HSA not that great in CA

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azianbob
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HSA not that great in CA

Post by azianbob » Mon Feb 11, 2019 11:36 am

I filed my taxes and just realized that the HSA isn't tax deducted in CA ... so gets added back to income. So if that's the case, when I'm 60 and I withdraw for non-medical expense, I am supposed to get taxed at ordinary income rates, so does that mean at that point my state income will not include this? Since I already paid tax on it putting it in on the state level

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willthrill81
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Re: HSA not that great in CA

Post by willthrill81 » Mon Feb 11, 2019 12:36 pm

azianbob wrote:
Mon Feb 11, 2019 11:36 am
I filed my taxes and just realized that the HSA isn't tax deducted in CA ... so gets added back to income. So if that's the case, when I'm 60 and I withdraw for non-medical expense, I am supposed to get taxed at ordinary income rates, so does that mean at that point my state income will not include this? Since I already paid tax on it putting it in on the state level
There's an old thread about this topic.

This quote from grabiner indicates that California does not tax non-qualified withdrawals. I cannot readily find a reputable source for this though.
grabiner wrote:
Sun Aug 12, 2012 9:28 pm
jane1 wrote:Does anyone know how it works if you live in California when you contributed to the HSA (and paid CA state tax on it) but then move to another state after 65. If you withdraw after 65 and treat it like an IRA (for non-medical expenses), do you pay the new state tax on the entire withdrawal? Double state taxation?
State taxes on intangible investments (such as stocks and bank accounts) are based on the laws of your state of residence at the time you pay the taxes. Thus, if an investment is taxed differently by two states, you can pay double tax or no tax.

Thus, if you contributed to an HSA while a CA resident, and then made a non-qualified withdrawal while not a CA resident, you would pay state tax twice. Conversely, if you contributed to an HSA while a non-CA resident, and then made a non-qualified withdrawal while a CA resident, you would pay no state tax.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

nolesrule
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Re: HSA not that great in CA

Post by nolesrule » Mon Feb 11, 2019 1:20 pm

In California, an HSA is treated like any other taxable account. It's not the contributions and withdrawals that matter, but the dividends, interest and capital gains.

Same in New Jersey.

stocknoob4111
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Re: HSA not that great in CA

Post by stocknoob4111 » Mon Feb 11, 2019 1:21 pm

yes, it's a bummer but it is what it is... I am in CA right now but intend to retire in a different state so when I withdraw from the HSA, I may be double taxed unless it's a state with no income tax. I'm not sure if there is an exemption for tax already paid.

yeahman
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Re: HSA not that great in CA

Post by yeahman » Mon Feb 11, 2019 1:24 pm

stocknoob4111 wrote:
Mon Feb 11, 2019 1:21 pm
yes, it's a bummer but it is what it is... I am in CA right now but intend to retire in a different state so when I withdraw from the HSA, I may be double taxed unless it's a state with no income tax. I'm not sure if there is an exemption for tax already paid.
Why would you be double taxed? Only CA and NJ tax HSAs.

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azianbob
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Re: HSA not that great in CA

Post by azianbob » Mon Feb 11, 2019 1:26 pm

nolesrule wrote:
Mon Feb 11, 2019 1:20 pm
In California, an HSA is treated like any other taxable account. It's not the contributions and withdrawals that matter, but the dividends, interest and capital gains.

Same in New Jersey.
So it's kind of like a after tax traditional IRA if I stay in CA? Like if I withdraw $50k to buy a car when in 65, then I won't get taxed on the principle but will get taxed on any gains and dividends?

nolesrule
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Re: HSA not that great in CA

Post by nolesrule » Mon Feb 11, 2019 1:27 pm

yeahman wrote:
Mon Feb 11, 2019 1:24 pm
stocknoob4111 wrote:
Mon Feb 11, 2019 1:21 pm
yes, it's a bummer but it is what it is... I am in CA right now but intend to retire in a different state so when I withdraw from the HSA, I may be double taxed unless it's a state with no income tax. I'm not sure if there is an exemption for tax already paid.
Why would you be double taxed? Only CA and NJ tax HSAs.
If you move from CA or NJ to another state with income tax and make non-qualified withdrawals, then the withdrawals would be subject to state taxes. For qualified withdrawals, you are right, it doesn't make a difference.

nolesrule
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Re: HSA not that great in CA

Post by nolesrule » Mon Feb 11, 2019 1:28 pm

azianbob wrote:
Mon Feb 11, 2019 1:26 pm
nolesrule wrote:
Mon Feb 11, 2019 1:20 pm
In California, an HSA is treated like any other taxable account. It's not the contributions and withdrawals that matter, but the dividends, interest and capital gains.

