HSA and taxes

[dandeliongirl75]

Hi,

I am not sure if this is the right place to post this, please redirect me if not.

We recently switched to health insurance that allows us to open an HSA.  I intend to do this just to cover the deductible tax free. However I see a lot of people saying this is a good tax advantaged savings account. The thing is I work at a small company and they are having us set up our own HSA's not through the company and we are not able to put in money pre tax.

How does this work for taxes? Will the money I put in after tax somehow allow me to not pay taxes on that money? Or if we are doing it this way do I only get the tax advantage when I withdraw the money against medical expenses?

Is it still worth me maxing out my contributions in an HSA after tax? I do not earn much (less than $50k) so I have to distribute my small amount of savings carefully and just opened a vanguard investment account as all my other investments ($90,000) are in IRA / 401k that I will find harder to access if I retire early. Is it better to be putting the money into my vanguard account other than what I will use each year for my deductible?

I hope this makes sense, I am new to all this and am learning fast but some things still confuse me.

Thanks.

[MooseOutFront]

Good questions really.  The part that sucks about not being able to contribute pretax is that you have to pay FICA on it at 7.62%.  You still get to contribute free of federal and state taxes.  You put in after tax monies, but then it's an "above the line" deduction when you file your income taxes, so the tax savings occurs at that time.

Honestly that 7.62% is enough of a tie breaker for me to prefer traditional 401k/IRA/Roth contributions for investment purposes.  For sure put enough in the HSA to cover deductible and then try to ramp up to at least have "max out of pocket" in there withing the next few years and then try not to use it, but I wouldn't be trying to max it all the way until the other stuff is maxed and you're searching for additional tax advantaged space.

[Cromacster]

Agree mostly with above.  It's a bummer that you can't contribute via payroll deduction.  The HSA is still very valuable account.  I agree that you should get enough in there to cover your deductible and out of pocket max.  I personally continue to contribute further than that.  I view my HSA as my personal insurance policy for when I am much older and medical expenses are much higher.  In my current position I don't touch my HSA even for expenses that qualify (less my wife's lasik surgery).  Just make sure you keep records of every medical expense you have that could qualify. 

Since you have to find your be picky about where you choose to go.  From what I have seen many HSA's have high fee's.

I suggest reading the article that Madfientist put together on the HSA
Ultimate Retirement Account

[MustLoveCats]

Good questions really.  The part that sucks about not being able to contribute pretax is that you have to pay FICA on it at 7.62%.  You still get to contribute free of federal and state taxes.  You put in after tax monies, but then it's an "above the line" deduction when you file your income taxes, so the tax savings occurs at that time.

Honestly that 7.62% is enough of a tie breaker for me to prefer traditional 401k/IRA/Roth contributions for investment purposes.  For sure put enough in the HSA to cover deductible and then try to ramp up to at least have "max out of pocket" in there withing the next few years and then try not to use it, but I wouldn't be trying to max it all the way until the other stuff is maxed and you're searching for additional tax advantaged space.

I am pretty sure the 7.62% FICA applies to 401k as well. All these things get the preferential income tax treatment but they are not exempt from FICA.

[GGNoob]

According to this website, 401k contributions do not reduce your FICA.

This website talks about HSA contributions:

Tax9 Do HSA contributions reduce FICA taxes? Employer contributions to a HSA account are not wages, and therefore are not subject to wage taxes like FICA. Employees' voluntary contributions to a HSA are wages, and therefore are subject to FICA taxes. Self-employed people are not subject to FICA taxes, but pay a self-employment tax instead. An HSA plan does not help reduce the self employment tax.

My wife is eligible for an HSA and we contribute to it ourselves, not through a payroll reduction. We max it out and will plan on maxing it out for as long as we are able to. This will be a great account to have for health expenses in retirement. We currently use http://healthsavings.com/.

[kendallf]

The point  MOF was making is that the FICA exemption is an additional sweetener for HSA accounts only.  There are less investment options and more fees in the typical HSA compared with a 401k.  There's also obviously the restriction to medical expenses.  So, missing that FICA advantage, max out your 401k and IRAs first.   

[GGNoob]

Is it still worth me maxing out my contributions in an HSA after tax? I do not earn much (less than $50k) so I have to distribute my small amount of savings carefully and just opened a vanguard investment account as all my other investments ($90,000) are in IRA / 401k that I will find harder to access if I retire early. Is it better to be putting the money into my vanguard account other than what I will use each year for my deductible?

After contributing enough to get my wife's 401k match, we prefer to max out the HSA before other investments. I prefer the HSA because we are basically contributing to it pre-tax (tax deduction at tax time) and we can withdraw without paying taxes as a reimbursement for qualified medical expenses. You do not need to withdraw the expenses in the same year they are incurred, so you can build up these reimbursements for a large payout down the road if you want. Then if we don't withdraw it for qualified medical expenses, we can withdraw from it at age 65 and just pay income taxes.

[MooseOutFront]

The point  MOF was making is that the FICA exemption is an additional sweetener for HSA accounts only.  There are less investment options and more fees in the typical HSA compared with a 401k.  There's also obviously the restriction to medical expenses.  So, missing that FICA advantage, max out your 401k and IRAs first.

This guy gets me. :)  Yes, exactly.  Without the bonus 7.62% instant return on investment that ONLY the payroll contributed HSA gets, I would rather invest in a 401k or IRA.

[dandeliongirl75]

Thanks for all the advice. I think I understand better now. Sadly I am not close to maxing out my 401k even, so I will stick to that for now other than using the HSA for covering actual health costs....

[MustLoveCats]

Good info! I didn't realize this about HSA through employers.

Yes, I max out ours along with 401k, I am glad it has an extra tax benefit I just discovered. :)

The point  MOF was making is that the FICA exemption is an additional sweetener for HSA accounts only.  There are less investment options and more fees in the typical HSA compared with a 401k.  There's also obviously the restriction to medical expenses.  So, missing that FICA advantage, max out your 401k and IRAs first.

[iluvzbeach]

Even if you aren't maxing out your 401K, I'd still contribute as much as you can to your HSA so you'll have the funds available in the event of a medical emergency. To take funds out of your 401K for such an expense would be very costly between taxes and penalties. At least get a nice cushion built up over time so that you've got funds available to meet your deductible.

[dandeliongirl75]

I will probably put about $3000 into the HSA next year - my deductible is only $1500....so that should cover most things....I think.

I am dumping most of my paycheck (80%) into my 401k for the last three pay periods of the year, but it occurred to me that maybe I should be putting it in my HSA instead (which I just opened today...). It seems that putting it in my 401k is not a bad thing though (although the investing options have an over 1% management fee). I have nothing in my HSA now, I may try to put about $1000 in before year end if I can manage it. The HSA has vanguard options.

I am very new to not sticking my head in the sand and ignoring money and hoping it will turn out ok (only several weeks in) so this year I paid most of my deductible out of pocket from after tax dollars....trying not to be too mad at myself over that....trying to do it right moving forwards. Feeling like an idiot today in general as I broke the fridge at work replacing the filter too as well as not knowing about money things :)

[Pooperman]

Not all states deduct HSA contributions. If you live in Alabama, California, or New Jersey, your HSA contributions are not exempt. I live in NJ, so neither my HSA nor my traditional IRA are deductible... but I work in NY and NY taxes trump NJs in terms of amount so I pay no NJ tax.

[DavidAnnArbor]

You  might think your deductible is $1,500 but now what's happening is that when you go to your in-network hospital for some kind of surgical procedure, they may make you briefly visit with an out-of-network consulting doctor, and voila, you now will have to pay a much higher amount than the $1,500 you thought.