Help me stop losing my mind over California HSA?

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TinKnightRisesAgain
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Help me stop losing my mind over California HSA?

Post by TinKnightRisesAgain »

The pandora's box of learning about California's HSA tax status might be the worst thing that has happened to me this year.

I've been doing a pretty lazy portfolio of Total Stock (60%), International (30%), and Total Bond (10%) funds. My HSA has the same allocation within it. I'm 28 so I'm pretty focused on growth. I don't plan to retire in California, but never say never.

I've gone back in forth on:

1. Just stuffing it with FSKAX and doing the paperwork every year and just enjoying the federal privileged status even though I'm paying higher taxes on the dividend and capital gains distributions.

2. Treating it as my bond storage location with something like FUAMX to pay lower taxes on dividend and capital gains distributions. I already have a Traditional 401k as my bond storage so I would need to weigh the pros and cons of that.

Not particularly interested in Treasury funds or TIPS, since my bonds, so far, have just been one, easy to track fund.

Lemme know if theres anything else I'm missing to help me out. I'm leaning option 1.
mega317
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Re: Help me stop losing my mind over California HSA?

Post by mega317 »

Many people put treasuries in their CA HSA for this reason. Isn't FUAMX a treasury fund? I'm not totally understanding your post. Total market stock funds are tax-efficient and would also be a good choice.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
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anon_investor
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Re: Help me stop losing my mind over California HSA?

Post by anon_investor »

TinKnightRisesAgain wrote: Tue Jun 02, 2020 1:10 pm The pandora's box of learning about California's HSA tax status might be the worst thing that has happened to me this year.

I've been doing a pretty lazy portfolio of Total Stock (60%), International (30%), and Total Bond (10%) funds. My HSA has the same allocation within it. I'm 28 so I'm pretty focused on growth. I don't plan to retire in California, but never say never.

I've gone back in forth on:

1. Just stuffing it with FSKAX and doing the paperwork every year and just enjoying the federal privileged status even though I'm paying higher taxes on the dividend and capital gains distributions.

2. Treating it as my bond storage location with something like FUAMX to pay lower taxes on dividend and capital gains distributions. I already have a Traditional 401k as my bond storage so I would need to weigh the pros and cons of that.

Not particularly interested in Treasury funds or TIPS, since my bonds, so far, have just been one, easy to track fund.

Lemme know if theres anything else I'm missing to help me out. I'm leaning option 1.
If possible, instead of using FSKAX, you are better off with an ETF that does not kick off capital gains distributions annually, which would be subject to California income tax. Some good options would be VTI and ITOT. Just my 2 cents.
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dual
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Re: Which Kindle do I need?

Post by dual »

hold BRK in it?
mervinj7
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Re: Help me stop losing my mind over California HSA?

Post by mervinj7 »

TinKnightRisesAgain wrote: Tue Jun 02, 2020 1:10 pm
I've been doing a pretty lazy portfolio of Total Stock (60%), International (30%), and Total Bond (10%) funds. My HSA has the same allocation within it. I'm 28 so I'm pretty focused on growth.
Your lazy portfolio looks good. It's very similar to mine. I also have HSA (Fidelity) in CA. I looked at two approaches.
1. Treasury Bills. Build a treasury ladder of auto-rolling bills. Duration and steps are variable.
2. Single Equity Holding like VTI. Only one fund to keep track of for tax purposes. No capital gains distributions if you use a ETF.

Even if one implements a three-fund portfolio, it is not necessary to hold the same allocation within each account. Personally, I also keep my bond allocation in my 401k, only equities in Roth IRA, but in my HSA, I only hold Treasury bills. Since my HSA is a small part of my overall portfolio, it barely moves my AA. Most importantly, I have no CA tax related work to do each year.
mega317
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Re: Help me stop losing my mind over California HSA?

Post by mega317 »

Two things I missed. 1. Welcome to the forum.

2.
TinKnightRisesAgain wrote: Tue Jun 02, 2020 1:10 pm The pandora's box of learning about California's HSA tax status might be the worst thing that has happened to me this year.
Really?! Have you seen the news?
https://www.bogleheads.org/forum/viewtopic.php?t=6212
CFM300
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Re: Help me stop losing my mind over California HSA?

Post by CFM300 »

TinKnightRisesAgain wrote: Tue Jun 02, 2020 1:10 pm Lemme know if theres anything else I'm missing to help me out.
I use FUAMX. Regardless of whether you choose that or FSKAX, direct your dividends to a money market fund so that you don't have to track the basis of shares from reinvested dividends.
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BroIceCream
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Re: Help me stop losing my mind over California HSA?

