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Invest in HSA or 529 Plan?

Posted: Thu May 30, 2019 3:56 pm
by bg5
Hey Gang,

We have a little extra money coming in each month and am wondering what I should do with the extra money. We are probably talking about $3000 extra per year.

Quick Background on my wife and I

Ages - 38 and 34

Kids = Ages 11 , 7 , 1

Debt = 4% interest rate with 28 years left on mortage. We owe $235K on home valued at $550k. We also owe $37k on a boat with 3.99% interest but are making a few extra payments a year on this as well. We do want to get it paid off but am not that concerned with it at this point as we could easily sell it and not owe any money. We do live on a lake and we love the boat

Combined Income = $140,000 (will be up to $155,000 in 3 years)

Retirment accounts = 200k (we put $31,000 a year into Roth IRA and 457b plans)

Pensions = we both will have government pensions that will be roughly half of our highest 3 years earnings with COLA

529 plans - Age 11 has $7000 Age 7 has $800 Age 1 has $10,000

HSA - We have $2400 in this now and we currenly contribute $1000 annually.


AS far as college goes we will be able to cash flow college for our kids. I am not saying we should do it that way but that is an option for us as our in state universities are great and run around $25,000 for room, board, food, etc. We were considering moving all of the 529 money into our youngest kids account so that it has the longest time to gain and possibly cash flow the other two or use some of that money for the first two kids and add money to the 529 plan.

I understand that an HSA is a huge tax savings but not sure if I want it to go there since college will be a huge cost to use although like I said we could cash flow it.

My wife and I would also like to retire at a younger age so maybe college will be the biggest challenge?

Any advice would help

Re: Invest in HSA or 529 Plan?

Posted: Thu May 30, 2019 3:57 pm
by bg5
Forgot to mention we have around 20k in savings with very stable jobs that will be around until we no longer want to work. We have around 60k in Roth IRA that could be accessed without penalty in the event of a crazy emergency.

Re: Invest in HSA or 529 Plan?

Posted: Thu May 30, 2019 4:27 pm
by CommitmentDevice
Personally, I would use the extra $ to pay down debt faster. A guaranteed 4% return is pretty sweet.

Re: Invest in HSA or 529 Plan?

Posted: Fri May 31, 2019 8:59 pm
by grabiner
CommitmentDevice wrote:
Thu May 30, 2019 4:27 pm
Personally, I would use the extra $ to pay down debt faster. A guaranteed 4% return is pretty sweet.
But the HSA has a much better guaranteed return, and should be maxed out in preference to anything else except for a matched 401(k). If the HSA exceeds your medical costs now, you are saving it for medical costs in retirement, so it can be treated as if it were part of your Roth IRA, but with an IRS subsidy on the contributions. In a 22% bracket, it costs you only $4680 to put $6000 in an HSA where it will grow tax-free, while it costs $6000 to put $6000 in a Roth IRA.

This doesn't mean that the Roth IRA is the investment you should reduce in order to contribute more to the HSA. If you are using the Roth IRA as an emergency fund, contribute less to the 401(k) instead.

Re: Invest in HSA or 529 Plan?

Posted: Mon Jun 03, 2019 11:06 am
by CommitmentDevice
grabiner wrote:
Fri May 31, 2019 8:59 pm
CommitmentDevice wrote:
Thu May 30, 2019 4:27 pm
Personally, I would use the extra $ to pay down debt faster. A guaranteed 4% return is pretty sweet.
But the HSA has a much better guaranteed return, and should be maxed out in preference to anything else except for a matched 401(k). If the HSA exceeds your medical costs now, you are saving it for medical costs in retirement, so it can be treated as if it were part of your Roth IRA, but with an IRS subsidy on the contributions. In a 22% bracket, it costs you only $4680 to put $6000 in an HSA where it will grow tax-free, while it costs $6000 to put $6000 in a Roth IRA.

This doesn't mean that the Roth IRA is the investment you should reduce in order to contribute more to the HSA. If you are using the Roth IRA as an emergency fund, contribute less to the 401(k) instead.
I stand corrected. I hadn't appreciated the math behind an HSA. Thanks grabiner.

Re: Invest in HSA or 529 Plan?

Posted: Mon Jun 03, 2019 4:20 pm
by megabad
bg5 wrote:
Thu May 30, 2019 3:56 pm
I understand that an HSA is a huge tax savings but not sure if I want it to go there since college will be a huge cost to use although like I said we could cash flow it.

My wife and I would also like to retire at a younger age so maybe college will be the biggest challenge?

Any advice would help
+1 for the HSA. Definitely agree with grabiner's comments. Even if your state has a tax incentive for 529s, it is likely less than the incentive provided by an HSA.

Keep in mind that there is no reason an HSA cannot be used indirectly for college savings (ie. save your medical receipts). However, financially it would likely make more sense to cashflow college and let the HSA keep building assuming you can do so and still max all tax advantaged accounts. HSA's not only provide more financial incentive than 529s, they have have significantly more lenient withdrawal rules. This one isn't even a contest in my opinion.

Re: Invest in HSA or 529 Plan?

Posted: Mon Jun 03, 2019 7:31 pm
by grabiner
megabad wrote:
Mon Jun 03, 2019 4:20 pm
bg5 wrote:
Thu May 30, 2019 3:56 pm
I understand that an HSA is a huge tax savings but not sure if I want it to go there since college will be a huge cost to use although like I said we could cash flow it.

My wife and I would also like to retire at a younger age so maybe college will be the biggest challenge?

Any advice would help
+1 for the HSA. Definitely agree with grabiner's comments. Even if your state has a tax incentive for 529s, it is likely less than the incentive provided by an HSA.
Every state with a tax incentive for 529s also offers a tax incentive for HSAs; CA and NJ, the two states which do not recognize HSAs, also have no tax incentive for their own 529 plans. (In both states, 529 earnings are tax-exempt if used for qualified education expenses.)