Author Topic: investing HSA funds  (Read 1509 times)

treesner

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investing HSA funds
« on: August 28, 2019, 03:32:34 PM »
Hey guys I got this email saying I can invest my HSA funds. I'm doing an HSA account and paying for medical expenses out of pocket as recommended by mad fientist and others.. I didn't realize you can put the HSA funds into stock?
Do I have to use fidelity (where my company hsa is) or can I put it in vanguard?
If I have to keep it in fidelity does anyone know what the good fidelity index investments are?


bacchi

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Re: investing HSA funds
« Reply #1 on: August 28, 2019, 03:51:04 PM »
Fidelity has the usual suspects: FSKAX for total market, FTFBX for US bonds, FCPVX for small company value.

My HSA is more conservative than the rest of my portfolio.

EvenSteven

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Re: investing HSA funds
« Reply #2 on: August 28, 2019, 03:54:15 PM »
Yeah, the reason it is recommended to pay out of pocket now, is because you won't have to pay taxes on the gains for those HSA funds. If you only get a paltry bank account interest on your HSA, then the benefit of paying out of pocket is basically nothing.

Vanguard doesn't do HSA accounts, so you can't move your HSA over there, but Fidelity should be an excellent choice.

Here is a list of mutual funds and ETFs from fidelity that might interest you:
https://www.bogleheads.org/wiki/Fidelity

thesis

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Re: investing HSA funds
« Reply #3 on: August 29, 2019, 11:40:57 AM »
Yeah, keeping your receipts to claim the deduction later while paying out of pocket is one interesting strategy for really maximizing the HSA.

Personally, though, I just use my HSA for health expenses as normal, but what I do is keep the amount of my deductible in cash in the HSA and invest the rest. It really depends on what you're comfortable with, I'm sure there are other strategies. I might want to dig into the madfientist strategy again to better understand it. For tax purposes, I hold onto those receipts anyway so...yeah.

Because of the current way I'm doing things, most of the invested portion of my HSA is in a total bond market fund. My Roth IRA is 100% VTSAX, so I'm fine with my HSA being mostly in bonds, instead. That's one bucket of money I'd rather not see fluctuate wildly with the market - the others I don't really care. But this could be irrelevant depending on your strategy.

terran

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Re: investing HSA funds
« Reply #4 on: August 30, 2019, 06:53:45 AM »
A common error I see is taking the "pay medical expenses out of pocket and keep the money in the HSA" advice as gospel without considering the rest of your accounts. IMO, this advice should only be followed if you're also maxing out all available tax advantaged accounts (or at least all accounts with decent investment options).

Fidelity is probably the best HSA provider out there, so I would stick with them. They have perfect equivalents to the recommended vanguard funds.  See https://www.bogleheads.org/wiki/Fidelity

FIRE@50

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Re: investing HSA funds
« Reply #5 on: August 30, 2019, 08:48:42 AM »
I'm required to keep $2,000 in cash in my HSA. The rest is in an S&P 500 index.

DavidAnnArbor

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Re: investing HSA funds
« Reply #6 on: August 30, 2019, 07:34:25 PM »
Fidelity is the gold standard of HSA accounts because that they don't charge any fees and don't require a cash amount sitting in an account earning no interest.

It's easiest to simply get the Fidelity Total US stock market index fund, and total international stock market index fund

SimpleLifer

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Re: investing HSA funds
« Reply #7 on: August 31, 2019, 09:02:24 AM »
I used to keep a % of HSA funds in cash, but this year I decided to put 100% of the funds in VTSAX.  (Thankfully) I don't have a lot of healthcare costs. 

harvestbook

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Re: investing HSA funds
« Reply #8 on: August 31, 2019, 10:40:06 AM »
A common error I see is taking the "pay medical expenses out of pocket and keep the money in the HSA" advice as gospel without considering the rest of your accounts. IMO, this advice should only be followed if you're also maxing out all available tax advantaged accounts (or at least all accounts with decent investment options).


yeah, that's a great strategy if you're already rich and healthy and life falls according to your plans.
We put our expected annual med expenses in an HSA at the credit union (2.5 percent). When we reimburse out of that, we invest that money in tax-deferred. We're getting double the tax deduction, which is worth a lot more than tax-free growth to us. I rarely hear anyone talk about the double tax deduction.