Post by BroIceCream »

anon_investor wrote: Tue Jun 02, 2020 4:06 pm If possible, instead of using FSKAX, you are better off with an ETF that does not kick off capital gains distributions annually, which would be subject to California income tax. Some good options would be VTI and ITOT. Just my 2 cents.
CFM300 wrote: Tue Jun 02, 2020 4:53 pm I use FUAMX. Regardless of whether you choose that or FSKAX, direct your dividends to a money market fund so that you don't have to track the basis of shares from reinvested dividends.
Great ideas shared. I do both of these two mentioned...
  • I use ITOT as the single position. (My HSA is only 2% of my total portfolio, so adding a bond or other equity position is not interesting to me)
  • I don't reinvest dividends. They just parked in the moneymarket fund, with my other payroll deductions.
  • Annually (Jan.1), I sweep the balance of my money market which is above my annual deductable into ITOT.
    I place all paycheck/payroll contributions into the moneymarket.
This provides a couple benefits which I prefer:
  • Ready access to my max-deductible amount funds if I have a really big medical issue that I don't want to pay out-of-pocket.
  • Minimizes the bookkeeping I need to do for tracking the ITOT basis for each payroll contribution. Otherwise I'd have 26 tax lots, per year, to track if I ever sell these while I reside in california.
A congressmen (Jay Obernolte) in So.Cal started a bill (AB-989, AB-1140) in CA legislature to make California match the rest of the country in the treatment of HSA's. Sadly, his bill died in committee, and nothing happened.
Topic Author
TinKnightRisesAgain
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Re: Help me stop losing my mind over California HSA?

Post by TinKnightRisesAgain »

mega317 wrote: Tue Jun 02, 2020 4:00 pm Many people put treasuries in their CA HSA for this reason. Isn't FUAMX a treasury fund? I'm not totally understanding your post. Total market stock funds are tax-efficient and would also be a good choice.
I guess my questions is, is it worth it to split up my bonds (into Treasuries and Corporate Bonds [or some other non-Treasury bond]) just to minimize state taxes (at least from what I understand. From what I know, unless I implement rolling Treasury bonds, I'll be paying state taxes on dividends and capital gain distributions, and something like a fund like FUAMX would still disperse those, it'd just be less taxes then a total market fund).
anon_investor wrote: If possible, instead of using FSKAX, you are better off with an ETF that does not kick off capital gains distributions annually, which would be subject to California income tax. Some good options would be VTI and ITOT. Just my 2 cents.
Hmmm, hadn't thought about that. It looks like VTI doesn't have capital gains distributions at all?



And thanks everyone else for responding, didn't think I'd get so many helpful answers in one afternoon :)
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anon_investor
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Re: Help me stop losing my mind over California HSA?

Post by anon_investor »

TinKnightRisesAgain wrote: Tue Jun 02, 2020 7:44 pm
mega317 wrote: Tue Jun 02, 2020 4:00 pm Many people put treasuries in their CA HSA for this reason. Isn't FUAMX a treasury fund? I'm not totally understanding your post. Total market stock funds are tax-efficient and would also be a good choice.
I guess my questions is, is it worth it to split up my bonds (into Treasuries and Corporate Bonds [or some other non-Treasury bond]) just to minimize state taxes (at least from what I understand. From what I know, unless I implement rolling Treasury bonds, I'll be paying state taxes on dividends and capital gain distributions, and something like a fund like FUAMX would still disperse those, it'd just be less taxes then a total market fund).
anon_investor wrote: If possible, instead of using FSKAX, you are better off with an ETF that does not kick off capital gains distributions annually, which would be subject to California income tax. Some good options would be VTI and ITOT. Just my 2 cents.
Hmmm, hadn't thought about that. It looks like VTI doesn't have capital gains distributions at all?



And thanks everyone else for responding, didn't think I'd get so many helpful answers in one afternoon :)
You can buy a treasury bond ETF like VGIT that does not have capital gains distributions, to avoid California income taxes.
mega317
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Re: Help me stop losing my mind over California HSA?

Post by mega317 »

OP do you know that treasury funds dividends are not taxed by the state?
https://www.bogleheads.org/forum/viewtopic.php?t=6212
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Picasso
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Re: Help me stop losing my mind over California HSA?

Post by Picasso »

mega317 wrote: Tue Jun 02, 2020 4:44 pm Two things I missed. 1. Welcome to the forum.

