Investing in HSA and/or backdoor Roth

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Kamadenu
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Investing in HSA and/or backdoor Roth

Post by Kamadenu » Mon Feb 26, 2018 6:13 pm

I need to contribute 2017 distribution to a HSA and 2018 Roth IRA. Just wondering if I had to buy bonds exclusively in one of these, which account is better for it?

I also have a asset allocation question for kids 529, who are 7 and 4 year old. I am doing a 50/30/20 allocation over domestic, international and bonds but not sure if it is suggested to invest more in stocks in 529s and not have any bonds in these accounts as I am kind of late in starting these accounts for the kids education.

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FiveK
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Re: Investing in HSA and/or backdoor Roth

Post by FiveK » Mon Feb 26, 2018 8:24 pm

Kamadenu wrote:
Mon Feb 26, 2018 6:13 pm
I need to contribute 2017 distribution to a HSA and 2018 Roth IRA. Just wondering if I had to buy bonds exclusively in one of these, which account is better for it?
If one assumes stocks will have better returns than bonds, using the Roth for stocks and leaving bonds to the HSA makes sense, because any Roth withdrawals after age 59.5 will be tax free whereas the HSA withdrawals might not be all tax free if the account balance outpaces medical expenses.

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Duckie
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Re: Investing in HSA and/or backdoor Roth

Post by Duckie » Mon Feb 26, 2018 8:29 pm

Kamadenu wrote:I need to contribute 2017 distribution to a HSA and 2018 Roth IRA. Just wondering if I had to buy bonds exclusively in one of these, which account is better for it?
HSA. In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free. So put the bonds in the HSA if the bond options are decent.
Last edited by Duckie on Thu Jun 14, 2018 6:00 pm, edited 1 time in total.

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grabiner
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Re: Investing in HSA and/or backdoor Roth

Post by grabiner » Tue Feb 27, 2018 10:26 pm

Duckie wrote:
Mon Feb 26, 2018 8:29 pm
Kamadenu wrote:I need to contribute 2017 distribution to a HSA and 2018 Roth IRA. Just wondering if I had to buy bonds exclusively in one of these, which account is better for it?
HSA. In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already the paid the taxes in the Roth accounts so future growth is tax-free. So put the bonds in the HSA if the bond options are decent.
Growth in both the HSA and the Roth is normally tax-free.

The reason to prefer bonds in the HSA is the "normally". If the stock market booms and you have stocks in the HSA, there is a risk that the HSA will exceed your medical expenses, and the gains will be taxable. If the stock market booms and you have stocks in the Roth IRA, you don't have to withdraw the extra money, nor pay tax on it, and your heirs can inherit a large Roth IRA.

But this isn't important enough that I would let it dominate the investment decisions. If your HSA provider has better stock than bond options, hold stocks in the HSA. Likewise, if your 401(k) has better stock than bond options, hold stocks there, and bonds in your Roth IRA.
Wiki David Grabiner

Kamadenu
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Re: Investing in HSA and/or backdoor Roth

Post by Kamadenu » Tue Mar 13, 2018 2:18 pm

Thank you. I see the usual vanguard options in my HSA.

Vanguard Small Cap Index Fund (VSMAX) 10%
Vanguard Long-Term Bond Index (VBLTX) 20%
Vanguard Emerging Markets Stock Index Fund (VEMAX) 30%
Vanguard 500 Index Fund Admiral Shares (VFIAX) 40%

is the way I am "investing" currently in my HSA. I still have to deposit $6750 for 2017 and I would like to know if I should just invest this whole 2017 contribution in VBLTX?

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grabiner
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Re: Investing in HSA and/or backdoor Roth

Post by grabiner » Tue Mar 13, 2018 7:30 pm

Kamadenu wrote:
Tue Mar 13, 2018 2:18 pm
Thank you. I see the usual vanguard options in my HSA.

Vanguard Small Cap Index Fund (VSMAX) 10%
Vanguard Long-Term Bond Index (VBLTX) 20%
Vanguard Emerging Markets Stock Index Fund (VEMAX) 30%
Vanguard 500 Index Fund Admiral Shares (VFIAX) 40%

is the way I am "investing" currently in my HSA. I still have to deposit $6750 for 2017 and I would like to know if I should just invest this whole 2017 contribution in VBLTX?
Invest your HSA as if it is part of your IRA. You may choose to have only one fund in the HSA for simplicity; this is fine as long as you have the other asset classes elsewhere.

I don't like Long-Term Bond Index as a core bond fund, as it has a lot of interest-rate risk; look at its historical performance when rates rose. If you hold bonds in your HSA, an intermediate-term fund might be better, for almost as good yields with significantly less risk.
Wiki David Grabiner

Kamadenu
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Re: Investing in HSA and/or backdoor Roth

Post by Kamadenu » Wed Mar 14, 2018 11:19 pm

Thanks grabiner.

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