Should I max my HSA contribution?

[tryathlete2011]

Can someone help me with the math here. I just switched to an HSA plan this year and have been putting in only $100/month. Next month I will finish maxing out my wifes Roth and I have already maxed out mine. I am contributing max to 401k. After the Roths are done next month,  I will have ~2,800 a month that I have been dumping into taxable accounts, so I have the wiggle room to do another $545/month, but how much will it help me?

We are a family of four, 41/37/9/7 and very healthy. Very rarely go to doctors.

[seattlecyclone]

You're healthy now, but you'll likely have some medical bills someday. HSAs are unique in that the contributions and withdrawals are both tax-free. With IRAs you only get one or the other.

[ender]

You also do not pay FICA taxes on an HSA directly through your employer.

For many people this is a nearly 40% tax savings (25% federal, 7.65% FICA, and 5-8% state) on the money. Which then becomes an IRA in the future when you turn age 65.

[chemistk]

In your situation, I would absolutely max it out! You can put in whatever investment mix you want and if you never use all of it, you'll get to draw from it after 65 tax-free.

[Dezrah]

In your situation, I would absolutely max it out! You can put in whatever investment mix you want and if you never use all of it, you'll get to draw from it after 65 tax-free.

This is not correct. At 65, you can withdraw penalty-free, tax-deferred.

It's a weirdly impossible situation though: health problems are the biggest destroyers of wealth out there, but if you're healthy enough that you never need the money for medical (really? never?) then your wealth is preserved, and if your wealth is preserved, why do you need the money?

Then there's the fact that a literal lifetime of investing in an HSA won't actually be enough to cover all a person's end of life care anyway.

Don't get me wrong, you should invest in every tax-advantaged option given to you, but I still wind up scratching my head over who the ideal audience is for the service.

[Mother Fussbudget]

The MadFientist has written a lot about HSA's, and how they can be thought of as an "Ultimate Retirement Account".  I would start by reading his articles on the HSA here.

In addition to being something like an IRA - regarding annual maximum contributions - there is likewise a start-of-year open window for making contributions to Max-out your previous year's balance. 

For example:  this year (2016), while doing my tax returns, I found I still had $375 available for a for 2015 contribution.  I quickly contributed that amount, both maxed out my 2015 contribution, AND claimed that amount on my 2015 tax return. For this year (2016) I increased my monthly contributions to max out the account by default.  But even if I didn't, I would have an opportunity to 'catch-up' my 2016 contributions during the contribution window from 1/1-thru-4/15 (tax-day) in 2017.

[tryathlete2011]

Thanks all. So if I'm understanding this correctly, I can increase my contribution by $445 per month (total $545). My monthly take home pay will go down by ~60% of that or $267 and I will have invested the additional $445 into the HSA, so I'm ahead the 40% or $178? Does that sound correct?

Either I will need the money for healthcare at some point or its basically an IRA after 65... tax-deferred money.

[Jack]

Q: "should I max out my HSA?"

A: "Yes"

The only exception is if doing so would cause you not to be able to afford things like food and shelter.

Thanks all. So if I'm understanding this correctly, I can increase my contribution by $445 per month (total $545). My monthly take home pay will go down by ~60% of that or $267 and I will have invested the additional $445 into the HSA, so I'm ahead the 40% or $178? Does that sound correct?

If your marginal tax rate + FICA = 40%, then yes.

[Mother Fussbudget]

Thanks all. So if I'm understanding this correctly, I can increase my contribution by $445 per month (total $545). My monthly take home pay will go down by ~60% of that or $267 and I will have invested the additional $445 into the HSA, so I'm ahead the 40% or $178? Does that sound correct?

Either I will need the money for healthcare at some point or its basically an IRA after 65... tax-deferred money.

You've basically got it.  But you can also take money out of the account before age 65 by tracking your medical expenses (receipts), and withdrawing amounts equal to those expenses.  Example:  I had a $1,000 crown put on a molar earlier this year.  I can now withdraw $1,000 from my HSA offsetting that expense, and use the money for whatever I want.  OR... I can wait, and withdraw that $1,000 WHENEVER I WANT - in my case, after early retirement.

[2Birds1Stone]

In your situation, I would absolutely max it out! You can put in whatever investment mix you want and if you never use all of it, you'll get to draw from it after 65 tax-free.

Then there's the fact that a literal lifetime of investing in an HSA won't actually be enough to cover all a person's end of life care anyway.

Don't get me wrong, you should invest in every tax-advantaged option given to you, but I still wind up scratching my head over who the ideal audience is for the service.

This is not always true. If an HSA is investing in an aggressive stock allocation there is no reason it cannot grow substantially enough to cover all/most of end of life care. If a couple begins investing $6700 and does so every year that nut can get quite large.

[seattlecyclone]

In your situation, I would absolutely max it out! You can put in whatever investment mix you want and if you never use all of it, you'll get to draw from it after 65 tax-free.

Then there's the fact that a literal lifetime of investing in an HSA won't actually be enough to cover all a person's end of life care anyway.

Don't get me wrong, you should invest in every tax-advantaged option given to you, but I still wind up scratching my head over who the ideal audience is for the service.

This is not always true. If an HSA is investing in an aggressive stock allocation there is no reason it cannot grow substantially enough to cover all/most of end of life care. If a couple begins investing $6700 and does so every year that nut can get quite large.

Yes, an HSA can grow large if you contribute throughout your life and never touch it. However you should be aware that although an HSA works much the same post-65 as a traditional IRA while you're still alive, an inherited HSA is not as good as an inherited IRA. Specifically, your heir will need to pay tax on the full value in the year of your death; there is no option to stretch withdrawals out over a number of years while allowing for tax-deferred compounding.

