Should I change how I use my HSA at work?

[MichaelB]

My work offers a HDHP, and automatically sets up a HSA for us. Previously, I would use it simply to set some money aside for medical expenses, and because they would also throw in about $20 per pay period if I contributed to it. They have investment options, but I've been putting it into a money market. Then, I found this article:

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

...and realized the awesome power of the HSA. So here's the question: I am type-1 diabetic, so I have fairly regular medical bills. It's not too severe--out of pocket costs are probably something along the lines of $100 or so per month for prescriptions, and doctor visits (maybe 2 or 3 per year--it's pretty under control right now). Would I be better off paying these out of pocket, and trying to build up my HSA for the future? Or continuing to do what I'm doing now--treating it as a way to automatically save for near-term expenses.

As I type this out, I am convincing myself more and more that I should start paying out of pocket (earning unlimited 1.5% cashback rewards with my Chase card...while being sure to completely pay off the balance each month), and build up a HSA balance for the future as a means of growth, tax savings, and to pay for future medical bills (which aren't going away any time soon unless my pancreas gets its ass in gear).

Also: HSA, Trad IRA, or 401k? I'm not making (okay, saving) enough yet to max out all three.

[MDM]

Also: HSA, Trad IRA, or 401k? I'm not making (okay, saving) enough yet to max out all three.

See the 'Investment Order' tab in the case study spreadsheet for thoughts on this.

[MichaelB]

Okay thanks. I'm sure y'all are giving the same answer over and over to noobs like me asking the same basic questions, so I appreciate your patience in educating us!

[seattlecyclone]

In general, I would say that maxing out your HSA should be a pretty high priority because it's tax-free going in and out. Get the maximum match on your 401(k) first, but after that go ahead and max out the HSA.

You say you're not able to max out all of your tax-advantaged accounts at this time. What I would then suggest is to keep paying medical bills out of the HSA. Use the money you save on taxes by funneling these expenses through a tax-free account to increase your contributions to your other retirement accounts. Once you get to a point where you do max out all of these accounts, start paying your medical bills with taxable funds, save your receipts, and let the HSA compound for use in your retirement.

[boarder42]

plus you bypass FICA if you do payroll deduct.  its really an amazing tax harbor.

[MichaelB]

What I would then suggest is to keep paying medical bills out of the HSA. Use the money you save on taxes by funneling these expenses through a tax-free account to increase your contributions to your other retirement accounts.

Makes sense to me. What are thoughts on investing within the HSA? I would think that I should put a portion in a money market fund for immediate/predictable short term expenses, and invest the remaining contribution (they have a lot of good investment options in the HSA).

[redcedar]

What I would then suggest is to keep paying medical bills out of the HSA. Use the money you save on taxes by funneling these expenses through a tax-free account to increase your contributions to your other retirement accounts.

Makes sense to me. What are thoughts on investing within the HSA? I would think that I should put a portion in a money market fund for immediate/predictable short term expenses, and invest the remaining contribution (they have a lot of good investment options in the HSA).

Good news on that front is that most HSA admins today force you to keep a certain amount in cash before you can invest. Health Savings Administrators being one exception with their first dollar investing option.

All HSA admins are focusing heavily on investors/savers so you may find a broad range of fund options and tool. Not all of the tools are free so make sure to avoid ones that don't provide benefit for their cost. You should be fine picking just a few low cost index funds.