2.
TinKnightRisesAgain wrote: Tue Jun 02, 2020 1:10 pm The pandora's box of learning about California's HSA tax status might be the worst thing that has happened to me this year.
Really?! Have you seen the news?
+1
Topic Author
TinKnightRisesAgain
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Re: Help me stop losing my mind over California HSA?

Post by TinKnightRisesAgain »

mega317 wrote: Tue Jun 02, 2020 8:47 pm OP do you know that treasury funds dividends are not taxed by the state?
I thought I did, and then I didn't, and now I'm realizing I lumped together capital gains and dividends. So dividends in a treasury fund, never taxable, but capital gains from a mutual fund, taxable?

Picasso wrote: +1
Despite all that's going on, I've, personally, had a pretty stellar year so far. New job, new dog, moved in with my girlfriend. Re-reading my post though, it does sound tone deaf though. I realize others are going through hardships that I'll never know
Last edited by TinKnightRisesAgain on Wed Jun 03, 2020 1:01 am, edited 1 time in total.
JD2775
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Re: Help me stop losing my mind over California HSA?

Post by JD2775 »

Not to hijack but I'm totally confused...

In CA too. I thought HSA earnings were not taxed. Tax free growth, tax free withdrawal (if used for medical). Is that not the case? I have mine invested 100% in VFINX for what it's worth...
CFM300
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Re: Help me stop losing my mind over California HSA?

Post by CFM300 »

JD2775 wrote: Tue Jun 02, 2020 10:54 pm In CA too. I thought HSA earnings were not taxed.
HSAs are not recognized by the Republic of California. Tax-wise, they're just another taxable account. At a minimum, there should be an adjustment on your California Schedule CA, adding back in the amount deducted from your federal taxes for your HSA contributions. You also need to report dividends and capital gains and track your cost basis.

Welcome to the fun!

https://thefinancebuff.com/california-n ... eturn.html
CFM300
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Re: Help me stop losing my mind over California HSA?

Post by CFM300 »

TinKnightRisesAgain wrote: Tue Jun 02, 2020 10:43 pm So dividends in a treasury fund, never taxable
Not quite. For FUAMX, for 2019, only 99.83% of the dividends were not taxable. Seriously:

https://www.fidelity.com/bin-public/060 ... letter.pdf
JD2775
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Re: Help me stop losing my mind over California HSA?

Post by JD2775 »

CFM300 wrote: Tue Jun 02, 2020 11:21 pm
JD2775 wrote: Tue Jun 02, 2020 10:54 pm In CA too. I thought HSA earnings were not taxed.
HSAs are not recognized by the Republic of California. Tax-wise, they're just another taxable account. At a minimum, there should be an adjustment on your California Schedule CA, adding back in the amount deducted from your federal taxes for your HSA contributions. You also need to report dividends and capital gains and track your cost basis.

Welcome to the fun!

https://thefinancebuff.com/california-n ... eturn.html
Ummmm, oops....Thanks. Should probably look into that. I use turbo tax, maybe they’ve been handling it and I just haven’t been paying attention
nalor511
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Re: Help me stop losing my mind over California HSA?

Post by nalor511 »

JD2775 wrote: Wed Jun 03, 2020 12:25 am
CFM300 wrote: Tue Jun 02, 2020 11:21 pm
JD2775 wrote: Tue Jun 02, 2020 10:54 pm In CA too. I thought HSA earnings were not taxed.
HSAs are not recognized by the Republic of California. Tax-wise, they're just another taxable account. At a minimum, there should be an adjustment on your California Schedule CA, adding back in the amount deducted from your federal taxes for your HSA contributions. You also need to report dividends and capital gains and track your cost basis.

Welcome to the fun!

https://thefinancebuff.com/california-n ... eturn.html
Ummmm, oops....Thanks. Should probably look into that. I use turbo tax, maybe they’ve been handling it and I just haven’t been paying attention
They haven't been handling your dividends, you may (will) need to amend if this account was open previous tax years
Topic Author
TinKnightRisesAgain
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Re: Help me stop losing my mind over California HSA?

Post by TinKnightRisesAgain »

CFM300 wrote: Tue Jun 02, 2020 11:26 pm
TinKnightRisesAgain wrote: Tue Jun 02, 2020 10:43 pm So dividends in a treasury fund, never taxable
Not quite. For FUAMX, for 2019, only 99.83% of the dividends were not taxable. Seriously:

https://www.fidelity.com/bin-public/060 ... letter.pdf
Oof, how does that even work? Multiply my dividend sum by .0017?
CFM300
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Re: Help me stop losing my mind over California HSA?