The rest we keep 100 percent in stocks at Fidelity for the long term. I also see spending for current expense as a diversification of risk-- if you die before you ever tap the HSA, then that wasn't such a great plan. And you're also getting immediate savings (the tax deduction) when you do pay for an expense.
« Last Edit: August 31, 2019, 10:44:21 AM by harvestbook »

bacchi

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Re: investing HSA funds
« Reply #9 on: August 31, 2019, 09:00:12 PM »
yeah, that's a great strategy if you're already rich and healthy and life falls according to your plans.
We put our expected annual med expenses in an HSA at the credit union (2.5 percent). When we reimburse out of that, we invest that money in tax-deferred. We're getting double the tax deduction, which is worth a lot more than tax-free growth to us. I rarely hear anyone talk about the double tax deduction.

How does this work out mathematically?

You get 2x the deduction, which could be worth it if you're in a high bracket. Tax-deferred is less valuable than tax-free of course but there are ways around that with Roth conversions. Then the question is whether you'll have enough in non-tax-deferred accounts to hold you over for the 5 year ladder.

Of course, if you're already maxing out the tax-deferred accounts, then this strategy loses much of its appeal. Unless you put the HSA withdrawals into a taxable account for the 5 year ladder.

It'd be interesting to see the results of different strategies.

Heliios

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Re: investing HSA funds
« Reply #10 on: August 31, 2019, 10:26:17 PM »
My HSA requires a minimum cash balance of $1000 before investing. Beyond that, we keep everything in VFIAX, which is one of about 20 different funds offered by our provider. At this point, it would take a pretty catastrophic market meltdown to prevent us from accessing our yearly out-of-pocket maximum, but even if that happened, we could just save receipts until we make additional contributions.

We always make the maximum yearly HSA contribution. In our investment hierarchy, maxing out our HSA comes third after company-matched 401k and Roth IRA contributions (catastrophic emergency fund/peace of mind). At age 65, the HSA withdrawal penalty goes away so you can use it like a traditional 401k for non-qualified expenses. Furthermore, HSA payroll contributions aren't subject to FICA (unlike 401k contributions), so an HSA contribution for non-medical expenses after 65 is slightly more advantageous than an un-matched 401k contribution.

I've heard arguments for paying all healthcare expenses out-of-pocket and letting your HSA grow for 20+ years before making a giant tax-free withdrawal all at once. I have a few problems with this though: (1) You have to hang onto all of your receipts for decades. What if they get lost? (ie. fire, data apocalypse, etc.) What if you pass away before ever making that withdrawal? (2) As mentioned previously, paying out-of-pocket may prevent you from filling other tax-advantaged accounts. (3) We typically only spend $1k - $2k each year, so with the family max contribution of $7k, our HSA is still growing pretty fast.

seattlecyclone

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Re: investing HSA funds
« Reply #11 on: August 31, 2019, 10:37:26 PM »
yeah, that's a great strategy if you're already rich and healthy and life falls according to your plans.
We put our expected annual med expenses in an HSA at the credit union (2.5 percent). When we reimburse out of that, we invest that money in tax-deferred. We're getting double the tax deduction, which is worth a lot more than tax-free growth to us. I rarely hear anyone talk about the double tax deduction.

How does this work out mathematically?

Assumptions:
* You have $7,000 of pre-tax income to allocate.
* You have $2,000 of expected medical bills that have to be paid out of this $7,000 somehow. The rest can go to savings.
* Married filing jointly.
* You can't afford to max out all of your available tax shelters.
* Current tax bracket: 12%.

Option 1: Put it all in the HSA, withdraw medical expenses in the same year, leaving the rest in the HSA.
Here you put all $7,000 in the HSA and pay your $2,000 medical bills directly from that account, leaving you with $5,000 of HSA money.

Option 2: Run the medical bills through the HSA, invest the rest in a pre-tax retirement account.
Here you put $2,000 of your pre-tax money in the HSA, withdraw it to pay your medical bills, leaving $5,000 to put in your pre-tax retirement account.

Option 3: Skip the HSA, invest the rest in a pre-tax retirement account.
Here you need to pay tax on the amount you pay for medical bills, so that eats up $2,272.73 of your pre-tax income. You're left with $4,727.27 to put in the pre-tax retirement account.

Can we agree that Option 3 is strictly worse than Option 2?

