Author Topic: How much to keep in HSA  (Read 15909 times)

rtrnow

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How much to keep in HSA
« on: March 08, 2013, 05:22:26 AM »
For the last few years I've maxed out my HSA contributions. That minus a few expenses leaves me with about $5,500 sitting in a <1% account. There are some investment options for any money above $2,500 but they are not great in terms of choice or especially expenses. When I look at health coverage after ER, the plans that appeal most to me are not eligible for an HSA because the deductibles are too high. I don't get why there is an upper deductible limit but oh well. So, my thought was it might be a good idea to have some pretax money sitting around for medical expenses later. How much? Should I invest even though the options kinda suck? Bad idea overall? thoughts?

sherr

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Re: How much to keep in HSA
« Reply #1 on: March 08, 2013, 07:02:31 AM »
Okay, there were lots of questions. I'll do my best.

First I would like to say that I've heard from others on this forum that you can open your own HSA with any company you want and transfer your money from one to the other. So if you don't like the investment options provided by your current provider you are not stuck, you just have to do a little more work. Your workplace may only allow you to do the contribution to your current provider, but then you should be able to transfer it somewhere else. That's my understanding at least.

Second, as long as the investment returns - fees are > 1% (which they probably are), then yes it's better to use the investment. Because of the tax-free nature of money you use on medical expenses and the fact that HSAs transition to essentially being a Traditional IRA when you hit retirement age means that it's really hard to find a better place to put your money. It would take a really lot of fees before an HSA would even come close to being comparable to a non-tax-advantaged account. I contribute the max to my HSA every year, and we have $13k and counting in it.

Third, just because your future health insurance after ER is not eligible for continuing HSA contributions *does not* mean that you can't use money you already have in your HSA for medical expenses, tax-free. You still can use what you have, you just can't contribute any more. HSAs are not a use-it-or-loose-it proposition, they are safe to contribute to regardless of future insurance coverage.

"Should you have pretax money for medical expenses?" Yes, that's what an HSA is, right? Maybe you meant post-tax? If you are debating about whether to stop contributing to the HSA and instead contribute to post-tax investments I'd say no, the HSA will win every time. Depending on your income level a Roth IRA *might* be a better investment choice if you end up having excellent health and never using your HSA money for medical costs, but if you do use it for medical costs then the HSA is superior.

I think HSAs are one of the clearest choices when it comes to investing. Contribute to it as much and as long as you can, and then once the money is in the account do the best thing you can with it, which likely means using the investment options.


shedinator

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Re: How much to keep in HSA
« Reply #2 on: March 08, 2013, 07:16:52 AM »
I'm confused... do you not currently have an HDHP? Or are you just considering increasing your deductible?

I think a good rule of thumb for maximum HSA savings is pretty formulaic. If D is your deductible, E is current year expenses, and S is the amount you can comfortable contribute in a year, then your maximum account balance should be 3D-S-E, but not less than 2D-E.

If you follow this formula, it essentially creates a situation in which you'll never pay post-tax dollars. If you had a one in a million accident in which you were admitted to the hospital on December 29, and stayed for a week, you could probably expect to be meeting your deductible for two years in one fell swoop, so to be totally 'risk proof,' you want to be able to cover whatever's left on this year's deductible, and 100% of next year's. Then you want to be able to re-activate your contributions next year, and be able to cover your deductible for the year after by the time New Year's rolls around.

So, to use my current numbers, I have a $3000 deductible, and a little over $500 in medical expenses so far this year. If my comfortable contribution rate is $1200/year (relatively low), then I'll want:
3D-S-E
3(3000)-1200-500
$7300.00
This way I could totally blow through my deductibles for this year and next year, and still be saving at such a rate as to be able to meet my deductible in 2015... Of course, that rate of savings wouldn't leave me prepared for 2016, but the odds of hitting my deductible 5 years in a row (we did last year) are pretty low, so I'm not gonna let that stress me out too much.

If you can't save your whole deductible in a year, and you expect to hit it with regularity, I would say just keep putting the money away, because it's better than the alternative. But if you're confident in your ability to recoup any costs, 3D-S-E leaves you practically bulletproof.

rtrnow

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Re: How much to keep in HSA
« Reply #3 on: March 08, 2013, 07:51:07 AM »
Okay, there were lots of questions. I'll do my best.