Post by CFM300 »

TinKnightRisesAgain wrote: Wed Jun 03, 2020 1:00 am Oof, how does that even work? Multiply my dividend sum by .0017?
The rabbit hole is deep. Let me share some things I've learned down here...

viewtopic.php?t=279583

viewtopic.php?t=304415
Topic Author
TinKnightRisesAgain
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Re: Help me stop losing my mind over California HSA?

Post by TinKnightRisesAgain »

I guess another question would be, how do you figure out the math on how to do the cost benefit of a higher growth fund and enjoying the special federal status, but eating the regular state status vs. parking bonds in there and missing out growth?

And another fun thought, assuming I don't use the HSA until I'm 65 and use it for non-medical issues, I'd still be paying income tax on it, so wouldn't that negate the Federal advantage? I know I'll likely use some of it for medical expenses after 65, but just as a thought experiment.

Unrelated, but all this learning has me doing more learning and challenging some things I've taken for granted. Are Roth withdrawals after 65 not subject to income tax? I could have sworn they aren't, but now I'm all lost.
nalor511
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Re: Help me stop losing my mind over California HSA?

Post by nalor511 »

TinKnightRisesAgain wrote: Wed Jun 03, 2020 1:47 am I guess another question would be, how do you figure out the math on how to do the cost benefit of a higher growth fund and enjoying the special federal status, but eating the regular state status vs. parking bonds in there and missing out growth?

And another fun thought, assuming I don't use the HSA until I'm 65 and use it for non-medical issues, I'd still be paying income tax on it, so wouldn't that negate the Federal advantage? I know I'll likely use some of it for medical expenses after 65, but just as a thought experiment.

Unrelated, but all this learning has me doing more learning and challenging some things I've taken for granted. Are Roth withdrawals after 65 not subject to income tax? I could have sworn they aren't, but now I'm all lost.
Roth withdrawals over age 59.5 as long as it's been open 5+ years, no tax.

Re: HSA in CA, you can use it with Treasuries for part of your fixed income allocation if you have one, or you can keep up with the reporting of divs/gains, and pay the taxes. There was a law working its way through the legislature to stop this HSA monkey business, but it was of course halted by Covid. http://leginfo.legislature.ca.gov/faces ... 0200AB2384
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unclescrooge
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Re: Help me stop losing my mind over California HSA?

Post by unclescrooge »

nalor511 wrote: Wed Jun 03, 2020 12:49 am
JD2775 wrote: Wed Jun 03, 2020 12:25 am
CFM300 wrote: Tue Jun 02, 2020 11:21 pm
JD2775 wrote: Tue Jun 02, 2020 10:54 pm In CA too. I thought HSA earnings were not taxed.
HSAs are not recognized by the Republic of California. Tax-wise, they're just another taxable account. At a minimum, there should be an adjustment on your California Schedule CA, adding back in the amount deducted from your federal taxes for your HSA contributions. You also need to report dividends and capital gains and track your cost basis.

Welcome to the fun!

https://thefinancebuff.com/california-n ... eturn.html
Ummmm, oops....Thanks. Should probably look into that. I use turbo tax, maybe they’ve been handling it and I just haven’t been paying attention
They haven't been handling your dividends, you may (will) need to amend if this account was open previous tax years
Can I do tax loss harvesting in my HSA? :mrgreen:
mervinj7
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Re: Help me stop losing my mind over California HSA?

Post by mervinj7 »

unclescrooge wrote: Wed Jun 03, 2020 9:16 pm Can I do tax loss harvesting in my HSA? :mrgreen:
For the purposes of CA state taxes, yes you can and should.
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anon_investor
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Re: Help me stop losing my mind over California HSA?

Post by anon_investor »

TinKnightRisesAgain wrote: Wed Jun 03, 2020 1:00 am
CFM300 wrote: Tue Jun 02, 2020 11:26 pm
TinKnightRisesAgain wrote: Tue Jun 02, 2020 10:43 pm So dividends in a treasury fund, never taxable
Not quite. For FUAMX, for 2019, only 99.83% of the dividends were not taxable. Seriously:

https://www.fidelity.com/bin-public/060 ... letter.pdf
Oof, how does that even work? Multiply my dividend sum by .0017?
Sounds like you would be better off just buying a VUG (Vanguard Growth Index Fund ETF) or some other kind of growth index ETF that has low dividend yield and no capital gains distributions.
fareastwarriors
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Re: Help me stop losing my mind over California HSA?

