your FICA income
whereas 401(k) contributions do not. This makes the HSA better than a 401(k) on the contribution-side. On the withdrawal side, the HSA is better than a 401(k) because HSA withdrawals are tax-free (if used for medical expenses) whereas 401(k) (and traditional IRA) withdrawals are taxable income.
Here's how HSA lowers your FICA income. We pay 6.2% FICA tax on wages up to a limit of $113,700 (2013 tax year). If you can lower your FICA income by $5,450 (lets assume employer kicks in $1,000) with HSA contributions, then you don't have to pay 6.2% on $5,450, which is $337. If, instead, you directed that $5,450 to your pre-tax 401(k), then you will pay FICA tax on that amount. Either way, your AGI and taxable income will be lower by $5,450 in both cases.
Bottom line, if you're not
maximizing all your tax-advantaged space, the first
account you should maximize is your HSA (but only after you've made sure to get the maximum 401(k) employer match, if any).