Author Topic: Health Savings Accounts as part of portfolio  (Read 6721 times)

ncornilsen

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Health Savings Accounts as part of portfolio
« on: October 09, 2013, 02:55:32 PM »
Hello

due to the shafting us younger people are going to recieve from the Affordable Care Act, I'm going to be changing to a high deductible health plan.
this will qualify me to create a Health Savings account.  My reading on HSA's has shown the have the following advantages:
-You can keep contributions
-They can be used to purchase index funds, etc
-contributions are tax deductible.
-Returns are not taxed if used for qualfied expenses before age 65
-Returns and principle are taxed at your marginal tax rate post 65, if used for anything.

Disadvantages
-there's no way to get money out of an HSA pre 65 without a 20% penalty.
-?

Now, my thought is, to fund this as much as I can for this year and , up to my Out of Pocket Maximum, after getting my employer match from my 401K. 75% of these funds would be invested per my asset allocation. This way it still works for my like a tax deferred IRA would. My principle is at risk here though... but at my age it'll be somewhat unlikely that I'd need that money in a short time period. 

Or, am I better off keeping my HSA open, having the money invested in other vehicles, then contribute to the HSA if and only if I incur medical expenses, to get the tax deduction?

It seems like a powerful tool when combined with a HDHP, I'm curious how others have utilized it?

Numbers Man

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Re: Health Savings Accounts as part of portfolio
« Reply #1 on: October 09, 2013, 03:18:46 PM »
The HSA is an awesome invention. I'm assuming that the term that you are using as "returns" means using money to pay for medical expenses, etc. Everything that you listed is true. So maximize the funding of your HSA if possible. You don't also have to contribute to the HSA but it's great at reducing your tax bill. 

ncornilsen

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Re: Health Savings Accounts as part of portfolio
« Reply #2 on: October 09, 2013, 03:39:58 PM »
Well, some HSA's can be used to purchase index funds, etc... so by returns I ment what you earned from whatever investments you bought with the money in your HSA can be used, tax free, to pay qualified medial expenses.

I'm still wrangling with some student loans and such at a 7% interest rate, so at this point I have a simple HSA that I threw $500 into to pay a $450 medical bill coming up... I'm not ready to maximize it's potential. I just want to get a few of the ins and outs clarified so I can noodle on how to use this when I am ready Feb 1, 2014.

Caoineag

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Re: Health Savings Accounts as part of portfolio
« Reply #3 on: October 09, 2013, 07:26:08 PM »
...
Disadvantages
-there's no way to get money out of an HSA pre 65 without a 20% penalty.
-?
...

Umm not true. Have had an HSA for many years. You can get money out tax free in the amount of your medical expenses. Even when I couldn't afford to contribute much, it saved me the taxes on any medical expenses I had to pay anyways (glass wearer here and dental visits are also medical expenses).

Some people save receipts and pay from other accounts so that they can draw the money tax free at a later time. I actually use mine for medical expenses and as an additional tax savings vehicle.

WTFrugal

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Re: Health Savings Accounts as part of portfolio
« Reply #4 on: October 09, 2013, 07:33:27 PM »
I've been getting close to maximizing mine out over the last few years. The place my company houses our HSAs doesn't offer much in the way of investment choices. It just sits in cash because the maintenance fees plus investment fees eat up a lot of the potential returns. I plan on continuing to use it until my company stops contributing to the account. Once they stop I'd move it to somewhere with more choices (haven't researched any placed yet though).

My wife and I have used it mostly for contacts and glasses, that's about it. Not sure if you have checked this out yet but here is the IRS list for what qualifies and what doesn't.

http://www.irs.gov/pub/irs-pdf/p502.pdf

Dezrah

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Re: Health Savings Accounts as part of portfolio
« Reply #5 on: October 10, 2013, 08:10:34 AM »
Keep in mind that an HSA is most advantageous when used for health expenses.  To me, using it strictly as an investment vehicle only makes sense if you've already maximized your other tax advantaged options. 

If you anticipate any larger medical expenses in the near or even distant future (child birth, major dental work, knee replacement, insulin medication, etc.) an HSA could save you a lot and serve as a cushion for your emergency fund.  Don't be afraid to use it for medical expenses or feel like you're robbing from your retirement plan.  Using the HSA for non-medical expenses in retirement is a worst case scenario for your money (yes, the worst case is you live a long, healthy life).

As for where does it fall in your current priorities, that depends a lot on you.  If you have regular, predictable medical expenses, put in at least that amount regardless.  Otherwise, here are some questions to consider:

Do you have a family history of medical problems?
Do you intend to have a family in the future?
Is the total in the HSA currently less than your annual out-of-pocket insurance costs?
Is your current debt at low interest rates (<7%)?
Are you contributing enough to your 401(k) to get the full employer match?
Are you fully maxing out your 401(k)?
Are you maxing out your Roth IRA?

The more you answered yes, the more I would prioritize your HSA.