Post by fareastwarriors »

nalor511 wrote: Wed Jun 03, 2020 12:23 pm
TinKnightRisesAgain wrote: Wed Jun 03, 2020 1:47 am I guess another question would be, how do you figure out the math on how to do the cost benefit of a higher growth fund and enjoying the special federal status, but eating the regular state status vs. parking bonds in there and missing out growth?

And another fun thought, assuming I don't use the HSA until I'm 65 and use it for non-medical issues, I'd still be paying income tax on it, so wouldn't that negate the Federal advantage? I know I'll likely use some of it for medical expenses after 65, but just as a thought experiment.

Unrelated, but all this learning has me doing more learning and challenging some things I've taken for granted. Are Roth withdrawals after 65 not subject to income tax? I could have sworn they aren't, but now I'm all lost.

Roth withdrawals over age 59.5 as long as it's been open 5+ years, no tax.

Re: HSA in CA, you can use it with Treasuries for part of your fixed income allocation if you have one, or you can keep up with the reporting of divs/gains, and pay the taxes. There was a law working its way through the legislature to stop this HSA monkey business, but it was of course halted by Covid. http://leginfo.legislature.ca.gov/faces ... 0200AB2384

Could you interpret the changes? I know we're not supposed to discuss pending legislation and only actual laws...
Topic Author
TinKnightRisesAgain
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Re: Help me stop losing my mind over California HSA?

Post by TinKnightRisesAgain »

anon_investor wrote: Wed Jun 03, 2020 10:38 pm
TinKnightRisesAgain wrote: Wed Jun 03, 2020 1:00 am
CFM300 wrote: Tue Jun 02, 2020 11:26 pm
TinKnightRisesAgain wrote: Tue Jun 02, 2020 10:43 pm So dividends in a treasury fund, never taxable
Not quite. For FUAMX, for 2019, only 99.83% of the dividends were not taxable. Seriously:

https://www.fidelity.com/bin-public/060 ... letter.pdf
Oof, how does that even work? Multiply my dividend sum by .0017?
Sounds like you would be better off just buying a VUG (Vanguard Growth Index Fund ETF) or some other kind of growth index ETF that has low dividend yield and no capital gains distributions.
That's definitely appealing. Pretty much the goldilocks in terms of what I was looking for (high growth, low dividends, no cap gains)
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TinKnightRisesAgain
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Re: Help me stop losing my mind over California HSA?

Post by TinKnightRisesAgain »

Although looking at it now, not too different than something like VTI it feels like
Lyrrad
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Re: Help me stop losing my mind over California HSA?

Post by Lyrrad »

TinKnightRisesAgain wrote: Wed Jun 03, 2020 11:41 pm
anon_investor wrote: Wed Jun 03, 2020 10:38 pm
Sounds like you would be better off just buying a VUG (Vanguard Growth Index Fund ETF) or some other kind of growth index ETF that has low dividend yield and no capital gains distributions.
That's definitely appealing. Pretty much the goldilocks in terms of what I was looking for (high growth, low dividends, no cap gains)
Personally I hold VUG in my HSA. I balance it out with VTV and VB in a tax-deferred or Roth account as part of my US stock allocation. (VUG is half of the top 85% in market cap, and VTV is the other half; VB holds is 85-98%, so one can hold them in a ratio of 3:3:1 to approximate VTI).

I expect VUG to have low distributions, so I'd normally only have to add the 4 quarterly distributions onto my CA tax form the following year.

It really isn't worth worrying about. Even if one held VTI/ITOT it would just distribute about 2% a year, and be subject to CA tax. VUG would be about 1%. So on a $10000 HSA balance VTI would cost about $10/year more than VUG in CA taxes at a 10% marginal rate. Note that if the ETF is eventually sold while a CA tax resident, the reduced dividend would be taxed in the form of an increased capital gain.

If one moves out of CA for a period of time and later moves back CA, one may want to reset the cost basis before moving back, since in most states HSA internal transactions would not be taxable.
manatee2005
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Re: Help me stop losing my mind over California HSA?

Post by manatee2005 »

mega317 wrote: Tue Jun 02, 2020 4:44 pm Two things I missed. 1. Welcome to the forum.

2.
TinKnightRisesAgain wrote: Tue Jun 02, 2020 1:10 pm The pandora's box of learning about California's HSA tax status might be the worst thing that has happened to me this year.
Really?! Have you seen the news?
No, he was too busy reading about obscure California HSA rules 😀
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btq96r
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Re: Help me stop losing my mind over California HSA?

Post by btq96r »

CFM300 wrote: Tue Jun 02, 2020 11:21 pm HSAs are not recognized by the Republic of California. Tax-wise, they're just another taxable account.
So wrong, but also so on brand.
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