HSA for Dummies

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jb1
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HSA for Dummies

Post by jb1 » Fri May 17, 2019 4:38 pm

Hey all, as I increase my financial knowledge I came across the subject of HSA’s. As someone who doesn’t have health benefits through work, is this something else to do? I’m a bit confused as to what the point of a HSA is.


I already max my Roth IRA, have 15k in a high yield bank account, and 75k in a taxable account.

fabdog
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Re: HSA for Dummies

Post by fabdog » Fri May 17, 2019 4:48 pm

An HSA is an account you put money in to pay for medical expenses. It is paired with a high deductible medical (which will say in it's title if it's HSA eligible)

If eligible, you can put money into the HSA and it comes off your income, like a deductible IRA. The money grows tax free, and when used for qualifying medical expenses comes out tax free. Many folks (myself included) pay most expenses out of pocket to keep the money growing tax free in the HSA

If you don't have health benefits thru work, are you buying an individual or family policy on an exchange or from a private health insurer? If you are, and you have (or switch to) a qualified HDHP then you'd be eligible to put money into an HSA

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MP123
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Re: HSA for Dummies

Post by MP123 » Fri May 17, 2019 7:22 pm

An HSA account is the best deal around from a tax perspective. You don't pay tax on the money you put in, it's growth, or it's withdrawal as long as it's spent on medical.

Unlike other tax advantaged accounts you don't need earned income to contribute, but you do need a high deductible health insurance plan that qualifies.

Definitely worth looking into, especially if you buy your own health insurance.

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Re: HSA for Dummies

Post by MotoTrojan » Fri May 17, 2019 7:45 pm

If you live in CA or NJ then the state tax is not deductible and you have to be careful; any capital gains from changing funds will not be shown on a tax-form at year end but you are still responsible for paying them. Many people in these states will use TIPS or other state-tax free investments. I personally invest in the S&P500 but never make any transactions (including sales) so the only thing I'll need to look up come tax-time is the dollar amount I received in dividends; note this is a manual look-up, I won't even get a 1099-DIV.

I just consider it additional tax-deferred space and it is even better than 401k/tIRA monies. Worst case if you are the world's healthiest person, it is equivalent to an IRA. Assuming you do spend it on healthcare later on, you got the best of a deductible 401k/IRA and a Roth all in one (no tax on either side of the deal).

The high-deductible insurance isn't for everyone but if you are generally healthy and don't have kids it can make sense. My company also contributes ~$500 towards the $3500 annual limit so that helps offset any slightly more expensive doctors trips (I pay out of pocket though, not through HSA).

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Re: HSA for Dummies

Post by grabiner » Fri May 17, 2019 8:32 pm

jb1 wrote:
Fri May 17, 2019 4:38 pm
Hey all, as I increase my financial knowledge I came across the subject of HSA’s. As someone who doesn’t have health benefits through work, is this something else to do? I’m a bit confused as to what the point of a HSA is.
The point of an HSA is that contributions are tax deductible, growth is tax-free, and withdrawals are tax-free if used for medical expenses. This is better than any other investment account except a 401(k) with an employer match. In a traditional 401(k) or IRA, withdrawals are taxable. In a Roth, contributions are not deductible.

But you are only eligible to contribute to an HSA if you have a qualifying high-deductible health plan. Therefore, you have to weigh the tax benefits of the HSA against the extra costs of using the high-deductible plan. This will depend on your expected health costs, and on the options offered by the employer/ACA marketplace/private insurer you use.
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Re: HSA for Dummies

Post by MotoTrojan » Fri May 17, 2019 8:39 pm

grabiner wrote:
Fri May 17, 2019 8:32 pm
jb1 wrote:
Fri May 17, 2019 4:38 pm
Hey all, as I increase my financial knowledge I came across the subject of HSA’s. As someone who doesn’t have health benefits through work, is this something else to do? I’m a bit confused as to what the point of a HSA is.
This is better than any other investment account except a 401(k) with an employer match. In a traditional 401(k) or IRA, withdrawals are taxable. In a Roth, contributions are not deductible.

Well my employer contribution to my HSA sure beats a 401k match then :).

