Questioning the HSA

[PDXTabs]

I've never had an HSA, but I could if I chose the high deductible plan at work next fall. Since I have my 401(k) maxed out, this would let me stuff away more pre-tax money. However, I am reluctant to contribute to a plan that I can't access until I'm 65 - I hope FIRE well before 65. Am I looking at this wrong? Some people seem to love them.

[PDXTabs]

I've never had an HSA, but I could if I chose the high deductible plan at work next fall. Since I have my 401(k) maxed out, this would let me stuff away more pre-tax money. However, I am reluctant to contribute to a plan that I can't access until I'm 65 - I hope FIRE well before 65. Am I looking at this wrong? Some people seem to love them.

[Cromacster]

You can use it to pay for current medical expenses.  Or if you can float the medical expenses, you can withdraw the money at a later date in the future (save your records).

When I had access to an HSA/HDHP I paid for all my medical expenses out of pocket and the money in the HSA is invested and growing.  The day will come when I either have a big expense and I will tap into it or I want to access the money for another purpose and I will cash in my previous medical expenses.

From a FIRE standpoint, I think it's best to get as much as you are allowed into a HSA.  Medical expense are the big unknown, it's nice to have a tax free place for money to grow.

[nereo]

I've never had an HSA, but I could if I chose the high deductible plan at work next fall. Since I have my 401(k) maxed out, this would let me stuff away more pre-tax money. However, I am reluctant to contribute to a plan that I can't access until I'm 65 - I hope FIRE well before 65. Am I looking at this wrong? Some people seem to love them.

Yes, you are looking at this wrong.
Read this for background:
https://www.madfientist.com/ultimate-retirement-account/

short version, an HSA is the only account where you can avoid payroll taxes.
It's pre-tax money going in and post-tax money coming out.  There is no calendar limit on when you can use the funds, so as long as you save receipts you can draw money out tax-free years or even decades later. 
At worst (e.g. if you never have any health-care related expenses) it just acts like a IRA, still garnering you tax-advantaged savings.

No payroll taxes, no taxes in, no taxes out.

[PDXTabs]

At worst (e.g. if you never have any health-care related expenses) it just acts like a IRA, still garnering you tax-advantaged savings.

At worst it is an IRA that missed the payroll taxes (which is great), but there is no 72(t) and you have to wait until 65 to start pulling from it. On balance, I'm having a hard time getting excited about it.

[nereo]

At worst (e.g. if you never have any health-care related expenses) it just acts like a IRA, still garnering you tax-advantaged savings.

At worst it is an IRA that missed the payroll taxes (which is great), but there is no 72(t) and you have to wait until 65 to start pulling from it. On balance, I'm having a hard time getting excited about it.

If you don't get excited about paying less in taxes, this forum may not be for you.

you are correct that at WORSE it will act like a IRA but with an extra 7.6% from payroll taxes.  True, there's no 72(t) and the limit for unrestricted access is 65, but there's a much easier way.  You can take out as MUCH as you want, at ANY time, TAX FREE as long as you have some medical receipts for you or your spouse or your children.  You can still contribute to an IRA while maxing out an HSA, which basically increases the amount you can contribute in tax-advantaged accounts (while lowering your taxable burden).

It doesn't matter when the receipts are from, or what you do with the money once you pull it out (technically you are just "reimbursing" yourself).  You can save up expenses for 15 years, and then take it all out in one go. Or not.  It's  incredibly versatile. I've yet to meet any family on a high deductible plan that has no medical expenses over a decade+. This includes prescriptions, dentist work, eye glasses and co-pays.

[terran]

At worst (e.g. if you never have any health-care related expenses) it just acts like a IRA, still garnering you tax-advantaged savings.

At worst it is an IRA that missed the payroll taxes (which is great), but there is no 72(t) and you have to wait until 65 to start pulling from it. On balance, I'm having a hard time getting excited about it.

