[Wiki - Update to HSA]

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bacon4retirement
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[Wiki - Update to HSA]

Post by bacon4retirement » Mon Jun 29, 2020 12:04 am

[Merged into the ongoing topic -- moderator oldcomputerguy]
[Moved into a new thread from: Suggestions for the Wiki --admin LadyGeek]

Would it be reasonable to update the wiki to more clearly state that HSAs used for investment holdings are similar to a Roth account rather than a traditional retirement account? When I initially read the wiki when I first set up my HSA, the lack of distinction between Traditional and Roth accounts led me to put bonds in the HSA when I should have used it for stocks. Would be nice to save someone else from making the same minor mistake.

Here is my suggestion for specific text updates to https://www.bogleheads.org/wiki/Health_ ... st_the_HSA
If you view the HSA as part of your retirement allocation, you can then choose which part your asset allocation should be held in the HSA based on state tax considerations, federal tax considerations, the available investment options in each account, and the length of time until funds may be withdrawn. If you live in a state that does not recognize HSAs, state taxes give a strong incentive to hold Treasury bonds or TIPS there. For people living in most states, HSAs are similar to Roth accounts in terms of the principles of tax-efficient fund placement for tax free accounts. The investment options in the HSA and in other accounts may determine what is better to hold in which account, particularly if the 401(k) options are poor. If you are near retirement, and you expect to rely on HSA withdrawals in the early withdrawal stages (because you are deferring Social Security and you need tax-free withdrawals to stay within your tax bracket), then it might make sense to have a significant bond allocation in your HSA (and Roth). That way you lower the risk that your HSA is too low to meet your withdrawal needs between retirement and Social Security benefits.

Original text:
If you are paying current expenses out of pocket, the HSA is intended for medical expenses in retirement. You should thus invest it as if it were part of your IRA or 401(k), as those accounts are also invested for retirement expenses. If you are using the HSA for current expenses, at least one year's deductible should be considered part of your emergency fund since it is likely you will need this amount for medical bills; the remainder can be invested as if it were part of an IRA or 401(k).
If you view the HSA as part of your retirement allocation, you can then choose which part should be held in the HSA, and which should be held elsewhere. If you live in a state that does not recognize HSAs, state taxes give a strong incentive to hold Treasury bonds or TIPS there. Otherwise, the investment options in the HSA and in other accounts may determine what is better to hold in which account; if your 401(k) has better bond than stock options, you would hold bonds there and stocks in your IRA and HSA.

Reference
[
Aptenodytes wrote:
Sun Aug 11, 2019 11:30 am
raixx017 wrote:
Sat Aug 10, 2019 8:31 pm
Thanks !
In that case, where should one place total market bond funds ( assuming one wants to and under similar conditions, age 30, etc) ? Roth IRA ? Taxable ? 401K ?
The wiki covers this topic thoroughly and clearly.

What I've come to appreciate is that if you are near retirement, and you expect to rely on HSA withdrawals in the early withdrawal stages (because you are deferring Social Security and you need tax-free withdrawals to stay within your tax bracket), then it might make sense to have a significant bond allocation in your HSA (and Roth). That way you lower the risk that your HSA is too low to meet your withdrawal needs between retirement and Social Security benefits.

Not everyone nearing retirement will need to worry about this. If your HSA + Roth + taxable account holdings are large enough, the sequence of return risks on those funds will be zero.

But I think a lot of middle-income families in which the primary money-earner(s) will retire before age 70 are likely to find themselves spending disproportionately from their HSAs and Roths up until age 70, and should at least consider reducing risk in those accounts as they get close to retirement.

The wiki page on tax efficient fund placement would also be clearer if it included HSAs and removed the implict assumption that 401(k) is a traditional. Here is a possible improvement for https://www.bogleheads.org/wiki/Tax-eff ... tock_funds:
If all else is equal (and it often isn't, because you may have different options in each retirement account), it is slightly better to have the fund with the highest expected return in your Roth account or HSA, because theses accounts are free from Required Minimum Distributions (RMDs), [note 6] are not counted as income for making Social Security taxable, and the Roth probably is less subject to the risk of changing tax rates.

Original text:
If all else is equal (and it often isn't, because you may have different options in your 401(k) and your Roth IRA), it is slightly better to have the fund with the highest expected return in your Roth, because the Roth is free from Required Minimum Distributions (RMDs), [note 6] is not counted as income for making Social Security taxable, and probably is less subject to the risk of changing tax rates.

retired@50
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Re: Update to HSA wiki

Post by retired@50 » Mon Jun 29, 2020 4:16 pm

bacon4retirement wrote:
Mon Jun 29, 2020 12:04 am
Would it be reasonable to update the wiki
Updates or suggestions for the wiki should be posted in this thread.

viewtopic.php?t=18149

Regards,
This is one person's opinion. Nothing more.

aristotelian
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Re: Update to HSA wiki

Post by aristotelian » Mon Jun 29, 2020 6:45 pm

I mostly agree with your revision. To most take advantage of the tax free growth as a general rule you would allocate it like Roth with highest expected return assets appropriate to your timeframe.

