HSA Target Balance?

[jeromedawg]

Hey guys,

Might be an open-ended question or one that garners the response "the lowest you think you can go" but what should the ideal target balance be on my HSA?

I have the option of choosing $1000, $2000 or $3000.

I certainly don't want to shoot myself in the foot but it's hard to tell since this is the first time I've had an HSA. Should I start out with $1000? The big factor of course is that anything in your target balance cannot be invested. I already have $1000 in the account from the previous employer so it would be nice to have my contributions get invested instead of sitting in the buffer.

[BarkyardBQ]

Do you have the cash flow to cover the deductible without pulling it from the HSA? If you do, consider your HSA a long term investment and go aggressive.

We have an HSA, it keeps 2k in cash, and we have a 3k deductible, we can cover it in cash instead of using the HSA. So we invest in the HSA, as if we won't be withdrawing from it for 15-30 years. Currently, all stock 75/25 US/Intl.

http://forum.mrmoneymustache.com/investor-alley/hsa-investing-is-conservative-the-way-to-go/

If you have the option (I'd) go with $1000 cash balance so you get more invested, but max it out every year!

[ender]

If your HSA is through your employer, you also avoid FICA taxes (7.5% or so).

I've put the maximum in every year and will continue to do so until (if?) the government makes it less ridiculously awesome.

[jeromedawg]

Thanks guys! I'm definitely going to be maxing it out each year. BTW: do employer contributions count towards the total contribution? I know with the 401k they don't but noticed that the $1000 contribution from my previous employer seems to have counted against the overall contribution for the HSA

[ender]

Thanks guys! I'm definitely going to be maxing it out each year. BTW: do employer contributions count towards the total contribution? I know with the 401k they don't but noticed that the $1000 contribution from my previous employer seems to have counted against the overall contribution for the HSA

Yep. But it's per year.

Also, if you switch employers and both have a contribution, you have to be careful to not exceed the maximum total. I just did this calculation myself today, actually, because I will work for two employers in 2016 that both contribute to my HSA.

[Highbeam]

If your HSA is through your employer, you also avoid FICA taxes (7.5% or so).

I've put the maximum in every year and will continue to do so until (if?) the government makes it less ridiculously awesome.

Do you deduct personal contributions to an HSA when you calculate your FICA tax burden? Meaning whether the contribution is made by payroll deduction or by contributions from my personal accounts, I can avoid paying income taxes in both cases?

[HPstache]

I am building my HSA for the first time this year.  My company gives $2,000 toward my account and I am bringing in an additional $3,500 for a total of $5,500.  I chose this number so that I would have at least one max out of pocket if needed.  If all goes well, I'd like to build my account to around $10,000 by the end of 2017, and then slow down my contributions a bit until I get $15,000-$20,000 saved up.  This would cover the family max OOP ($10K) and have some reserve for when my kids need braces or I decide to get the snip snip or whatever else the future holds.

[Koreth]

If the HSA contribution is made by payroll, you should see an automatic calculated reduction in your FICA deductions. If you contribute to the HSA with post-tax dollars, then you'll see your normal FICA deduction on your pay stub. I don't know if you'll recoup those extra FICA taxes when you file your tax return for the year. This is my first year with an HSA, too.

Personally, as far as balances go, I intend to keep my maximum annual out-of-pocket expenses' worth of cash in the HSA, then anything above and beyond that in investments. That way, the HSA can still function for its intended use (cash buffer against medical expenses), while still reaping the investment benefits it can provide.

[jeromedawg]

Is there any reason why anyone would intentionally *not* use from the target balance/buffer pool in the HSA fund and pay for medical expenses fully out of pocket instead?

[chesebert]

I use $1k for medical emergency money. I am paying my medical expenses with CC and saving all my qualified expense receipts. I will let my HSA grow and hopefully cash out when I FIRE by offsetting prior generated medical expenses.

[jeromedawg]

I use $1k for medical emergency money. I am paying my medical expenses with CC and saving all my qualified expense receipts. I will let my HSA grow and hopefully cash out when I FIRE by offsetting prior generated medical expenses.

So you use your CC for basic doc appts, prescriptions, etc and just save the receipts? Are you deducting those on taxes? Don't you have to accumulate a certain amount of medical expenses in order to deduct them though?