Now, you could come up with an Option 2a where you put the retirement savings in Roth instead of pre-tax, but that just reduces the problem to a question of whether it's better to go with pre-tax or Roth in general. That has already been discussed ad nauseum elsewhere.

Some possible confounding factors:
* If HSA contributions are made through payroll deductions as part of your employer's health plan, you'll generally avoid paying payroll tax on these. Not so with 401(k) contributions. This is a point in the HSA's favor.
* If you would get an employer match by making the pre-tax retirement contributions, that's a point in the retirement account's favor.

I would argue that Option 1 is probably better than Option 2 most of the time. The nominal amount of dollars saved is the same either way. The question is how these dollars will be taxed upon withdrawal.

With the HSA money you'll pay no tax if you withdraw an amount that is less than your out-of-pocket medical expenses going forward (including COBRA premiums and Medicare premiums). If you withdraw more than this you'll pay tax at your regular rate, plus 20% if you're under 65.

With the retirement account money you'll pay tax at your regular rate whenever you withdraw, plus 10% if you're under 59½ and haven't done something like the Roth conversion ladder to avoid the 10% early withdrawal tax.

With the HSA the path to tax-free withdrawals is clear: incur qualifying medical expenses. Basically the only way to avoid this is to be perfectly healthy until you get hit by a bus prior to age 65 and pronounced dead at the scene, meaning no hospital bills or Medicare premiums. For this to happen to both partners in a marriage is extremely unlikely. Even if this does happen, the difference for your heirs is just that they have to tax a taxable distribution of the full amount in the year of your death rather than stretching these distributions out over a number of years.

With the retirement account the path to tax-free withdrawals is also pretty clear: convert or withdraw less than your standard or itemized deductions. The standard deduction isn't all that large though. Most of us will probably be spending more than this in retirement. In that case it's nice to have a source of funds (such as an HSA or Roth principal) to tap into tax-free once we hit the top of our desired tax bracket.

You may want to avoid contributing so much to your HSA that its annual growth is likely to outpace your Medicare premiums by age 65 if you remain healthy. Until that point, the HSA is pretty appealing. There's a reason that our standard investment order recommends maxing out an HSA before making unmatched retirement account contributions. I agree with this reasoning wholeheartedly.
« Last Edit: August 31, 2019, 10:39:21 PM by seattlecyclone »

terran

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Re: investing HSA funds
« Reply #12 on: September 01, 2019, 06:39:53 AM »
Maybe I'm just not following it correctly, but I think @seattlecyclone's response is missing what I would view at the best option, which is a combination of option 1 and 2: Contribute the full $7000 to the HSA (to get the tax deduction and the FICA reduction), reimburse the $2000 medical expense, leaving $5000 in the HSA, put the $2000 in a tax advantaged account (either tax deferred or Roth depending on current and future expected marginal tax brackets).

If you can max out all retirement accounts and pay medical expenses out of pocket then it likely makes sense leave money in the HSA and save receipts. This is because you're essentially deciding between having money in the HSA or having money it taxable accounts.

If you can't both max out all tax advantaged accounts and pay medical expenses, then it makes more sense to reimburse yourself from the HSA so you don't have to keep track of receipts. This is because you're deciding between having money in the HSA or having money in an IRA. As @seattlecyclone points out, the decision to contribute to Roth or traditional at this point is independent of whether to withdraw from the HSA to contribute to an IRA.

Something I've seen people get tripped up is the so called "triple tax advantage" of the HSA (tax deduction going in, FICA tax free, tax free growth if used for medical expenses). The thing is, once you've contributed to the HSA you've already gotten the first two tax advantages (tax deduction, and FICA tax deduction) whether or not you withdraw immediately, and a Roth contribution also gets tax free growth (no matter what it's spent on) and you don't have to save receipts. Granted, traditional IRA doesn't have tax free growth, but you'd only do that if you deem the current tax deduction superior to the tax free growth.

seattlecyclone

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Re: investing HSA funds
« Reply #13 on: September 01, 2019, 03:13:40 PM »
Maybe I'm just not following it correctly, but I think @seattlecyclone's response is missing what I would view at the best option, which is a combination of option 1 and 2: Contribute the full $7000 to the HSA (to get the tax deduction and the FICA reduction), reimburse the $2000 medical expense, leaving $5000 in the HSA, put the $2000 in a tax advantaged account (either tax deferred or Roth depending on current and future expected marginal tax brackets).

