HSA Really Worth It In California?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Shaka
Posts: 24
Joined: Sat Jul 04, 2020 8:04 pm

HSA Really Worth It In California?

Post by Shaka » Sat Aug 01, 2020 2:31 pm

I've been considering switching over to an HSA offering at my company. California doesn't recognize HSAs, so there is additional work to calculate state taxes each year due to dividends and capital gains distributions.

I tried to do a comparison of my traditional plan vs. HSA (which I described in a previous post) can came up with the following result.

It assumes I have the same pool of money to invest no matter which plan I choose. Money left over from this pool after medical expenses goes into VTI (in either a post-tax account, the HSA account, or both) and grows for 27 years (my timeline for retirement). Plots shows money left over after liquidating the entire account at retirement and paying all state and federal taxes due (plots show doing this for both qualified expenses and unqualified expenses). California taxes over the 27 years are taken into account. I show three cases: a theoretical best case of no medical expenses at all, a theoretical worst case of maxing out your out of pocket expenses, and a case in the middle. The spreadsheet that performs these calculations can be viewed here.

Image

For the assumptions shown here, the middle case nets about $80K to $120K more than using the traditional plan, as the inconvenience of paying California taxes. The spreadsheet allows one to select treasuries instead of a stock investment, but I haven't been able to figure out the proper growth vs. dividend assumptions, so I didn't show those plots here.

Any thoughts?

User avatar
anon_investor
Posts: 2829
Joined: Mon Jun 03, 2019 1:43 pm

Re: HSA Really Worth It In California?

Post by anon_investor » Sat Aug 01, 2020 2:51 pm

OP, your assumption is you will remain in California forever... will you?

Topic Author
Shaka
Posts: 24
Joined: Sat Jul 04, 2020 8:04 pm

Re: HSA Really Worth It In California?

Post by Shaka » Sat Aug 01, 2020 2:58 pm

anon_investor wrote:
Sat Aug 01, 2020 2:51 pm
OP, your assumption is you will remain in California forever... will you?
No current plans to move, but who can predict the future?! =)

Gleevec
Posts: 338
Joined: Sun Mar 03, 2013 11:25 am

Re: HSA Really Worth It In California?

Post by Gleevec » Sat Aug 01, 2020 3:10 pm

HSA in California are a fine option, personally I hold all my TIPS in my HSA to mitigate the state tax issue

User avatar
anon_investor
Posts: 2829
Joined: Mon Jun 03, 2019 1:43 pm

Re: HSA Really Worth It In California?

Post by anon_investor » Sat Aug 01, 2020 3:16 pm

Shaka wrote:
Sat Aug 01, 2020 2:58 pm
anon_investor wrote:
Sat Aug 01, 2020 2:51 pm
OP, your assumption is you will remain in California forever... will you?
No current plans to move, but who can predict the future?! =)
That is something to bake into your analysis. If you were to leave California (and establish tax residence in another state) before HSA liquidation, then a tax efficient portfolio would not be subject to any california capital gains tax at liquidation.

For example a portfolio of a growth index ETF and an intermediate treasury ETF could work.

-a growth index ETF would have a lower dividend yield that the S&P500 or Total Stock Market index, would not kick off annual captial gains distributions, and long term would likely have very similar return to the S&P500/Total Stock Market Index.
-an intermediate treasury ETF would have state tax exempt dividends

Rebalance with new money as much as possible to avoid creating any taxable events. However, you can tax loss harvest if there is a large crash, which would allow you to rebalance without a tax consequence. Regular tax loss harvesting can also reduce the tax drag on the dividends.

If you already manage a taxable account, all these activities would not be much different. You might need to keep a spreadsheet and statements to prepare taxes since you will not get a nice 1099.

Topic Author
Shaka
Posts: 24
Joined: Sat Jul 04, 2020 8:04 pm

Re: HSA Really Worth It In California?

Post by Shaka » Sat Aug 01, 2020 3:16 pm

Gleevec wrote:
Sat Aug 01, 2020 3:10 pm
HSA in California are a fine option, personally I hold all my TIPS in my HSA to mitigate the state tax issue
I'm trying to put this type of investment into my spreadsheet to compare the difference to equity investments. Do you know what the historical average annual growth rate of TIPS are? I'm new to investing and am not yet terribly familiar with this type of investment. I tried putting in some low growth assumptions and in certain cases an HSA comes out behind after-tax investments.

Topic Author
Shaka
Posts: 24
Joined: Sat Jul 04, 2020 8:04 pm

Re: HSA Really Worth It In California?

Post by Shaka » Sat Aug 01, 2020 3:21 pm

anon_investor wrote:
Sat Aug 01, 2020 3:16 pm
If you already manage a taxable account, all these activities would not be much different. You might need to keep a spreadsheet and statements to prepare taxes since you will not get a nice 1099.
Yes, this is what I'm trying to determine...if the difference in choosing state tax exempt investments (that avoid this work) is worth the difference in growth from choosing investments that will require the spreadsheet work for CA taxes. =)

User avatar
willthrill81
Posts: 19733
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: HSA Really Worth It In California?

