Why should I max out HSA?

[specialkayme]

I've read on alot of threads about how you should max out your HSA contributions (after maxing out 401k match, if any, but before maxing out 401k or IRA contributions). I understand the logic, in that you get the tax savings on the contributions, but don't have to pay any tax on the withdrawal (unlike IRA or 401k, where you get the tax savings going in, and it grows tax free, but you pay tax on the way out).

But if you have few medical expenses each year, why should you max it out?

I'm fairly healthy. I spend maybe $200 in doctor visits per year. About $100 in contacts. That's typically about it. HSA's provide maybe 0.2% interest. So why should I put the other $3,100 into the HSA to max it out?

The only theory on why I should put it there now that I can think of would be if I have major surgery in 10 years or so. But it seems to me it would be better for me to take the tax hit by not putting it into the HSA (maybe 30%, so I'm down to $2,170), invest it in the stock market, let it sit for 9 years where it will hopefully double in value (~7% return), pay 15% LTCG tax, netting me $3,689, which is more than I'd have if I put it into the HSA.

Or am I missing something massive here?

[therethere]

Most HSA providers let you invest your HSA once you have a minimum amount in the account. Mine is 2k. I just invest mine in a total stock market index fund.

You also have to remember you are saving the FICA taxes on that money too. So 25% fed, 5% state, and 7.6% FICA almost doubles your money instantly.

[Spork]

Most HSA providers let you invest your HSA once you have a minimum amount in the account. Mine is 2k. I just invest mine in a total stock market index fund.

You also have to remember you are saving the FICA taxes on that money too. So 25% fed, 5% state, and 7.6% FICA almost doubles your money instantly.

+1

I will add: it also comes right off the top.  If you're looking to meet ACA numbers, reducing your AGI by $6750 (2017, married) can have a huge difference on your ACA subsidies.

[2Birds1Stone]

The biggest reason, that money is not use it or lose it.

It will grow invested for decades. When you do have eligible medical expenses in the future (knock on wood that they are not serious) the funds can be used at any time.

It's estimated that the average retiree will spend upwards of $250k on medical costs, outside of what is covered by medicare.

As therethere pointed out, HSA is also the only account exempt from FICA taxes.

[Heroes821]

As others have said HSA money can be invested.  I've only ever used Discovery Benefits but my minimum cash balance is $1000 and the rest can be invested.  They offer at least 3 vanguard funds with 0.16% expense ratios (no admiral funds sadly).  On top of that HSA money comes out PRE-EVERYTHING taxes. Then when used on medical expenses you pay no taxes on growth or principal ever.

My plan is to max it for years until I hit Medicaid or medicare (I can never remember which) at 65 and then use the HSA funds to cover any medical expenses that I need to pay out of pocket for the remaining 30-40 years of me and my wife's lives.

[Tay_CPA]

Think of it this way: even though you don't have many medical expenses now, you will likely have them in the future. You can use this money tax- and penalty-free at any time for a qualified medical expense. It goes in tax-free, grows tax-free, and can be pulled out tax-free. If you have the opportunity and ability to contribute to an HSA, I'd say do it, max it out, and invest it. It's another place you can save your money pretax! Check out Mad Fientist's post on this, it was really helpful in convincing me of the benefits of maxing an HSA: http://www.madfientist.com/ultimate-retirement-account/

For any medical expenses not covered by health insurance, I currently pay out of pocket. I keep records and receipts of those payments, especially the large ones. Later on down the road, I can take that same amount of money out of my HSA account because it's for a qualified medical expense. Or if I have a large medical bill to pay in the future and don't want to pay out of pocket, I can use the HSA money. Since I can only contribute to an HSA while on a high deductible plan, I figure it makes sense to take advantage of it now.

Also, as therethere mentioned, I have my funds invested in a total stock market index fund so it's not like the money is just sitting in a savings account getting a low return.

I say go for it!

[specialkayme]

A) I wasn't aware HSA accounts could be invested. Neat. But mine can't. At least, not the one set up by my employer. We just get basic interest (0.2%). Can I set up an HSA with another bank, even if it isn't the one set up through my employer?

B) I understand that I'll have significantly more medical expenses in the future. I understand that the average retiree will have up to $250k in medical expenses. But if I toss $3,200 a year into an account, get average rate of return from investing in the market, based on my age I'd have approximately $400,000 in my HSA account. Way more than I'd conceivably ever need in retirement. And I can't use it for non-medical expenses.

C) Likewise, I wasn't aware of the FICA avoidance. Another good reason.

I'll have to read up on the article Tay_CPA provided, but right now it makes sense to contribute to an HSA, but I can't justify maxing out the HSA before coming closer to maxing out 401k. Maybe I'm not getting it though.