Where does the money to actually pay the doctor come from here? You're taking $2,000 from your HSA and then putting it in your IRA, but the money for the doctor must be coming from someplace else because you end up with all $7,000 in savings.

Heliios

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Re: investing HSA funds
« Reply #14 on: September 01, 2019, 04:37:26 PM »
Maybe I'm just not following it correctly, but I think @seattlecyclone's response is missing what I would view at the best option, which is a combination of option 1 and 2: Contribute the full $7000 to the HSA (to get the tax deduction and the FICA reduction), reimburse the $2000 medical expense, leaving $5000 in the HSA, put the $2000 in a tax advantaged account (either tax deferred or Roth depending on current and future expected marginal tax brackets).

I think we are running into the "money is fungible" argument. Let's pretend that your HSA is not included in your net worth. If you incur a $2000 medical expense, your cash holdings decrease by $2000, meaning that unless you compensate for this by reducing your yearly expenditures, you will probably "save" $2000 less. Then you reimburse yourself from your HSA and the $2000 that you spent magically reappears. Now you are back on track. Yes, when the HSA is included, your overall net worth has decreased by $2000, but paying for medical expenses is the purpose of the HSA. I don't think the typical MMM investor would look at this and say "Whoo!! My HSA reimbursement just cleared! I'm going shopping!" Rather, I think that they will continue to make additional 401k, IRA, HSA, etc. contributions according to their investment plan, which in most cases means saving any and all excess to yearly expenses, so I don't think there really is a triple advantage going on here.

walkwalkwalk

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Re: investing HSA funds
« Reply #15 on: September 01, 2019, 05:36:44 PM »
Maybe I'm just not following it correctly, but I think @seattlecyclone's response is missing what I would view at the best option, which is a combination of option 1 and 2: Contribute the full $7000 to the HSA (to get the tax deduction and the FICA reduction), reimburse the $2000 medical expense, leaving $5000 in the HSA, put the $2000 in a tax advantaged account (either tax deferred or Roth depending on current and future expected marginal tax brackets).

I think we are running into the "money is fungible" argument.
It is also finite.

terran

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Re: investing HSA funds
« Reply #16 on: September 01, 2019, 08:45:05 PM »
Maybe I'm just not following it correctly, but I think @seattlecyclone's response is missing what I would view at the best option, which is a combination of option 1 and 2: Contribute the full $7000 to the HSA (to get the tax deduction and the FICA reduction), reimburse the $2000 medical expense, leaving $5000 in the HSA, put the $2000 in a tax advantaged account (either tax deferred or Roth depending on current and future expected marginal tax brackets).

Where does the money to actually pay the doctor come from here? You're taking $2,000 from your HSA and then putting it in your IRA, but the money for the doctor must be coming from someplace else because you end up with all $7,000 in savings.

Well yes, all of this talk of leaving money in an HSA or not has to assume you can afford to pay the medical expenses from somewhere, so my assumption is it's coming from taxable or a bank account. If you can't afford to pay medical expenses out of pocket and you also can't afford to max all tax advantaged accounts then you have no choice but to take money from your HSA to pay medical expenses, so all of this is a moot point.

seattlecyclone

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Re: investing HSA funds
« Reply #17 on: September 01, 2019, 09:41:19 PM »
Maybe I'm just not following it correctly, but I think @seattlecyclone's response is missing what I would view at the best option, which is a combination of option 1 and 2: Contribute the full $7000 to the HSA (to get the tax deduction and the FICA reduction), reimburse the $2000 medical expense, leaving $5000 in the HSA, put the $2000 in a tax advantaged account (either tax deferred or Roth depending on current and future expected marginal tax brackets).

Where does the money to actually pay the doctor come from here? You're taking $2,000 from your HSA and then putting it in your IRA, but the money for the doctor must be coming from someplace else because you end up with all $7,000 in savings.

Well yes, all of this talk of leaving money in an HSA or not has to assume you can afford to pay the medical expenses from somewhere, so my assumption is it's coming from taxable or a bank account. If you can't afford to pay medical expenses out of pocket and you also can't afford to max all tax advantaged accounts then you have no choice but to take money from your HSA to pay medical expenses, so all of this is a moot point.