Post by willthrill81 » Sat Aug 01, 2020 3:56 pm

anon_investor wrote:
Sat Aug 01, 2020 2:51 pm
OP, your assumption is you will remain in California forever... will you?
That was the first thing that came to my mind as well. Millions have already left CA, so there's a good chance that the OP will at some point too.
“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

User avatar
anon_investor
Posts: 2829
Joined: Mon Jun 03, 2019 1:43 pm

Re: HSA Really Worth It In California?

Post by anon_investor » Sat Aug 01, 2020 3:57 pm

Shaka wrote:
Sat Aug 01, 2020 3:21 pm
anon_investor wrote:
Sat Aug 01, 2020 3:16 pm
If you already manage a taxable account, all these activities would not be much different. You might need to keep a spreadsheet and statements to prepare taxes since you will not get a nice 1099.
Yes, this is what I'm trying to determine...if the difference in choosing state tax exempt investments (that avoid this work) is worth the difference in growth from choosing investments that will require the spreadsheet work for CA taxes. =)
It is not a lot of work. The growth differential could be substantial.

investing engineer
Posts: 90
Joined: Thu Aug 27, 2015 5:14 pm

Re: HSA Really Worth It In California?

Post by investing engineer » Sat Aug 01, 2020 10:47 pm

California taxation on HSA is quite shaky, and can be exempted by the legislature at any point of time in the future. I won't give up the growth opportunity.

Big Dog
Posts: 1904
Joined: Mon Sep 07, 2015 4:12 pm

Re: HSA Really Worth It In California?

Post by Big Dog » Sat Aug 01, 2020 10:51 pm

Gleevec wrote:
Sat Aug 01, 2020 3:10 pm
HSA in California are a fine option, personally I hold all my TIPS in my HSA to mitigate the state tax issue
I hold US Treasuries my HSA (and count that as part of the 'bond' portion of my AA).

User avatar
SB1234
Posts: 208
Joined: Sat Mar 10, 2018 7:41 pm
Location: Laniakea

Re: HSA Really Worth It In California?

Post by SB1234 » Sat Aug 01, 2020 11:28 pm

Shaka wrote:
Sat Aug 01, 2020 2:31 pm
I've been considering switching over to an HSA offering at my company. California doesn't recognize HSAs, so there is additional work to calculate state taxes each year due to dividends and capital gains distributions.

I tried to do a comparison of my traditional plan vs. HSA (which I described in a previous post) can came up with the following result.

It assumes I have the same pool of money to invest no matter which plan I choose. Money left over from this pool after medical expenses goes into VTI (in either a post-tax account, the HSA account, or both) and grows for 27 years (my timeline for retirement). Plots shows money left over after liquidating the entire account at retirement and paying all state and federal taxes due (plots show doing this for both qualified expenses and unqualified expenses). California taxes over the 27 years are taken into account. I show three cases: a theoretical best case of no medical expenses at all, a theoretical worst case of maxing out your out of pocket expenses, and a case in the middle. The spreadsheet that performs these calculations can be viewed here.

Image

For the assumptions shown here, the middle case nets about $80K to $120K more than using the traditional plan, as the inconvenience of paying California taxes. The spreadsheet allows one to select treasuries instead of a stock investment, but I haven't been able to figure out the proper growth vs. dividend assumptions, so I didn't show those plots here.

Any thoughts?
In my experience calculating taxes on HSA investments took less than 30 minutes. I saved more than 1500 on federal income taxes. For me the math is clear. It is worthwhile for me. VTI pretty much had zero cap gains distributions, So only pay taxes on dividends and interest income from the bond funds (I use 80/20 for HSA). Hopefully far in the future when I actually have to pay taxes on any cap gains I will probably lose 8% of the gains. But the federal taxes on the gains will still be zero.
anecdotes are not data

02nz
Posts: 5425
Joined: Wed Feb 21, 2018 3:17 pm

Re: HSA Really Worth It In California?

Post by 02nz » Sun Aug 02, 2020 1:08 pm

SB1234 wrote:
Sat Aug 01, 2020 11:28 pm
In my experience calculating taxes on HSA investments took less than 30 minutes.
I use TurboTax, and the CA module flagged for me the need to enter capital gains and distributions from my HSA. I used my Fidelity HSA year-end statement, which had these amounts clearly listed. Total additional time for all this was maybe 3 minutes. The tax is very minimal if you didn't sell (use ETFs since they generally only have dividend distributions) and not a reason to avoid an HSA in CA.

User avatar
BroIceCream
Posts: 237
Joined: Tue Oct 30, 2018 11:31 pm
Location: California

Re: HSA Really Worth It In California?