Same in New Jersey.
So it's kind of like a after tax traditional IRA if I stay in CA? Like if I withdraw $50k to buy a car when in 65, then I won't get taxed on the principle but will get taxed on any gains and dividends?
No. It's like a taxable brokerage account. You have to pay taxes each year on any dividends, interest and capital gains. But you will need to track your own transactions, since there will be no 1099s issued.

An after-tax IRA still has tax deferral on growth, which an HSA in CA or NJ does not.

stocknoob4111
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Re: HSA not that great in CA

Post by stocknoob4111 » Mon Feb 11, 2019 1:50 pm

yeahman wrote:
Mon Feb 11, 2019 1:24 pm
Why would you be double taxed? Only CA and NJ tax HSAs.
So, it looks like it would be double taxed except for payment of medical expenses? In the context of HSAs does after 65 use of HSA funds for any other purpose register as a Qualified distribution?

My understanding is that a HSA withdrawal in a state other than CA or NJ is considered income and taxed as ordinary income EXCEPT if used for qualifying medical expenses. So i'm in CA right now so I paid income tax on my HSA contribution already, but at 65 I retire in GA which has around a 6% income tax rate. Now, at 66 if I withdraw HSA funds to use for something else which is not medical I have to pay 6% again so yes, looks like it's double taxed!!

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azianbob
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Re: HSA not that great in CA

Post by azianbob » Mon Feb 11, 2019 6:30 pm

If you have to pay taxes every year on dividends, does that also mean you can record losses to an HSA and deduct it from taxes every year?

So I guess the best case scenario is for me to move to another state (like Arizona) and keep doing the HSA, then move back to CA at 65 and I can withdraw the whole balance and I won't pay a single cent of state tax on it?

MiddleOfTheRoad
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Re: HSA not that great in CA

Post by MiddleOfTheRoad » Mon Feb 11, 2019 8:49 pm

azianbob wrote:
Mon Feb 11, 2019 6:30 pm
If you have to pay taxes every year on dividends, does that also mean you can record losses to an HSA and deduct it from taxes every year?

So I guess the best case scenario is for me to move to another state (like Arizona) and keep doing the HSA, then move back to CA at 65 and I can withdraw the whole balance and I won't pay a single cent of state tax on it?
You would have to realize all capital gains before moving back to CA.

yeahman
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Re: HSA not that great in CA

Post by yeahman » Mon Feb 11, 2019 9:30 pm

azianbob wrote:
Mon Feb 11, 2019 6:30 pm
If you have to pay taxes every year on dividends, does that also mean you can record losses to an HSA and deduct it from taxes every year?

So I guess the best case scenario is for me to move to another state (like Arizona) and keep doing the HSA, then move back to CA at 65 and I can withdraw the whole balance and I won't pay a single cent of state tax on it?
Best case is you use your HSA only for your bond allocation and it's all in treasuries you hold to maturity. No state tax and because it's an HSA, no federal tax either.

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willthrill81
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Re: HSA not that great in CA

Post by willthrill81 » Mon Feb 11, 2019 10:07 pm

Of course, there is a simple solution to the problem: don't live in a state that taxes HSA contributions. :D
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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grabiner
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Re: HSA not that great in CA

Post by grabiner » Wed Feb 13, 2019 12:24 am

azianbob wrote:
Mon Feb 11, 2019 6:30 pm
If you have to pay taxes every year on dividends, does that also mean you can record losses to an HSA and deduct it from taxes every year?
Only if they would otherwise be deductible. If you hold a mutual fund which declined in value, you can sell for a capital loss.
So I guess the best case scenario is for me to move to another state (like Arizona) and keep doing the HSA, then move back to CA at 65 and I can withdraw the whole balance and I won't pay a single cent of state tax on it?
You would need to harvest all your gains before moving to CA, by selling your mutual funds and then buying them back (or buying other funds). If you sell while a CA resident, you pay CA tax on the capital gain.
Wiki David Grabiner

Topic Author
azianbob
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Re: HSA not that great in CA

Post by azianbob » Wed Feb 13, 2019 1:53 pm

this state is the worst! high state income taxes, crazy high home prices, high gas prices, high water prices, no break on hsa ...

we put up with all this crap just to get nice weather and see actresses on the streets sometimes?

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