Isn't the whole point of this discussion to figure out what to do if you can't afford to max out your tax shelters? If you can, it's easy: max out your tax shelters, then let the tax-sheltered money ride as long as you can, paying for stuff out of unsheltered funds in the meanwhile.

If you can't afford to max everything out, then you have choices to make. Do I put my limited amount of money into an HSA, or should I prefer my 401(k)? And so on…

terran

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Re: investing HSA funds
« Reply #18 on: September 02, 2019, 06:38:56 AM »
Maybe I'm just not following it correctly, but I think @seattlecyclone's response is missing what I would view at the best option, which is a combination of option 1 and 2: Contribute the full $7000 to the HSA (to get the tax deduction and the FICA reduction), reimburse the $2000 medical expense, leaving $5000 in the HSA, put the $2000 in a tax advantaged account (either tax deferred or Roth depending on current and future expected marginal tax brackets).

Where does the money to actually pay the doctor come from here? You're taking $2,000 from your HSA and then putting it in your IRA, but the money for the doctor must be coming from someplace else because you end up with all $7,000 in savings.

Well yes, all of this talk of leaving money in an HSA or not has to assume you can afford to pay the medical expenses from somewhere, so my assumption is it's coming from taxable or a bank account. If you can't afford to pay medical expenses out of pocket and you also can't afford to max all tax advantaged accounts then you have no choice but to take money from your HSA to pay medical expenses, so all of this is a moot point.

Isn't the whole point of this discussion to figure out what to do if you can't afford to max out your tax shelters? If you can, it's easy: max out your tax shelters, then let the tax-sheltered money ride as long as you can, paying for stuff out of unsheltered funds in the meanwhile.

If you can't afford to max everything out, then you have choices to make. Do I put my limited amount of money into an HSA, or should I prefer my 401(k)? And so on…

Yes, the point (at least my point) is what to do if you can't max out all tax advantaged accounts. And my suggestion is that if you're deciding between spending taxable money on medical expenses and leaving money in an HSA or spending HSA money on medical expenses and putting taxable money in an IRA you should choose the latter. I've seen people argue vehemently for the former and I think that's wrong.

You should absolutely contribute the max to an HSA as the first priority, but you shouldn't leave money in an HSA if it means you won't be able to fund an IRA. At best, leaving the money in the HSA is almost as good as contributing to a Roth IRA with the "almost" being the extra work of keeping receipts for a long time. At worst, leaving money in the HSA is worse than getting another deduction by contributing to a traditional HSA.

seattlecyclone

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Re: investing HSA funds
« Reply #19 on: September 02, 2019, 11:43:49 AM »
Oh yeah, "saving receipts" when you haven't maxed out your retirement accounts is definitely suboptimal. That's basically my Option 3 above.

In my examples I'm assuming you don't have some outside source of $2,000 to spend on medical bills; you have a finite amount of cash ($7,000 pre-tax) to devote to your medical expenses and your savings put together. In the Option 3 you're using post-tax funds to pay your medical bills and then putting the rest in your retirement account. If you had instead taken a reimbursement from the HSA to fund these expenses pre-tax (as in Option 2) you would have more left over to save.

I argue above that if you haven't yet maxed out your HSA you should probably do that first before you do unmatched retirement account contributions, but that advice doesn't necessarily hold 100% of the time.

terran

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Re: investing HSA funds
« Reply #20 on: September 02, 2019, 12:32:22 PM »
Agreed, option 3 is suboptimal. I think it's pretty obvious (I hope) that medical spending should always be sent through the HSA to get the tax deduction and the FICA tax exemption. I've just seen people argue for keeping money in the HSA and paying from other money even when that means you won't be able to max out other tax advantaged accounts. Basically they're taking the "HSA is the best retirement account" statement (from Mad Fientist et al) a step too far and not realizing that they've already realized the two advantages that make it the best whether or not they withdraw, with the only remaining advantage being equal to contributing to a Roth IRA.

I think it comes down to two pretty simple rules: 1) if you can max out all tax advantaged accounts and still pay for medical expenses without withdrawing from the HSA you should because it effectively gives you access to more tax advantaged space. 2) if you can't max out all tax advantaged accounts and still pay for medical expenses without withdrawing from the HSA then you should withdraw from the HSA. Rule 2 applies to both the situation where you have no outside money to use for medical expenses, and the situation where you have outside money that could be used for either medical expenses or to save.