[EZmoney]

[Do you deduct personal contributions to an HSA when you calculate your FICA tax burden? Meaning whether the contribution is made by payroll deduction or by contributions from my personal accounts, I can avoid paying income taxes in both cases?

Apparently FICA taxes are not deductible.

From eHow:

FICA Tax Implications

If you contribute to your HSA through a payroll deduction, the money is excluded from both income taxes and FICA taxes. For example, if you contribute $1,000 through payroll deductions, you won't have FICA taxes withheld on that $1,000 and your W-2 will show $1,000 less income. In contrast, if you make a contribution on your own, your W-2 will show that $1,000 of income but you get to claim the contribution as an income tax deduction. However, it doesn't reduce the amount of FICA taxes you owe.

[Highbeam]

Thank you EZ. Very interesting.

[Gin1984]

Is there any reason why anyone would intentionally *not* use from the target balance/buffer pool in the HSA fund and pay for medical expenses fully out of pocket instead?

I don't pay out of pocket because if I did, I would not be able to fund my 401k/Roth as I want to.

[jeromedawg]

Is there any reason why anyone would intentionally *not* use from the target balance/buffer pool in the HSA fund and pay for medical expenses fully out of pocket instead?

I don't pay out of pocket because if I did, I would not be able to fund my 401k/Roth as I want to.

But if you were able to fund your roth, 401k AND HSA fully, would you pay out of pocket? or would you take from the 'liquid' pool/buffer from the HSA still? I guess what I'm really wondering is if there's a big benefit to using your after-tax/out of pocket dollars to pay for medical expenses (as much as you can) versus just using pre-tax dollars straight from the HSA target balance for the medical expenses.

[jeromedawg]

[Do you deduct personal contributions to an HSA when you calculate your FICA tax burden? Meaning whether the contribution is made by payroll deduction or by contributions from my personal accounts, I can avoid paying income taxes in both cases?

Apparently FICA taxes are not deductible.

From eHow:

FICA Tax Implications

If you contribute to your HSA through a payroll deduction, the money is excluded from both income taxes and FICA taxes. For example, if you contribute $1,000 through payroll deductions, you won't have FICA taxes withheld on that $1,000 and your W-2 will show $1,000 less income. In contrast, if you make a contribution on your own, your W-2 will show that $1,000 of income but you get to claim the contribution as an income tax deduction. However, it doesn't reduce the amount of FICA taxes you owe.

Ah, so it's best (for tax minimization purposes) to just continue with payroll deductions as the source of contributions rather than doing lump-sum contributions from your own accounts which would effectively be 'after-tax' and also effectively non-deductible.

[iamlindoro]

If you contribute to your HSA through a payroll deduction, the money is excluded from both income taxes and FICA taxes. For example, if you contribute $1,000 through payroll deductions, you won't have FICA taxes withheld on that $1,000 and your W-2 will show $1,000 less income. In contrast, if you make a contribution on your own, your W-2 will show that $1,000 of income but you get to claim the contribution as an income tax deduction. However, it doesn't reduce the amount of FICA taxes you owe.

Ah, so it's best (for tax minimization purposes) to just continue with payroll deductions as the source of contributions rather than doing lump-sum contributions from your own accounts which would effectively be 'after-tax' and also effectively non-deductible.

Whether you contribute from your own accounts or payroll, the HSA is still deductible (thus you'd get the income tax deduction and the tax-free growth)-- having it taken directly from payroll just adds to that the exemption from FICA.

[jeromedawg]

If you contribute to your HSA through a payroll deduction, the money is excluded from both income taxes and FICA taxes. For example, if you contribute $1,000 through payroll deductions, you won't have FICA taxes withheld on that $1,000 and your W-2 will show $1,000 less income. In contrast, if you make a contribution on your own, your W-2 will show that $1,000 of income but you get to claim the contribution as an income tax deduction. However, it doesn't reduce the amount of FICA taxes you owe.

Ah, so it's best (for tax minimization purposes) to just continue with payroll deductions as the source of contributions rather than doing lump-sum contributions from your own accounts which would effectively be 'after-tax' and also effectively non-deductible.

Whether you contribute from your own accounts or payroll, the HSA is still deductible (thus you'd get the income tax deduction and the tax-free growth)-- having it taken directly from payroll just adds to that the exemption from FICA.

