Author Topic: Struggling to see the benefit of HSA  (Read 3309 times)

doneby35

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Struggling to see the benefit of HSA
« on: October 24, 2016, 11:37:15 AM »
So I'm turning 31 soon. and I just enrolled in my employer's 401k with the 18000 max contribution.
Next thing I was looking at, since i'm on a HDHP plan, HSA. I read the article "Ultimate Retirement Account" on Mad Fientist, but I'm having trouble understanding how it would be beneficial.

Let's say I have a salary of $100,000. I max out HSA with pre-tax contributions of $3400 and an employer contribution of $500. And then I go to a doctor and I have medical expenses of $1000. I pay out of pocket and leave the HSA fund alone. And then what? how does this help me exactly?

Threshkin

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Re: Struggling to see the benefit of HSA
« Reply #1 on: October 24, 2016, 11:59:41 AM »
So I'm turning 31 soon. and I just enrolled in my employer's 401k with the 18000 max contribution.
Next thing I was looking at, since i'm on a HDHP plan, HSA. I read the article "Ultimate Retirement Account" on Mad Fientist, but I'm having trouble understanding how it would be beneficial.

Let's say I have a salary of $100,000. I max out HSA with pre-tax contributions of $3400 and an employer contribution of $500. And then I go to a doctor and I have medical expenses of $1000. I pay out of pocket and leave the HSA fund alone. And then what? how does this help me exactly?

The idea is that your HSA acts as a second pre-tax savings account.  You let the money in your HSA grow and use it later, hopefully much later, for medical expenses.

neil

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Re: Struggling to see the benefit of HSA
« Reply #2 on: October 24, 2016, 12:06:32 PM »
HSAs functionally act like a traditional IRA from a tax and investment perspective (although there are not many good places to hold an HSA account currently from an expense perspective) with the added benefit that it could be used for health expenses tax-free.  This would actually put an HSA above a traditional IRA as a priority for your investment money.  (Roth IRAs depend on tax bracket.) 

Many functional early retirement strategies require loading up pre-tax vehicles, shifting to a Roth over time and sustaining on Roth contributions that are in the clear.  Health expenses are probably the most common reason for unexpected expenses.  The HSA provides flexibility for you to pull from it without penalty in retirement (or anytime, really) without going through any additional hoops, thus providing more flexibility to access your money.

In your hypothetical example, you'll run into health expenses on your way to FIRE as well.  In this case, you have a $1000 expense you will either pay from your HSA or your bank account.  If you pay out of your HSA, you will have an extra $1000 in your taxable account that would likely make its way into a Vanguard fund eventually.  That money is available to spend however you like, but you'll be taxed on the dividends and any capital gains you incur over time.  The HSA money grows completely tax free and remains 100% eligible to use for medical expenses. 

Another good note on HSAs is how they can serve as emergency funds for health services no matter what stage of life you are in.  If you find yourself temporarily unemployed with a few health bills piling up, this asset remains available to you.

Not much can get into the HSA, so it's not likely to be your dominant asset.  If you work 10 years, you'll add about $35K that probably grows into $60K or so if invested.  I could easily see myself generating this much in medical expenses, but if I don't, it's eligible as IRA money when I am 60 anyhow.  As long as I have significant tax assets outside of retirement accounts, I don't really plan to use it.  I might change my tune in retirement and tap it occasionally.  However, I can understand the point of view of someone who has to make tradeoffs; I am capable of maxing all available tax shelters (as a W-2 employee anyway) and thus do not face the issue of comparing investment vehicles for best use of my money.

I certainly wish we could just have a generic pretax vehicle to use however we wanted.  All this IRS complexity is a pain in the ass, but sadly worth the time (to me, anyway).

Cpa Cat

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Re: Struggling to see the benefit of HSA
« Reply #3 on: October 24, 2016, 12:20:59 PM »
And then I go to a doctor and I have medical expenses of $1000. I pay out of pocket and leave the HSA fund alone. And then what? how does this help me exactly?