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Re: HSA for Dummies

Post by grabiner » Fri May 17, 2019 8:51 pm

MotoTrojan wrote:
Fri May 17, 2019 8:39 pm
grabiner wrote:
Fri May 17, 2019 8:32 pm
jb1 wrote:
Fri May 17, 2019 4:38 pm
Hey all, as I increase my financial knowledge I came across the subject of HSA’s. As someone who doesn’t have health benefits through work, is this something else to do? I’m a bit confused as to what the point of a HSA is.
This is better than any other investment account except a 401(k) with an employer match. In a traditional 401(k) or IRA, withdrawals are taxable. In a Roth, contributions are not deductible.

Well my employer contribution to my HSA sure beats a 401k match then :).
I view the employer contribution to an HSA as a subsidy on the insurance cost. If your employer reduces your premium by $1000 and your insurance is paid by payroll deduction, you get $1000 pre-tax, or $780 after-tax in a 22% bracket; you can then use that $780 to contribute $1000 of your own money to the HSA, just as if your employer contributed the $1000 directly.
Wiki David Grabiner

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Re: HSA for Dummies

Post by MotoTrojan » Fri May 17, 2019 8:59 pm

grabiner wrote:
Fri May 17, 2019 8:51 pm
MotoTrojan wrote:
Fri May 17, 2019 8:39 pm
grabiner wrote:
Fri May 17, 2019 8:32 pm
jb1 wrote:
Fri May 17, 2019 4:38 pm
Hey all, as I increase my financial knowledge I came across the subject of HSA’s. As someone who doesn’t have health benefits through work, is this something else to do? I’m a bit confused as to what the point of a HSA is.
This is better than any other investment account except a 401(k) with an employer match. In a traditional 401(k) or IRA, withdrawals are taxable. In a Roth, contributions are not deductible.

Well my employer contribution to my HSA sure beats a 401k match then :).
I view the employer contribution to an HSA as a subsidy on the insurance cost. If your employer reduces your premium by $1000 and your insurance is paid by payroll deduction, you get $1000 pre-tax, or $780 after-tax in a 22% bracket; you can then use that $780 to contribute $1000 of your own money to the HSA, just as if your employer contributed the $1000 directly.
Interesting take. Any reason you don't see compensation as fungible? 401k match = insurance subsidy = HSA contribution = paycheck (tax-adjusted of course).

I suppose the employee contribution counts against my annual HSA limit which is not the case with a 401k, so that is a distinct difference in favor of a 401k match/contribution.

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Re: HSA for Dummies

Post by grabiner » Fri May 17, 2019 9:06 pm

MotoTrojan wrote:
Fri May 17, 2019 8:59 pm
grabiner wrote:
Fri May 17, 2019 8:51 pm

I view the employer contribution to an HSA as a subsidy on the insurance cost. If your employer reduces your premium by $1000 and your insurance is paid by payroll deduction, you get $1000 pre-tax, or $780 after-tax in a 22% bracket; you can then use that $780 to contribute $1000 of your own money to the HSA, just as if your employer contributed the $1000 directly.
Interesting take. Any reason you don't see compensation as fungible? 401k match = insurance subsidy = HSA contribution = paycheck (tax-adjusted of course).
Because this compensation is conditional on using the specific plan. If your employer offers both an HDHP and a non-HDHP, the HSA contribution is an extra employer contribution to the HDHP.

The US Govermnent plans work this way. The Government pays 75% of the cost of most health plans, but the HDHPs also make a contribution to the HSA for you, which makes the HDHPs particularly attractive. (The 75% subsidy means that the plan premium is $1500 more if it contributes $1500 to your HSA, but you only pay $375 of that cost.) I worked out that for a typical government employee, an HDHP is better than a conventional plan even if you use the entire HDHP deductible and would have paid nothing under the conventional plan.
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Re: HSA for Dummies

Post by arcticpineapplecorp. » Fri May 17, 2019 9:52 pm

Read this:

HSA - The Ultimate Retirement Account:
https://www.madfientist.com/ultimate-re ... t-account/

money goes in tax free, grows tax free and come out tax free if spent on qualified medical expenses (or reimbursements for medical expenses previously paid out of pocket). In the event you spend the money on non-medical items, it's taxable as any traditional IRA or 401k would be if withdrawn after 65 (not 59.5 as for trad. IRA).