Ah I see... so in either case, it's *always* better just to contribute directly from payroll.

[iamlindoro]

Ah I see... so in either case, it's *always* better just to contribute directly from payroll.

Definitely!  I'm self-employed and don't have the option (well, without changing structure a lot), but still definitely want my HSA for the tax-free earnings *and* growth!  Hooray for HSAs!

[Gin1984]

Is there any reason why anyone would intentionally *not* use from the target balance/buffer pool in the HSA fund and pay for medical expenses fully out of pocket instead?

I don't pay out of pocket because if I did, I would not be able to fund my 401k/Roth as I want to.

But if you were able to fund your roth, 401k AND HSA fully, would you pay out of pocket? or would you take from the 'liquid' pool/buffer from the HSA still? I guess what I'm really wondering is if there's a big benefit to using your after-tax/out of pocket dollars to pay for medical expenses (as much as you can) versus just using pre-tax dollars straight from the HSA target balance for the medical expenses.

Yes, if I made enough to max everything and then had additional dollars I would use my after tax dollars to pay vs my HSA money.  And the reason is that the money is growing without the tax bite in the HSA and therefore will grow faster than money in a taxable account.

[jeromedawg]

Is there any reason why anyone would intentionally *not* use from the target balance/buffer pool in the HSA fund and pay for medical expenses fully out of pocket instead?

I don't pay out of pocket because if I did, I would not be able to fund my 401k/Roth as I want to.

But if you were able to fund your roth, 401k AND HSA fully, would you pay out of pocket? or would you take from the 'liquid' pool/buffer from the HSA still? I guess what I'm really wondering is if there's a big benefit to using your after-tax/out of pocket dollars to pay for medical expenses (as much as you can) versus just using pre-tax dollars straight from the HSA target balance for the medical expenses.

Yes, if I made enough to max everything and then had additional dollars I would use my after tax dollars to pay vs my HSA money.  And the reason is that the money is growing without the tax bite in the HSA and therefore will grow faster than money in a taxable account.

But as far as the "target balance" is concerned, that money doesn't get invested in anything at least during the year. I guess the point is to just keep it all in there (all $1000 or whatever) since, presumably, the following years it *would* be invested. The way I understand it though, if I have a target balance of $1000, it will always be the amount money in your HSA minus $1000 that's actually invested. Is that the right understanding?

[peoria]

I believe that only employer contributions or contributions through a cafeteria plan are not subject to FICA taxes, not all payroll deductions.

That distinction may not matter for some, but my employer is small and does not have a cafeteria plan.

I cannot just ask my employer to start taking deductions and adding to my HSA.  My employer is allowed to make contributions to HSA, but they have to be exactly the same for all employees with an HSA eligible health plan. If I were to request it for myself, it would be a voluntary employee contribution and would be subject to FICA taxes.

[chesebert]

I use $1k for medical emergency money. I am paying my medical expenses with CC and saving all my qualified expense receipts. I will let my HSA grow and hopefully cash out when I FIRE by offsetting prior generated medical expenses.

So you use your CC for basic doc appts, prescriptions, etc and just save the receipts? Are you deducting those on taxes? Don't you have to accumulate a certain amount of medical expenses in order to deduct them though?

That's a good question. I don't think you can itemize the amount on the one hand and then take the same amount out of HSA on the other hand. That would amount to double dipping, and I believe the rule is not designed to allow that. Does anyone know?

In any case my AGI is too high to itemize medical in any case, so it's moot point for me personally.

[chucklesmcgee]

I use $1k for medical emergency money. I am paying my medical expenses with CC and saving all my qualified expense receipts. I will let my HSA grow and hopefully cash out when I FIRE by offsetting prior generated medical expenses.

Why do you think you need any medical emergency money in cash? With insurance and CCs it'll be months before you see any bills. Wouldn't it just be better to have all that invested and sell it when you need it?

[bearkat]

To address why you should pay for med costs out of pocket and save receipts to reimburse yourself later:

http://www.madfientist.com/ultimate-retirement-account/
http://www.madfientist.com/hsa/

Both of these articles are what showed me the light wrt HSA's.

[jeromedawg]

BTW: for the $1000 that was contributed by my previous employer, will that be subject to the FICA tax?