Post by BroIceCream » Sun Aug 02, 2020 5:06 pm

02nz wrote:
Sun Aug 02, 2020 1:08 pm
SB1234 wrote:
Sat Aug 01, 2020 11:28 pm
In my experience calculating taxes on HSA investments took less than 30 minutes.
I use TurboTax, and the CA module flagged for me the need to enter capital gains and distributions from my HSA. I used my Fidelity HSA year-end statement, which had these amounts clearly listed. Total additional time for all this was maybe 3 minutes. The tax is very minimal if you didn't sell (use ETFs since they generally only have dividend distributions) and not a reason to avoid an HSA in CA.
Agreed.
I use ITOT as the single position - low dividends and gains. I never sell, as I always have my "high deductible" max in cash. (My HSA is only 2% of my total portfolio, so adding a tax-free bond position is not interesting to me; I'll take all the growth I can get, after I set aside my 'deductible' aside in cash.)

To minimize tracking of each tax lot - I don't buy the ETF/fund with every payroll deduction (26x/year). Annually (Jan.1), I sweep the balance of my money market which is above my annual deductable into ITOT.... only one tax lot per year to track the basis of.

Jtf6
Posts: 63
Joined: Tue Mar 04, 2014 10:05 pm

Re: HSA Really Worth It In California?

Post by Jtf6 » Sun Aug 02, 2020 6:12 pm

I literally did the same thing to calculate my dividends from fidelity using TurboTax. I put my money in to FZROX.


02nz wrote:
Sun Aug 02, 2020 1:08 pm
SB1234 wrote:
Sat Aug 01, 2020 11:28 pm
In my experience calculating taxes on HSA investments took less than 30 minutes.
I use TurboTax, and the CA module flagged for me the need to enter capital gains and distributions from my HSA. I used my Fidelity HSA year-end statement, which had these amounts clearly listed. Total additional time for all this was maybe 3 minutes. The tax is very minimal if you didn't sell (use ETFs since they generally only have dividend distributions) and not a reason to avoid an HSA in CA.

02nz
Posts: 5425
Joined: Wed Feb 21, 2018 3:17 pm

Re: HSA Really Worth It In California?

Post by 02nz » Sun Aug 02, 2020 6:18 pm

Jtf6 wrote:
Sun Aug 02, 2020 6:12 pm
I literally did the same thing to calculate my dividends from fidelity using TurboTax. I put my money in to FZROX.
Note that FZROX does have some capital gains distributions, so slightly higher tax cost. But they appear to be pretty tiny so a very small difference vs say VTI.

Topic Author
Shaka
Posts: 24
Joined: Sat Jul 04, 2020 8:04 pm

Re: HSA Really Worth It In California?

Post by Shaka » Sun Aug 02, 2020 6:30 pm

SB1234 wrote:
Sat Aug 01, 2020 11:28 pm
In my experience calculating taxes on HSA investments took less than 30 minutes.
02nz wrote:
Sun Aug 02, 2020 1:08 pm
I use TurboTax, and the CA module flagged for me the need to enter capital gains and distributions from my HSA. I used my Fidelity HSA year-end statement, which had these amounts clearly listed. Total additional time for all this was maybe 3 minutes. The tax is very minimal if you didn't sell (use ETFs since they generally only have dividend distributions) and not a reason to avoid an HSA in CA.
BroIceCream wrote:
Sun Aug 02, 2020 5:06 pm
Agreed.
I use ITOT as the single position - low dividends and gains. I never sell, as I always have my "high deductible" max in cash. (My HSA is only 2% of my total portfolio, so adding a tax-free bond position is not interesting to me; I'll take all the growth I can get, after I set aside my 'deductible' aside in cash.)

To minimize tracking of each tax lot - I don't buy the ETF/fund with every payroll deduction (26x/year). Annually (Jan.1), I sweep the balance of my money market which is above my annual deductable into ITOT.... only one tax lot per year to track the basis of.
Thanks all for sharing these strategies. This has made me more comfortable. Regards!

User avatar
grabiner
Advisory Board
Posts: 27457
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: HSA Really Worth It In California?

Post by grabiner » Mon Aug 03, 2020 10:34 pm

02nz wrote:
Sun Aug 02, 2020 1:08 pm
SB1234 wrote:
Sat Aug 01, 2020 11:28 pm
In my experience calculating taxes on HSA investments took less than 30 minutes.
I use TurboTax, and the CA module flagged for me the need to enter capital gains and distributions from my HSA. I used my Fidelity HSA year-end statement, which had these amounts clearly listed. Total additional time for all this was maybe 3 minutes. The tax is very minimal if you didn't sell (use ETFs since they generally only have dividend distributions) and not a reason to avoid an HSA in CA.
I don't remember TurboTax asking me to enter adjustments in NJ when I lived there; I had to know to make them, reporting bank interest and dividends that were NJ-taxable only. (I didn't have any capital gains in my HSA while a NJ resident.)
Wiki David Grabiner

Post Reply