hold onto your receipts if you plan to reimburse yourself later from HSA for items you paid out of pocket for medical expenses.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: HSA for Dummies

Post by Tdubs » Fri May 17, 2019 11:04 pm

grabiner wrote:
Fri May 17, 2019 9:06 pm
MotoTrojan wrote:
Fri May 17, 2019 8:59 pm
grabiner wrote:
Fri May 17, 2019 8:51 pm

I view the employer contribution to an HSA as a subsidy on the insurance cost. If your employer reduces your premium by $1000 and your insurance is paid by payroll deduction, you get $1000 pre-tax, or $780 after-tax in a 22% bracket; you can then use that $780 to contribute $1000 of your own money to the HSA, just as if your employer contributed the $1000 directly.
Interesting take. Any reason you don't see compensation as fungible? 401k match = insurance subsidy = HSA contribution = paycheck (tax-adjusted of course).
Because this compensation is conditional on using the specific plan. If your employer offers both an HDHP and a non-HDHP, the HSA contribution is an extra employer contribution to the HDHP.

The US Govermnent plans work this way. The Government pays 75% of the cost of most health plans, but the HDHPs also make a contribution to the HSA for you, which makes the HDHPs particularly attractive. (The 75% subsidy means that the plan premium is $1500 more if it contributes $1500 to your HSA, but you only pay $375 of that cost.) I worked out that for a typical government employee, an HDHP is better than a conventional plan even if you use the entire HDHP deductible and would have paid nothing under the conventional plan.
The government HDHP plan is good, but it isn't quite this good. It is very hard to know if the HDHP option is best till the end of the year. Take the GEHA standard and HDHP plans for federal employees. The premiums are almost identical for a family (HDHP is about $50 less per year). The deductible for the standard plan is $700 and $3000 for the HDHP with $1800 as a GEHA contribution to the HSA. But the standard plan has two advantages--$20 copay on all office visits from day 1 of a new year. You pay the full office visit price in the HDHP till you hit the deductible. They give you $1800 with one hand and take it away in office visits with the other. So, a medical cost comparison of the plans during the deductible period isn't apples to apples.

And don't fall off a ladder--the standard plan has better coverage for ER visits due to accidents. The HDHP has better eye care coverage and, of course, access to an HSA of $8000 rather than an FSA of $2700 with the standard plan. One last HDHP advantage, only 5% out of pocket once you hit the deductible vs. 15% for the standard plan. These differences make it very hard to figure out which plan is better till you can look back on the year.

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Re: HSA for Dummies

Post by grabiner » Fri May 17, 2019 11:35 pm

Tdubs wrote:
Fri May 17, 2019 11:04 pm
grabiner wrote:
Fri May 17, 2019 9:06 pm
If your employer offers both an HDHP and a non-HDHP, the HSA contribution is an extra employer contribution to the HDHP.

The US Government plans work this way. The Government pays 75% of the cost of most health plans, but the HDHPs also make a contribution to the HSA for you, which makes the HDHPs particularly attractive. (The 75% subsidy means that the plan premium is $1500 more if it contributes $1500 to your HSA, but you only pay $375 of that cost.) I worked out that for a typical government employee, an HDHP is better than a conventional plan even if you use the entire HDHP deductible and would have paid nothing under the conventional plan.
The government HDHP plan is good, but it isn't quite this good. It is very hard to know if the HDHP option is best till the end of the year. Take the GEHA standard and HDHP plans for federal employees. The premiums are almost identical for a family (HDHP is about $50 less per year). The deductible for the standard plan is $700 and $3000 for the HDHP with $1800 as a GEHA contribution to the HSA. But the standard plan has two advantages--$20 copay on all office visits from day 1 of a new year. You pay the full office visit price in the HDHP till you hit the deductible. They give you $1800 with one hand and take it away in office visits with the other. So, a medical cost comparison of the plans during the deductible period isn't apples to apples.
(I did this analysis for the DC Bogleheads a few years ago.)

