Newb HSA questions

[Neverstop]

I just started contributing to my hsa with hsabank and I have a few questions. Hsa bank charges a $2.50 fee per month and a $3 fee per month for investing. Both of the fees are waived if you maintain a balance of $5k, but at the rate I am contributing my balance at the end of the year will be ~$1700 after the fees.

Should I start investing immediately or should I wait for my balance to hit $5k? I can't contribute more at the moment since I am paying about $1700 towards my debts a month, but I can definitely hit $5k by the of next year.

[seattlecyclone]

If this HSA is just for yourself (and not other family members as well), the annual contribution limit is less than $5,000, so you'll end up paying fees for at least the first year no matter when you start. Given that, a few tens of dollars of fees during the first couple of years won't kill you.

[Jack]

If you expect to have $1700 at the end of the year, that means your average balance will be around $850. To break even given $36 in fees, you'd need returns of a little over 4%. (That's a very rough calculation; to do it right you'd need to properly account for the cash flow over time.) If you are investing in something from which you expect higher (risk-adjusted) returns, it's probably worth it.

It's probably too late now since you already started contributing, but the best thing to do might have been to open the account shortly before the end of the plan year, max it out ($3350), then put in the other $1650 right at the beginning of plan year #2. If you did it right, you might only be charged zero to one month's worth of fees. (That neglects a possible difference in investment returns for investing now vs. later, of course.)

[Neverstop]

Would it be wiser to just save up the $5k first and then invest? I'll only have to eat about $15 this year if I do. I haven't even looked at the investment options yet on td ameritrade.

[Jack]

Would it be wiser to just save up the $5k first and then invest? I'll only have to eat about $15 this year if I do. I haven't even looked at the investment options yet on td ameritrade.

If you've already opened the account, won't they keep charging you $2.50/month whether you contribute more or not? Or were you thinking of closing it out again? If you close it out, have you investigated the tax implications?

Also, are you contributing to other retirement accounts (401k and IRA)? Are you maxing them out? Since money is fungible, if you've already got some other retirement account but still have room to contribute more, you could front-load it now then later drop it to the minimum and fund your HSA with the difference.

For example, instead of this:

Month	1	2	3	...	10	11	12	Total
401k	$1000	$1000	$1000	...	$1000	$1000	$1000	$12000
HSA	$140	$140	$140	...	$140	$140	$140	$1680
HSA fees	-$5.5	-$5.5	-$5.5	...	-$5.5	-$5.5	-$5.5	-$66

you could do this:

Month	1	2	3	...	10	11	12	Total
401k	$1140	$1140	$1140	...	$1140	$600	$0	$12000
HSA	$0	$0	$0	...	$0	$540	$1140	$1680
HSA fees	$0	$0	$0	...	$0	-$5.5	-$5.5	-$11

If the 401k and HSA had exactly the same asset allocation, then the $55 saved in fees would be the only difference between the two schemes. (Also note that the above example assumes no 401k match, or a true-up match. If you have to contribute every pay period to get maximum matching, adjust accordingly.)

However, if foregoing the HSA until the end of the year would cause you to invest the money differently or not at all, the change in investment returns could be of much greater concern than the savings in fees.

Finally, it's also entirely possible that re-arranging the paperwork is more trouble than it's worth. We're only talking about a few tens of dollars, after all.

[Neverstop]

Yes they will keep charging me the $2.50 a month no matter what if the balance is below $5k. You only get charged the $3 a month if your balance is below $5k and you invest. I have not looked into closing it out, but I know there is a $25 fee to do so.

I am not contributing to a 401K at the moment, I wont be eligable until september. I Have a Vanguard roth IRA i opened last week and put $25 in but that's it. I am currently paying off about $1600 a month towards my debts so I can be debt free by the end of the year which is why I am not contributing much at the moment.

[Jack]

Ok, in that case it would only make sense to close out the account if it were going to stay closed for at least 10 months (actually more like 11 or 12, since avoiding the paperwork is worth a couple of bucks) -- but by then it would be time for you to reopen it, so you might as well leave it alone and eat the $2.50/month.