There's no time limit on reimbursing that $1,000 from your HSA. So the next step is to save your receipt and let your HSA grow. At some later date, preferably many years from now, you submit your $1,000 receipt, along with all of your other medical receipts.

For example, if you have $1,000 in your HSA and cash out to pay your $1,000 medical expense - now you have $0 in there.

If you wait until that $1,000 grows to $2,000 in the HSA and then submit your $1,000 medical expense - now you've paid your medical expense AND have an additional $1,000 in the HSA for the future.

It's considered the ideal retirement account: you get a tax deduction when the money goes in, your money grows tax free, and it comes out tax free (the assumption being that you'll eventually have the opportunity to empty it in retirement).

What you give up by immediately reimbursing the medical expense is the middle part - letting your money grow tax free and then reaping the benefit of that growth via tax free withdrawals.

doneby35

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Re: Struggling to see the benefit of HSA
« Reply #4 on: October 24, 2016, 12:36:03 PM »
I see, makes total sense now. Thank you all.

terran

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Re: Struggling to see the benefit of HSA
« Reply #5 on: October 24, 2016, 01:17:52 PM »
This is a minor point, but just so you know, any employer contributions count towards the HSA maximum allowed contributions, so if you have a single plan and your company contributes $500, then you can only contribute an additional $2900 for 2017 (the limit is/was $3350 for 2016)

doneby35

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Re: Struggling to see the benefit of HSA
« Reply #6 on: October 24, 2016, 01:47:41 PM »
ah so it's not like 401k where the employer contribution is added to the 18000 employee max.

terran

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Re: Struggling to see the benefit of HSA
« Reply #7 on: October 24, 2016, 01:53:55 PM »
Nope, the limit is $3400 no matter where the contribution comes from. A 401k also has a total contribution limit regardless of source of $53k, but also the limit of $18k from the participant.

In fact (and this is a technicality that really doesn't matter), if you contribute to the HSA through payroll deductions chances are it goes through a section 125 "cafeteria" plan which actually means the whole contribution is from the employer and you have made the election to accept that contribution in lieu of salary, which is why both you and the employer are able to avoid paying FICA taxes on the contribution. Such plans can also be used to offer benefits like employer paid transit passes.

doneby35

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Re: Struggling to see the benefit of HSA
« Reply #8 on: October 25, 2016, 09:54:16 AM »
So do i only contribute 2900 out of my paycheck since the employer contributes $500? or do I contribute the whole 3400 out of my paycheck and the employer's 500 goes where?

MDM

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Re: Struggling to see the benefit of HSA
« Reply #9 on: October 25, 2016, 03:28:09 PM »
So do i only contribute 2900 out of my paycheck since the employer contributes $500?
Yes.

SweetTPi

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Re: Struggling to see the benefit of HSA
« Reply #10 on: October 26, 2016, 11:22:28 AM »
So do i only contribute 2900 out of my paycheck since the employer contributes $500?
Yes.
Yes.  Another thing for everyone to watch out for depending on how alert/knowledgeable the HR department is or how well the automated systems work: It can be a pain and a half to get excess contributions out if someone screws up.

Last year I had it set to max out exactly.  Well, HR decided to pay what should have been the first paycheck of 2016 early, since it would have been delayed from Friday, Jan 1st to Jan 4th.  This messed up all the insurance, etc, because everything then counted for 2015.  In fact, the only thing that didn't mess up was the 401k withholding because that was set as an automatic limit.  Everything else was fixed by HR except for the HSA- I had to go through all the pain and effort of getting that money out of the account.  It was a mess. 

I'm still using the option of an HSA, though.  I just worked with my payroll person to get an alert put in the system to throw up flags if it happens again.

boarder42

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Re: Struggling to see the benefit of HSA
« Reply #11 on: October 26, 2016, 12:11:36 PM »
also the 3400 should be FICA deductible as well. make sure you're doing salary deduct.