You get $1800 in your HSA, and the tax savings on $5200 you contribute. If your combined federal and state tax rate is 30% (common in the DC area), you save $1560 in tax on your own contributions to the HSA (compared to, say, putting the money in the Roth TSP), for a total savings of $3360. Therefore, you can pay the entire deductible under the HDHP and still be ahead of the conventional plan.
And don't fall off a ladder--the standard plan has better coverage for ER visits due to accidents.
Agreed; that is the situation in which you would be likely to use the whole HDHP deductible and very little under the standard plan.
The HDHP has better eye care coverage and, of course, access to an HSA of $8000 rather than an FSA of $2700 with the standard plan.
(The HSA limit is $7000 unless you are over 55.) You can still use a limited-expense FSA with the HDHP, to cover your dental and vision costs. If you need an FSA with the standard plan for medical costs, you must have those as non-covered costs, so you are still paying 70% of those costs.
One last HDHP advantage, only 5% out of pocket once you hit the deductible vs. 15% for the standard plan.
Thus the worst case for the HDHP is hitting the deductible exactly; once you go over, you would pay more on the standard plan than on the HDHP.
These differences make it very hard to figure out which plan is better till you can look back on the year.
Except that the way the math works out makes it extremely unlikely that the conventional plan comes out ahead; the uncertainty is how much. If you are in the 12% bracket in a no-tax state, the net benefit is only $2424, so it is possible that the conventional plan comes out ahead.
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Re: HSA for Dummies

Post by Tdubs » Sat May 18, 2019 6:30 am

grabiner wrote:
Fri May 17, 2019 11:35 pm
Tdubs wrote:
Fri May 17, 2019 11:04 pm
grabiner wrote:
Fri May 17, 2019 9:06 pm
If your employer offers both an HDHP and a non-HDHP, the HSA contribution is an extra employer contribution to the HDHP.

The US Government plans work this way. The Government pays 75% of the cost of most health plans, but the HDHPs also make a contribution to the HSA for you, which makes the HDHPs particularly attractive. (The 75% subsidy means that the plan premium is $1500 more if it contributes $1500 to your HSA, but you only pay $375 of that cost.) I worked out that for a typical government employee, an HDHP is better than a conventional plan even if you use the entire HDHP deductible and would have paid nothing under the conventional plan.
The government HDHP plan is good, but it isn't quite this good. It is very hard to know if the HDHP option is best till the end of the year. Take the GEHA standard and HDHP plans for federal employees. The premiums are almost identical for a family (HDHP is about $50 less per year). The deductible for the standard plan is $700 and $3000 for the HDHP with $1800 as a GEHA contribution to the HSA. But the standard plan has two advantages--$20 copay on all office visits from day 1 of a new year. You pay the full office visit price in the HDHP till you hit the deductible. They give you $1800 with one hand and take it away in office visits with the other. So, a medical cost comparison of the plans during the deductible period isn't apples to apples.
(I did this analysis for the DC Bogleheads a few years ago.)

You get $1800 in your HSA, and the tax savings on $5200 you contribute. If your combined federal and state tax rate is 30% (common in the DC area), you save $1560 in tax on your own contributions to the HSA (compared to, say, putting the money in the Roth TSP), for a total savings of $3360. Therefore, you can pay the entire deductible under the HDHP and still be ahead of the conventional plan.
And don't fall off a ladder--the standard plan has better coverage for ER visits due to accidents.
Agreed; that is the situation in which you would be likely to use the whole HDHP deductible and very little under the standard plan.
The HDHP has better eye care coverage and, of course, access to an HSA of $8000 rather than an FSA of $2700 with the standard plan.
(The HSA limit is $7000 unless you are over 55.) You can still use a limited-expense FSA with the HDHP, to cover your dental and vision costs. If you need an FSA with the standard plan for medical costs, you must have those as non-covered costs, so you are still paying 70% of those costs.
One last HDHP advantage, only 5% out of pocket once you hit the deductible vs. 15% for the standard plan.
Thus the worst case for the HDHP is hitting the deductible exactly; once you go over, you would pay more on the standard plan than on the HDHP.
These differences make it very hard to figure out which plan is better till you can look back on the year.
Except that the way the math works out makes it extremely unlikely that the conventional plan comes out ahead; the uncertainty is how much. If you are in the 12% bracket in a no-tax state, the net benefit is only $2424, so it is possible that the conventional plan comes out ahead.
That's good to know--that was my less quantified analysis, too, when I started on an HDHP this year. In my family of four, we easily blow past the $3000.

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