You're 34, so if you continue to contribute the $6900 HSA family max (ignoring the after 50 catch up) until you're medicare eligible at 65, and you get a 5% after inflation return you'll end up with $488,249.45 in today's dollars in your HSA, so that's the most you could possibly end up with. If you retire sooner, presumably you'll stop contributing unless you find that it would be tax advantageous to withdraw from IRA and move that money to HSA, or you find yourself making unexpected income that you want to tax shelter.

How does that $500k compare to an amount you would be comfortable retiring with? If it's close you might be right, but as long as your FIRE amount is significantly larger than that then there's no reason you can't withdraw at a higher withdrawal rate from other accounts and withdraw from the HSA once you hit 65.

If you think about it another way, there's a 20% early withdrawal penalty on non-healthcare HSA withdrawals, which is 10% worse than the early withdrawal penalty of IRAs, but once you figure in the 7.65% FICA savings, it's only 2.35% worse at 12.35% "real" penalty. If your current marginal tax rate is at least 12.35% higher than your expected marginal tax rate in retirement, you'd actually be better off contributing to the HSA and withdrawing early for non-healthcare expenses and paying the 20% penalty than skipping the HSA.

[slappy]

But you can use HSA money to pay for Medicare, right? And everyone has to do that at some point, right? So the worse case is that you just use it for that.

[wbranch]

It seems like you are basing these thoughts on $0 for medical costs until you are 65?

My wife and I are 29 with minimal health care costs. Maxing HSA and investing it as well seems like a no brainer. In a few more years we will have many years worth of deductibles in the HSA. Hard to say what with happen with healthcare going forward. If we end up not using it until we are 65 as an IRA that actually sounds like a best case scenario to me.

It also looks like an HSA could pay for COBRA premiums for first 18 months of FIRE. 

[slappy]

It seems like you are basing these thoughts on $0 for medical costs until you are 65?

My wife and I are 29 with minimal health care costs. Maxing HSA and investing it as well seems like a no brainer. In a few more years we will have many years worth of deductibles in the HSA. Hard to say what with happen with healthcare going forward. If we end up not using it until we are 65 as an IRA that actually sounds like a best case scenario to me.

It also looks like an HSA could pay for COBRA premiums for first 18 months of FIRE.

I'm basing it off paying my medical costs out of pocket and leaving the money in the HSA to grow. Luckily my OOP max is only $4k so it's not too crazy. Plus I always have the option of pulling from the HSA if necessary.

[PDXTabs]

It seems like you are basing these thoughts on $0 for medical costs until you are 65?

Not necessarily, but to access the HSA I have to give up my relatively nice low deductible ($650) plan, so right there my costs go up. So yes, I could push money around. I could spend less on insurance premiums and more on tax-free out of pocket costs (I have a FSA right now, with $500 rollover per year, so its all tax free right now - but not portable).

Or, I could buy a bunch of ETFs with after tax money and hope that don't have to realize any capital gains until I FIRE, at which point I can take an awful lot of capital gains without paying a lick of taxes.

[ReadySetMillionaire]

Not to hijack the thread, but can those of you who have HSA's recommend a company that allows you to invest the funds? Mine was set up with my previous employer and it's basically just a savings account.

[MEJG]

Not to hijack the thread, but can those of you who have HSA's recommend a company that allows you to invest the funds? Mine was set up with my previous employer and it's basically just a savings account.

We're at optum bank.  You have to keep $3,000 in cash in order to avoid a monthly $2.75 account fee, and you have a 0.03% investment balance fee per month- but we have access to vanguard funds and it is one of the only ones DH's company will work with directly with their payroll company.

[nereo]

It seems like you are basing these thoughts on $0 for medical costs until you are 65?

Not necessarily, but to access the HSA I have to give up my relatively nice low deductible ($650) plan, so right there my costs go up. So yes, I could push money around. I could spend less on insurance premiums and more on tax-free out of pocket costs (I have a FSA right now, with $500 rollover per year, so its all tax free right now - but not portable).

Or, I could buy a bunch of ETFs with after tax money and hope that don't have to realize any capital gains until I FIRE, at which point I can take an awful lot of capital gains without paying a lick of taxes.