One exception I can think of is if you value liquidity, particularly if you are struggling to max your retirement accounts and do not have a big emergency fund. You could refer to the Bogleheads wiki on Roth as Emergency Fund -- the same logic applies except the liquid amount is up to the amount of past eligible expenses rather than past contributions. In that case, any amount you would want to keep liquid you would want in cash, CD, or low risk bond fund. https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

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grabiner
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Re: Update to HSA wiki

Post by grabiner » Mon Jun 29, 2020 10:15 pm

I am a wiki editor and will take a look at this discussion and the wiki page.
aristotelian wrote:
Mon Jun 29, 2020 6:45 pm
I mostly agree with your revision. To most take advantage of the tax free growth as a general rule you would allocate it like Roth with highest expected return assets appropriate to your timeframe.
If it is very large, you may not want to do this, as you run the risk that your HSA will exceed your medical expenses and become partially taxable. It is better to hold riskier assets in a Roth IRA than in an HSA.
Wiki David Grabiner

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bacon4retirement
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Re: Update to HSA wiki

Post by bacon4retirement » Mon Jun 29, 2020 11:12 pm

retired@50 wrote:
Mon Jun 29, 2020 4:16 pm
bacon4retirement wrote:
Mon Jun 29, 2020 12:04 am
Would it be reasonable to update the wiki
Updates or suggestions for the wiki should be posted in this thread.

viewtopic.php?t=18149

Regards,
Oh, I'll post there in the future. I also now see the sticky in the local chapters forum about joining the wiki team.

retired@50
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Re: Update to HSA wiki

Post by retired@50 » Mon Jun 29, 2020 11:21 pm

bacon4retirement wrote:
Mon Jun 29, 2020 11:12 pm
retired@50 wrote:
Mon Jun 29, 2020 4:16 pm
bacon4retirement wrote:
Mon Jun 29, 2020 12:04 am
Would it be reasonable to update the wiki
Updates or suggestions for the wiki should be posted in this thread.

viewtopic.php?t=18149

Regards,
Oh, I'll post there in the future. I also now see the sticky in the local chapters forum about joining the wiki team.
If you hope to see action on your post, I'd suggest you cut and paste your remarks to the thread I linked.

Regards,
This is one person's opinion. Nothing more.

Spirit Rider
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Re: Update to HSA wiki

Post by Spirit Rider » Tue Jun 30, 2020 7:49 am

grabiner wrote:
Mon Jun 29, 2020 10:15 pm
I am a wiki editor and will take a look at this discussion and the wiki page.
aristotelian wrote:
Mon Jun 29, 2020 6:45 pm
I mostly agree with your revision. To most take advantage of the tax free growth as a general rule you would allocate it like Roth with highest expected return assets appropriate to your timeframe.
If it is very large, you may not want to do this, as you run the risk that your HSA will exceed your medical expenses and become partially taxable. It is better to hold riskier assets in a Roth IRA than in an HSA.
In most cases it would indeed have be very large, if you factor in Medicare Part B & D premiums (especially if subject to IRMAA), medical OOP, dental insurance and/or OOP, vision products, hearing (tests, aids and batteries) LTC (OOP and/or insurance and again over-the-counter medical products now including feminine hygiene products, etc...

Fidelity's study on average lifetime healthcare costs for a 65 year old couple retiring in 2019 was $285K in 2019 dollars. That only included medical costs and not dental, hearing, vision and LTC costs. Now many BHs can probably minimize this with proper selection of a Medicare Supplement or Advantage plan. However, the vast majority of people will run out of HSA funds long before the last of the couple does.

The possibility of too large an HSA should certainly be mentioned, but qualified by the likely healthcare costs (HSA qualified medical expenses). A possible mitigation effort is to use a high-deductible Medicare Supplement plan. This turns the majority of non-qualified premiums into qualified OOP costs.

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LadyGeek
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Re: [Wiki - Update to HSA]

Post by LadyGeek » Tue Jun 30, 2020 8:15 am

retired@50 wrote:
Mon Jun 29, 2020 11:21 pm
bacon4retirement wrote:
Mon Jun 29, 2020 11:12 pm
retired@50 wrote:
Mon Jun 29, 2020 4:16 pm
bacon4retirement wrote:
Mon Jun 29, 2020 12:04 am
Would it be reasonable to update the wiki
Updates or suggestions for the wiki should be posted in this thread.

viewtopic.php?t=18149

Regards,
Oh, I'll post there in the future. I also now see the sticky in the local chapters forum about joining the wiki team.
If you hope to see action on your post, I'd suggest you cut and paste your remarks to the thread I linked.

Regards,
retired@50 is correct to post in Suggestions for the Wiki. When the suggestion turns into a discussion, it's best to use a separate thread so we can focus on the topic at hand.

We're discussing both HSAs and investments, but the intent is for HSAs. This thread is in the Personal Finance (Not Investing) forum (HSA).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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