For me personally, HSA maximizing comes after 401(k) to employer match, maximizing Roth IRA, and accelerated student debt repayment, but before maximizing 401(k) and house down-payment savings.

Good luck.

(Edited to rephrase out-of-pocket expenses question to give the appropriate answer.)
« Last Edit: October 10, 2013, 09:56:47 AM by Dezrah »

TSR Capital

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Re: Health Savings Accounts as part of portfolio
« Reply #6 on: October 10, 2013, 09:28:42 AM »
Nilsen, I've been following a strategy similar to what you describe since 2006.  I contribute the maximum each year, and I've built up a sizable amount in my HSA.  I've never withdrawn any money.  Even if I had a medical cost, I'd spend non-sheltered money and leave the HSA untouched as long as I could.  I think of it as a specialized IRA.

I highly recommend this firm for the HSA.  They allow you to link to a brokerage account at TDAmeritrade.  Low cost and variety of options.  I've never had any issues with HSA Bank.
http://www.hsabank.com/

As an aside, HSA has allowed me to actually get paid for having medical insurance.  The cost of my HDHP (I have a 5K deductible, full coverage after that) is more than offset by the tax break for the HSA.  Plus I get to shelter an additional 3.3 K each year.  It's such a good deal that I declined the medical plans offered through my employer and go with a HDHP on my own.



ncornilsen

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Re: Health Savings Accounts as part of portfolio
« Reply #7 on: October 10, 2013, 10:56:51 PM »
TSR, I'm not sure I follow you there... how do you get paid for your HDHP?  unless your premium is less than 67 a month? (assuming a 25% marginal rate)


TSR Capital

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Re: Health Savings Accounts as part of portfolio
« Reply #8 on: October 11, 2013, 08:40:17 AM »
Annual Net Premium: $900
Federal + State/Local Tax Rate: 33% (could be higher this year, may wind up in the 28% federal bracket)

HSA tax break = $3250 x .33 = $1073

Net profit = $1073 - $900 = $173

JR

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Re: Health Savings Accounts as part of portfolio
« Reply #9 on: October 16, 2013, 02:26:26 PM »
Keep in mind that HSA contributions made through an employer are exempt from FICA and state taxes (in most states). My employer just switched to HSA bank as well so I will be maxing mine out every year for the immediate over 10% FICA/state income tax benefit. I doubt I will use it all for medical expenses so at 65 I will just use it like any other deferred tax savings vehicle.

bo_knows

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Re: Health Savings Accounts as part of portfolio
« Reply #10 on: October 16, 2013, 02:34:34 PM »
My HSA requires a minimum of $10k (I think) balance before you can invest in index funds.

But, I don't know the exact amount since we've used up all our HSA money over the past year. (Child-birth and a couple injuries on my part)

The HSA does sound like a great deal.  We'll continue to contribute to it, and hopefully make it over that $10k mark someday  ha!

DocCyane

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Re: Health Savings Accounts as part of portfolio
« Reply #11 on: October 16, 2013, 05:50:36 PM »
http://www.vanguard.com/us/whatweoffer/overview/healthsavings

This is the HSA I'm in. They partner with Vanguard and invest in their funds. No minimums. And really nice customer service.

tfordon

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Re: Health Savings Accounts as part of portfolio
« Reply #12 on: October 17, 2013, 05:50:19 AM »
The mad fientist (a MMM guest poster) had a great post on the advantages of HSAs: http://www.madfientist.com/ultimate-retirement-account/.

mbk

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Re: Health Savings Accounts as part of portfolio
« Reply #13 on: October 18, 2013, 10:52:37 AM »
http://www.vanguard.com/us/whatweoffer/overview/healthsavings

This is the HSA I'm in. They partner with Vanguard and invest in their funds. No minimums. And really nice customer service.

Do they charge any fee for managing the account?
I am currently using Alliant credit union with a balance of around $1k. There are no account maintenance fees, but the APR is 0.75% I think.
But the amount is too low to invest in index funds.

My employer started offering HSA's from next year, but we also got pretty good HMO plans with only little copays.
Plus I am FICA exempt for two more years, so it doesn't make sense to me of joining our employer HSA plan .

cbgg

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Re: Health Savings Accounts as part of portfolio
« Reply #14 on: October 24, 2013, 08:19:47 PM »
The mad fientist (a MMM guest poster) had a great post on the advantages of HSAs: http://www.madfientist.com/ultimate-retirement-account/.

GREAT article!

To OP - if I were in your situation, I'd put almost everything I've got towards paying down my student debt.  I'm conservative like that.  But after that I'd work to max my HSA (along with my 401k and my IRA).  If an HSA is well used it can be even better than an IRA.  Don't think of it as something you'll use now.  When you are old and grey you are likely to have significant medical expense, it'll be a tax free gold mine at that point.  And if you are a super healthy old person?  Well then it'll basically turn into a Traditional IRA.  Not bad at all.