I do still think you should "back-load" your 2016 contributions and front-load your 2017 contributions so as to go from $0 to $5000 balance as quickly as possible and minimize the duration of the $3/month investing fee (or the opportunity cost of uninvested cash). During the months that you're working on that, you should pay the minimums on the loans. (Please don't miss out on maxing your 2016 HSA; let your "pay off debt by the end of the year" goal slip if it comes to it.)


By the way, I realize you've already decided to pay off your debt first, but if the interest rate on it is 5% or less -- or if you're in a high tax bracket -- I think you should reconsider. Personally, I'm maxing my 401k, HSA, and IRAs for myself and my wife and only paying extra on my student loans with what's left over after that, and it's working out very well for me. The tax savings* alone from dropping my AGI compensate for the student loan interest (which itself is deductible, LOL), so the investment returns are just icing on the cake.

(* Technically, that tax is only deferred, not "saved." However, by the time I pay it I'll be retired, which means that either (a) I'll only be claiming enough earned income to meet my modest expenses, which means I'll be in a very low tax bracket, or (b) my investments will have done so well that I'm drowning in money, which means I won't really care how much tax I'm paying.)

[Neverstop]

Actually after doing some calculations I am 90% sure I can pay off all my debt this year and max out my hsa. I have also been using some payroll calculators and it would be in my best interest to make sure I max out that hsa this year. So I'm going to do my best to do both. Maxing it out would also make sure I'm in the 15% tax bracket.

I got about $9k left in debt and its all about 6% apy, if push comes to shove ill prioritize the hsa.

[Neverstop]

So, I've been thinking some more. Next year I will be making more money and I will surely be in the 25% bracket unless I make out my hsa and contribute to a 401k and ira. If I take your advice and forego paying off all my debt and instead just pay a little less than half I will be able to max out that roth ira and hsa. Seeing as I'll be making more money next year a traditional ira would be in my favor so I'll just open one of those next year.

What would you guys do if you were in my shoes?

A) by the end of 2016 only owe about $4k @ 6% with a maxed out hsa and maxed out roth ira with vanguard.

Or

B) be completely debt free with a maxed out hsa and about $1k in a roth ira.

[Jack]

As you saw in my previous post I'm normally a "don't worry so much about low interest debt; invest instead" kind of guy. However, at 6% your debt is just expensive enough to be worth paying off. I'd go with choice B.

I'd tweak it a little, though: $1000 in a Roth IRA is just going to annoy you because the balance is too small for the normally-recommended funds (you'd be stuck with the STAR fund or target-date funds instead), unless you went for ETFs. It'll also make it harder to maintain your desired asset allocation, since it's more complicated to rebalance across accounts.

Instead, I suggest going ahead and putting that $1000 in a traditional IRA this year, or your 401k (since you said you'll be eligible after September) if you get an employer match. If you were planning to continue to make Roth contributions in 2017 and beyond it'd be different, but one year of them (without even maxing it out) isn't worth maintaining a separate account for IMO.

[talltexan]

I vote for getting the HSA going as soon as you want to. The fees are only a few bucks, but the momentum of having that kind of account is really exciting.

[seattlecyclone]

What would you guys do if you were in my shoes?

A) by the end of 2016 only owe about $4k @ 6% with a maxed out hsa and maxed out roth ira with vanguard.

Or

B) be completely debt free with a maxed out hsa and about $1k in a roth ira.

Given those choices I'd probably pick Option A. This year's tax-advantaged savings space is something you'll never get back if you don't use it, and the cost is keeping a small amount of debt for a few extra months, adding up to perhaps a hundred dollars in additional interest.

Remember that you have until April 2017 to max out your 2016 IRA and HSA. Would that open up an Option C (pay off the debt as quickly as possible but still max out your HSA and IRA by next April)?

[Neverstop]

Possibly. Do you get 16 months each year to max out an hsa and ira? What about 401k? That could work. Im really leaning toward the roth ira since i can benefit from a traditional ira more next year.

[seattlecyclone]

Possibly. Do you get 16 months each year to max out an hsa and ira? What about 401k? That could work. Im really leaning toward the roth ira since i can benefit from a traditional ira more next year.

The window to make HSA and IRA contributions goes from January 1 until April 15 of the next year. 401(k) contributions are limited to the calendar year.