First I would like to say that I've heard from others on this forum that you can open your own HSA with any company you want and transfer your money from one to the other. So if you don't like the investment options provided by your current provider you are not stuck, you just have to do a little more work. Your workplace may only allow you to do the contribution to your current provider, but then you should be able to transfer it somewhere else. That's my understanding at least.

Second, as long as the investment returns - fees are > 1% (which they probably are), then yes it's better to use the investment. Because of the tax-free nature of money you use on medical expenses and the fact that HSAs transition to essentially being a Traditional IRA when you hit retirement age means that it's really hard to find a better place to put your money. It would take a really lot of fees before an HSA would even come close to being comparable to a non-tax-advantaged account. I contribute the max to my HSA every year, and we have $13k and counting in it.

Third, just because your future health insurance after ER is not eligible for continuing HSA contributions *does not* mean that you can't use money you already have in your HSA for medical expenses, tax-free. You still can use what you have, you just can't contribute any more. HSAs are not a use-it-or-loose-it proposition, they are safe to contribute to regardless of future insurance coverage.


So I guess I was not totally clear. I have maxed my HSA for the last several years and I'm on track to do the same this year but was wondering if that the right thing to do. It sounds like yes. I was not aware that HSA money could be moved readily to another provider. I will look into that. I do have to use my company provider to get the small ($375) yearly match and have money taken out pretax.

I am aware that HSA is not use it or lose it. My thinking was to max it now, then in ER when I most likely have a health plan no eligible for an HSA there will still be tax free money waiting to help with medical expenses.

I already max my retirement (401k-ish) plan, 457a, and roth ira. This would be my last option for saving pretax money.


TheDude

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Re: How much to keep in HSA
« Reply #4 on: March 08, 2013, 10:20:51 AM »
I guess it really depends how what your saving priorities are. Here is how I use my HSA. Keep in mind I also max out IRAs 401Ks  and hopefully soon an 457.

I think my HSA is the number one investment vehicle after company match on retirement funds. Heres why:

1. It not taxed. This includes income and SS and Medicare. There is no other money that gets this treatment.
2. Its my emergency fund. I pay for all medical bills with post tax dollars and leave my HSA alone. I save all receipts. This means I can take the money out at any time. There is no rule that you have to take it out in the same month, year or even decade.
3. Once you the money is in the HSA you can use it to pay medical expenses even if you no longer in and HSA plan.

I max mine out every year. Hopefully later this year I will move my kids onto the plan and be able to stock away 6450 every year.  I plan on moving my money to HSA Bank. You can keep 5K in the account to get rid of fees and get a whole .3%. Then you can open a TD Ameritrade accountant and transfer anything more than 5K. There you can invest in their commission free ETFs.

chucklesmcgee

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Re: How much to keep in HSA
« Reply #5 on: March 08, 2013, 11:38:08 AM »
I guess it really depends how what your saving priorities are. Here is how I use my HSA. Keep in mind I also max out IRAs 401Ks  and hopefully soon an 457.

I think my HSA is the number one investment vehicle after company match on retirement funds. Heres why:

1. It not taxed. This includes income and SS and Medicare. There is no other money that gets this treatment.
2. Its my emergency fund. I pay for all medical bills with post tax dollars and leave my HSA alone. I save all receipts. This means I can take the money out at any time. There is no rule that you have to take it out in the same month, year or even decade.
3. Once you the money is in the HSA you can use it to pay medical expenses even if you no longer in and HSA plan.

I max mine out every year. Hopefully later this year I will move my kids onto the plan and be able to stock away 6450 every year.  I plan on moving my money to HSA Bank. You can keep 5K in the account to get rid of fees and get a whole .3%. Then you can open a TD Ameritrade accountant and transfer anything more than 5K. There you can invest in their commission free ETFs.

This exactly. Though I should say that with HSA bank, it's in your favor to take the fees and invest that 5k in ameritrade.

the fixer

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Re: How much to keep in HSA
« Reply #6 on: March 08, 2013, 11:44:06 AM »
Though I should say that with HSA bank, it's in your favor to take the fees and invest that 5k in ameritrade.