Ok... after much confusion I think I see where you are coming from.
If the question is "I have a health plan that includes an HSA - should I contribute to it" - the answer is an absolute YES

But - you seem to be asking: "I have two health plan options, one with an HSA/high-deductible and one without - which is right for me?" - the answer there is... it depends.  You and your family may indeed be better suited to chose a low-deductible plan. To know for sure you'd have to estimate what your OOP expenses would be for both, as well as your tax rate.
If your premiums are the same for either plan it might favor the low-deductible plan.  But typically employee premiums for low-deductible plans are several hundred $ more/month.  Hence the growing popularity for high deductible plans in the workplace.

[McStache]

It seems like you are basing these thoughts on $0 for medical costs until you are 65?

Not necessarily, but to access the HSA I have to give up my relatively nice low deductible ($650) plan, so right there my costs go up. So yes, I could push money around. I could spend less on insurance premiums and more on tax-free out of pocket costs (I have a FSA right now, with $500 rollover per year, so its all tax free right now - but not portable).

Or, I could buy a bunch of ETFs with after tax money and hope that don't have to realize any capital gains until I FIRE, at which point I can take an awful lot of capital gains without paying a lick of taxes.

There's a HDHP analysis tab in the Case Study Spreadsheet that might be worth looking at for your specific case.  With my HDHP, between the lower premiums, the tax advantages and the free HSA money from my employer, the HDHP plan always comes out ahead.

[wageslave23]

Not to hijack the thread, but can those of you who have HSA's recommend a company that allows you to invest the funds? Mine was set up with my previous employer and it's basically just a savings account.

We're at optum bank.  You have to keep $3,000 in cash in order to avoid a monthly $2.75 account fee, and you have a 0.03% investment balance fee per month- but we have access to vanguard funds and it is one of the only ones DH's company will work with directly with their payroll company.

This is nitpicking MEJG, but $2.75 a month is only $33 a year, or 1.1% of $3000.  Wouldn't you be better off investing the $3k and paying the fees?

[MEJG]

Not to hijack the thread, but can those of you who have HSA's recommend a company that allows you to invest the funds? Mine was set up with my previous employer and it's basically just a savings account.

We're at optum bank.  You have to keep $3,000 in cash in order to avoid a monthly $2.75 account fee, and you have a 0.03% investment balance fee per month- but we have access to vanguard funds and it is one of the only ones DH's company will work with directly with their payroll company.

This is nitpicking MEJG, but $2.75 a month is only $33 a year, or 1.1% of $3000.  Wouldn't you be better off investing the $3k and paying the fees?

Optum requires a min of $2,000 cash balance before any investments.  So I'm loosing out on investing the additional $1,000 in order to avoid $33/yr.  There is an interest rate of  0.1% on the cash value.  So I either pay $33/yr and have a cash value of $2,000 sitting in cash and earn $2 so a net loss of $31, or I have a cash value of $3000, a net gain of $3 in interest and invest everything over the $3,000.

The other factor is we *may* tap the cash portion for medical use in any given year.  This hasn't happened in the past two years, but for instance this year we might use it for an upcoming hospitalisation, using this year's contributions to get back over that $2,000 investment threshold then back up to $3,000. 

It's one of the only ones that DH's company will work with directly from payroll, so honestly I hadn't done a a through cost analysis on that extra $1,000 in the market vs. $33/yr.

[Seradoc]

Not to hijack the thread, but can those of you who have HSA's recommend a company that allows you to invest the funds? Mine was set up with my previous employer and it's basically just a savings account.

I invested $25,000 of HSA funds in VTI shares last fall at https://livelyme.com/.  It costs me $30/year to maintain this investment.

I haven't had any concerns so far and it has appreciated $2,300 in those months, which blows the 1.5% I was getting at my credit union away, though at the risk of exposure to the stock market.

[robtown]

Not to hijack the thread, but can those of you who have HSA's recommend a company that allows you to invest the funds? Mine was set up with my previous employer and it's basically just a savings account.

My HSA from several years back has a set of investment funds.   It is by far the worst performing set of funds I have ever seen.  I have not checked for this year, but I'd be amazed if it made 4%.