For this reason my current plan is not to postpone any HSA withdrawals after ER. I've been saving receipts from medical expenses and will pull out the full allowed amount after we retire to cover living expenses during the first year or two. If we remain healthy we'll probably still have a fair amount left over in the HSA, but from then on we will withdraw these tax-free amounts in the year the expenses are incurred.

[Dezrah]

However you should be aware that although an HSA works much the same post-65 as a traditional IRA while you're still alive, an inherited HSA is not as good as an inherited IRA. Specifically, your heir will need to pay tax on the full value in the year of your death; there is no option to stretch withdrawals out over a number of years while allowing for tax-deferred compounding.

For this reason my current plan is not to postpone any HSA withdrawals after ER. I've been saving receipts from medical expenses and will pull out the full allowed amount after we retire to cover living expenses during the first year or two. If we remain healthy we'll probably still have a fair amount left over in the HSA, but from then on we will withdraw these tax-free amounts in the year the expenses are incurred.

This is new information to me, seattlecyclone.  Thank you for sharing.  We're still a long way from our drawdown stage of life, but it's good to have all the information possible.

Slightly unrelated:

I've had an HSA for several years now.  Before I was smart enough to scan and store my receipts in the cloud, I stuck all my HSA receipts in a folder.  Most of those are now lost or physically illegible (ink rubbed off).  I basically have no way to prove those expenses were for qualified medical expenses if I were audited. 

In my case, the gross amount we're talking about is so small that even with the taxes and penalties, I'm not losing any sleep over it.  But I assume my situation is not unique. 

Is the IRS going to wake up in a cold sweat one night and realize the impossible task of figuring out who is abusing the system and who is just bad (normal?) at record keeping?  Do they even care?  Are HSAs just too minor to care about when compared to corporate and income taxes?

[ender]

However you should be aware that although an HSA works much the same post-65 as a traditional IRA while you're still alive, an inherited HSA is not as good as an inherited IRA. Specifically, your heir will need to pay tax on the full value in the year of your death; there is no option to stretch withdrawals out over a number of years while allowing for tax-deferred compounding.

For this reason my current plan is not to postpone any HSA withdrawals after ER. I've been saving receipts from medical expenses and will pull out the full allowed amount after we retire to cover living expenses during the first year or two. If we remain healthy we'll probably still have a fair amount left over in the HSA, but from then on we will withdraw these tax-free amounts in the year the expenses are incurred.

This is new information to me, seattlecyclone.  Thank you for sharing.  We're still a long way from our drawdown stage of life, but it's good to have all the information possible.

Slightly unrelated:

I've had an HSA for several years now.  Before I was smart enough to scan and store my receipts in the cloud, I stuck all my HSA receipts in a folder.  Most of those are now lost or physically illegible (ink rubbed off).  I basically have no way to prove those expenses were for qualified medical expenses if I were audited. 

In my case, the gross amount we're talking about is so small that even with the taxes and penalties, I'm not losing any sleep over it.  But I assume my situation is not unique. 

Is the IRS going to wake up in a cold sweat one night and realize the impossible task of figuring out who is abusing the system and who is just bad (normal?) at record keeping?  Do they even care?  Are HSAs just too minor to care about when compared to corporate and income taxes?

We've got everything in a google spreadsheet, with date of purchase, date of redemption, and purpose...

which isn't really proof either, but we have most of the receipts still too.

[ShoulderThingThatGoesUp]

I started maxing out my HSA this year thanks to the advice of people on this board. I barely notice it in my paycheck. I have it set up to leave $2200 in the cash account linked to the debit card they sent me and automatically sweep everything over that into the investment account. I have to manually go in and buy a couple shares of VTI every other week, but that's honestly kinda fun.

[Nickels Dimes Quarters]

Add another vote for maxing out the account annually. I am new to the HSA club, but love it. It provides one more way to keep my AGI very low (that has several advantages). I pay all of my medical bills out of pocket for now and keep receipts with my tax papers. I am slowly switching to digital storage, so by the end of 2016 all of my documentation will be scanned and organized by year so that I can pull out that money later.

Sounds like you're doing well. Keep it up!

NDQ

[2Birds1Stone]

In your situation, I would absolutely max it out! You can put in whatever investment mix you want and if you never use all of it, you'll get to draw from it after 65 tax-free.

Then there's the fact that a literal lifetime of investing in an HSA won't actually be enough to cover all a person's end of life care anyway.

Don't get me wrong, you should invest in every tax-advantaged option given to you, but I still wind up scratching my head over who the ideal audience is for the service.

This is not always true. If an HSA is investing in an aggressive stock allocation there is no reason it cannot grow substantially enough to cover all/most of end of life care. If a couple begins investing $6700 and does so every year that nut can get quite large.

Yes, an HSA can grow large if you contribute throughout your life and never touch it. However you should be aware that although an HSA works much the same post-65 as a traditional IRA while you're still alive, an inherited HSA is not as good as an inherited IRA. Specifically, your heir will need to pay tax on the full value in the year of your death; there is no option to stretch withdrawals out over a number of years while allowing for tax-deferred compounding.

For this reason my current plan is not to postpone any HSA withdrawals after ER. I've been saving receipts from medical expenses and will pull out the full allowed amount after we retire to cover living expenses during the first year or two. If we remain healthy we'll probably still have a fair amount left over in the HSA, but from then on we will withdraw these tax-free amounts in the year the expenses are incurred.

Great strategy!