I've got $3100 in HSA Bank now. I'm going to put another max contribution in this year, then start investing. How to the HSA Bank fees work if all your money is with TD Ameritrade? Can you pay them with post-tax money, or are you leaving ~$100 in the cash account for fee collection?

My original plan was to leave ~$3000 in cash then invest the rest in a US stock market index ETF, with dividends going back into the cash account. This would mean I only owe the investment fee and not the minimum balance fee, and the fees would get paid with dividends. But I'm open to suggestions on better ways to manage this, especially because I'm not sure I 100% understand HSA Bank's fee structure.

rtrnow

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Re: How much to keep in HSA
« Reply #7 on: March 09, 2013, 06:27:04 AM »

2. Its my emergency fund. I pay for all medical bills with post tax dollars and leave my HSA alone. I save all receipts. This means I can take the money out at any time. There is no rule that you have to take it out in the same month, year or even decade.


I knew this but hadn't thought about it that way. I generally use after tax money to pay small bills leaving the HSA intact. I will start tracking those more closely and let it become my "emergency fund" too. Great idea.

I have to maintain a balance above $2,500 to avoid the $3 a month fee. It looks like it also makes since to go ahead and invest even if the fees are about 1.5%. That should still yield a better return than the .5% I'm getting now. 

Thanks for the replies.

Zaga

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Re: How much to keep in HSA
« Reply #8 on: March 09, 2013, 09:18:40 AM »
I save to the max.  This money can be used later for ANY medical expense, including future premiums when you are FIRE.

MooreBonds

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Re: How much to keep in HSA
« Reply #9 on: March 09, 2013, 09:36:33 AM »
I knew this but hadn't thought about it that way. I generally use after tax money to pay small bills leaving the HSA intact. I will start tracking those more closely and let it become my "emergency fund" too. Great idea.

I have to maintain a balance above $2,500 to avoid the $3 a month fee. It looks like it also makes since to go ahead and invest even if the fees are about 1.5%. That should still yield a better return than the .5% I'm getting now. 

Thanks for the replies.

Another thing to keep in mind - you can actually withdraw money from the HSA and use prior year medical expenses as the matching amount (I never did understand why they wrote the legislation this way, but they did).

Ex. In 2013, you pay $700 for some HSA-applicable doctor bills. You can leave your money in the HSA investment account growing, and then, say, in 2018, you can withdraw $700 from your HSA and use your 2013 expenses as the qualifying medical expenses to make your withdrawal tax-free.

The 'catch' is, you can only use each qualifying medical expense once for a withdrawal (for that $700 bill in 2013, you can't take $700 out of your HSA in 2013 and also in 2018, using the same medical bill).

When I first opened my HSA, I presumed you had to withdraw money from your HSA in the year you incur the expense, and I was going to just let the funds grow untouched anyway....but then a few years ago, I saw some posters on the ER forum reference the "delayed withdrawal" feature of the HSA, and checked it myself.

rtrnow

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Re: How much to keep in HSA
« Reply #10 on: March 09, 2013, 10:11:18 AM »
I save to the max.  This money can be used later for ANY medical expense, including future premiums when you are FIRE.

Are you sure about that? I thought HSA money could only pay for premiums for COBRA or while on unemployment.

Zaga

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Re: How much to keep in HSA
« Reply #11 on: March 09, 2013, 11:17:33 AM »
You're right, thanks for correcting me.  I quoted the actual rules below, I was thinking of medicare and COBRA premiums.  However I still contribute the max, there are many things that an HSA can do to benefit you in future years.

"Can my HSA be used to pay premiums?
No, this would be a nonmedical withdrawal, subject to taxes and penalty.

Exceptions.
No penalty or taxes will apply if the money is withdrawn to pay premiums for:
1) Qualified long-term care insurance; or
2) Health insurance while you are receiving federal or state unemployment compensation; or
3) Continuation of coverage plans, like COBRA, required under any federal law; or
4) Medicare premiums."

http://www.hsacenter.com/faqs.html