[alanB]

It seems like you are basing these thoughts on $0 for medical costs until you are 65?

Not necessarily, but to access the HSA I have to give up my relatively nice low deductible ($650) plan, so right there my costs go up. So yes, I could push money around. I could spend less on insurance premiums and more on tax-free out of pocket costs (I have a FSA right now, with $500 rollover per year, so its all tax free right now - but not portable).

Or, I could buy a bunch of ETFs with after tax money and hope that don't have to realize any capital gains until I FIRE, at which point I can take an awful lot of capital gains without paying a lick of taxes.

You are only thinking about Federal taxes.  In addition to FICA which was mentioned (7.65% savings upfront!!), based on your location, you can also save on those vicious Oregon taxes.  Even if you move in the future you still save upfront.

If your goal is to pay less tax over the course of your life, an HSA is almost definitely going to be your best option!

[BTDretire]

It seems like you are basing these thoughts on $0 for medical costs until you are 65?

Not necessarily, but to access the HSA I have to give up my relatively nice low deductible ($650) plan, so right there my costs go up. So yes, I could push money around. I could spend less on insurance premiums and more on tax-free out of pocket costs (I have a FSA right now, with $500 rollover per year, so its all tax free right now - but not portable).

 Several years ago I raised my deductible from $2,500 to $10,000, my premium decreased from $9,900 to $4,300.
I then started maxing out the HSA. I know have over $50k in my HSA. So far I pay for all medical costs from regular income and let the HSA grow. My worst medical expense year was about $4,500 when my son had his wisdom teeth pulled. Other than that,
our expenses have been low.
For my family it was well worth it.

[PDXTabs]

It seems like you are basing these thoughts on $0 for medical costs until you are 65?

Not necessarily, but to access the HSA I have to give up my relatively nice low deductible ($650) plan, so right there my costs go up. So yes, I could push money around. I could spend less on insurance premiums and more on tax-free out of pocket costs (I have a FSA right now, with $500 rollover per year, so its all tax free right now - but not portable).

Or, I could buy a bunch of ETFs with after tax money and hope that don't have to realize any capital gains until I FIRE, at which point I can take an awful lot of capital gains without paying a lick of taxes.

You are only thinking about Federal taxes.  In addition to FICA which was mentioned (7.65% savings upfront!!), based on your location, you can also save on those vicious Oregon taxes.  Even if you move in the future you still save upfront.

If your goal is to pay less tax over the course of your life, an HSA is almost definitely going to be your best option!

Good point, although right now I'm living and working in WA, so no state income taxes. Also, last year (but probably not going forward) I made enough money to stop paying FICA, so my marginal tax rate was 28%.

[Acastus]

Not to hijack the thread, but can those of you who have HSA's recommend a company that allows you to invest the funds? Mine was set up with my previous employer and it's basically just a savings account.

Nope. You can only use an HSA to pay medical bills, not insurance. Eyeglasses, other medical equipment, doctor, hospital, lab, Rx, that kind of thing.

If you young whippersnappers think these expenses will never happen, you are either Jack Lalanne's grandchild or dreaming. Everyone in their 50's has an "issue" or 2. Usually just something that needs watching, not something broken today. Most take a small handful of prescriptions. This pot of money will be handy to have around.

[Cromacster]

Not to hijack the thread, but can those of you who have HSA's recommend a company that allows you to invest the funds? Mine was set up with my previous employer and it's basically just a savings account.

Nope. You can only use an HSA to pay medical bills, not insurance. Eyeglasses, other medical equipment, doctor, hospital, lab, Rx, that kind of thing.

If you young whippersnappers think these expenses will never happen, you are either Jack Lalanne's grandchild or dreaming. Everyone in their 50's has an "issue" or 2. Usually just something that needs watching, not something broken today. Most take a small handful of prescriptions. This pot of money will be handy to have around.

Uhhh what?  Investing the HSA is what makes it so powerful for a young person.

HSA Bank is one that I see recommended quite a bit.

I currently have mine with Optum.

[Slow2FIRE]

Not to hijack the thread, but can those of you who have HSA's recommend a company that allows you to invest the funds? Mine was set up with my previous employer and it's basically just a savings account.

Nope. You can only use an HSA to pay medical bills, not insurance. Eyeglasses, other medical equipment, doctor, hospital, lab, Rx, that kind of thing.

If you young whippersnappers think these expenses will never happen, you are either Jack Lalanne's grandchild or dreaming. Everyone in their 50's has an "issue" or 2. Usually just something that needs watching, not something broken today. Most take a small handful of prescriptions. This pot of money will be handy to have around.

Uhhh what?  Investing the HSA is what makes it so powerful for a young person.

HSA Bank is one that I see recommended quite a bit.

I currently have mine with Optum.

I have HSA bank...if that is the best around, it is a very sad, sad world for HSAs.  Mainly the clunkiness of their website.

You do get to invest with TD ameritrade at no charge from HSA bank.  I'm not pleased with TD ameritrade dropping the vanguard ETFs though.


Honestly, we are just using our HSA for today's expenses.  Who wants to keep track of all the receipts for decades?  Perhaps keeping only the big ticket items makes sense, but all the little $3 charges for prescription meds and other little things just creates a mess.  We've had over $30,000 of medical expenses between the two of us over the last 2 years so pretty much emptied out the HSA accounts.

In our 40s and already have tons of medical costs...

[Acastus]

Sorry RSM, I responded to the wrong post.

But you can use HSA money to pay for Medicare, right? And everyone has to do that at some point, right? So the worse case is that you just use it for that.

You cannot pay insurance premiums, including Medicare A/B, with an HSA. You can only pay medical bills, including onsite copays, Rx, doctor, lab, hospital, therapist. Once you turn 65, it continues to pay medical bills with no taxes, and it works like a traditional IRA for any nonmedical purchases.

[slappy]

Sorry RSM, I responded to the wrong post.

But you can use HSA money to pay for Medicare, right? And everyone has to do that at some point, right? So the worse case is that you just use it for that.

You cannot pay insurance premiums, including Medicare A/B, with an HSA. You can only pay medical bills, including onsite copays, Rx, doctor, lab, hospital, therapist. Once you turn 65, it continues to pay medical bills with no taxes, and it works like a traditional IRA for any nonmedical purchases.

I know you can't pay medical insurance premiums in general (I think there are a couple of exceptions), but I'm fairly certain you can use them to pay Medicare premiums.

https://www.kiplinger.com/article/insurance/T027-C001-S003-use-a-hsa-to-pay-medicare-premiums-tax-free.html

[PDXTabs]

I found this IRS Publication 969. This makes me more excited:

Insurance premiums. You can’t treat insurance premiums as qualified medical expenses unless the premiums are for:
1. Long-term care insurance.
2. Health care continuation coverage (such as coverage under COBRA).
3. Health care coverage while receiving unemployment compensation under federal or state law.
4. Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040).

Items (2) and (3) can be for your spouse or a dependent meeting the requirement for that type of coverage. For item (4), if you, the account beneficiary, are not 65 or older, Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) generally aren’t qualified medical expenses.


So if you get laid off, or quit your job, you can use the HSA to pay for COBRA.

[FiveSigmas]

Regarding HSA vendors, check out:

https://www.bogleheads.org/wiki/Health_savings_account#HSA_custodians_and_options

I have no personal experience, but right now, Lively seems to be the hot new thing:

https://www.bogleheads.org/forum/viewtopic.php?f=2&t=228522

BTW:

Also, last year (but probably not going forward) I made enough money to stop paying FICA, so my marginal tax rate was 28%.

I know there's a phase-out for Social Security, but I assume you're still paying Medicare payroll taxes?

[PDXTabs]

Also, last year (but probably not going forward) I made enough money to stop paying FICA, so my marginal tax rate was 28%.

I know there's a phase-out for Social Security, but I assume you're still paying Medicare payroll taxes?

You're totally right. I guess my marginal tax rate at the end of the year was 29.45%.