[Tay_CPA]

A) Oh no, bummer that yours can't be invested! I am not sure about the using a different bank question, sorry.

B) This depends on how long you work and for how many years work at a job that offers a high deductible plan. You may not always have the chance to contribute to one. I believe the Mad Fientist article discusses this, but if you don't end up having many medical expenses in the future (fingers crossed!) the account acts like a regular traditional IRA. After 65, you will pay income tax on HSA distributions for non-qualified medical expenses. You can still get the money out. Ideally your tax rate would be lower in retirement anyways.

Also, my apologies! I didn't realize you weren't maxing your 401k, I was giving my thoughts based on the assumption of maxing both accounts. If you are able to max both - great! Otherwise, 401k might take priority, especially to get the match. I don't know what the general Mustachian financial advice on this situation would be though, so I'll let others answer that :) (max 401k & contribute some to HSA, not max either but contribute to both, only max 401k, etc.)

[specialkayme]

First off, I was wrong. I can invest my HSA. There's no information on the account about it, but once you reach a $3,500 balance, you can open an "HSA Sub Account" and invest anything over $3,000. So that helps significantly.

After reading the Mad Fientist article helped alot. I didn't get the concept of treating it as a combonation super tax saving vehicle (for qualified medical expenses), a traditional IRA (for non medical, after retirement expenses) AND a Roth IRA (for qualified medical expenses that you haven't "reimbursed" yourself from). That, plus the FICA, and I get it now :)

Thanks.

And, generally from what I've read, I've heard people recommend that you 1) contribute to 401(k) up to matching, 2) Max out HSA, 3) Max out IRA, then 4) Max out 401(k) (in that order). After reading the article, I get why.

[Tay_CPA]

Hey, that's great news about being able to invest it! Also, I'm happy to hear the article helped. I was definitely resistant to the idea of using an HSA as a retirement account before, but Mad Fientist does a great job of explaining it and that convinced me. (Side Note: You should check out his financial independence podcast series! He's always interviewing interesting people; I've been listening to those a lot lately.)

Thanks for the info on the order of how to go about things! Best of luck with it all :)

[missundecided]

You can transfer the funds deposited into your employer HSA into one of your choosing. But in order to capitalize on the FICA, let payroll contribute to the employer HSA first.

[boarder42]

Yes HSA funds are almost always transferable do as the above says and take payroll deduct then transfer. But look at what the transfer fee is and try to optimize. Maybe you build up a stash and dump it over 3-4 times a year

[Lan Mandragoran]

Interesting... I kind of have the same question.... Im 27 with a wife and a son and my employer contributes 5.5k a year to my HSA.

Should I really contribute up to the maximum considering that 5.5k per year is already likely to be significantly more medical expenses than I will use (we have probably had 5.5k expenses in the last 10 years)?

Obviously I will have more expenses as I get older, but its hard to put money into an account thats essentially locked until I'm 65 knowing I'm unlikely to use it.

[Spork]

Interesting... I kind of have the same question.... Im 27 with a wife and a son and my employer contributes 5.5k a year to my HSA.

Should I really contribute up to the maximum considering that 5.5k per year is already likely to be significantly more medical expenses than I will use (we have probably had 5.5k expenses in the last 10 years)?

Obviously I will have more expenses as I get older, but its hard to put money into an account thats essentially locked until I'm 65 knowing I'm unlikely to use it.

The fun answer is: if you have more than you can use you can pull it out penalty free at 65.  Worst case is it sits there and grows for 38 years and you withdraw it at a (probably) lower tax rate than you are paying now.

[Lan Mandragoran]

Well, I do have a fairly large lump sum from my work retirement savings plan when I reach 60~. Kind of devalues the whole investing for my late 60's when I shouldn't have any problems at that point.

I guess the advantages might outweigh that though idk :).

[Spork]

Well, I do have a fairly large lump sum from my work retirement savings plan when I reach 60~. Kind of devalues the whole investing for my late 60's when I shouldn't have any problems at that point.

I guess the advantages might outweigh that though idk :).

Assuming your work plan is a 401k or similar... That particular bag of money can be pulled out without penalty prior to 59.5 if you do it correctly. 
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

---

But back to HSA...  My particular method of managing my HSA:  I DO NOT withdraw from my HSA when an expense occurs.  Instead, I just leave it there to grow.  Over time, if you need cash, you can go back and withdraw your medical expenses tax free.

In other words, this makes a good emergency fund.  You put money in tax deferred.  And as expenses occur, you end up with a growing nest egg that can be withdrawn tax free.

[Lan Mandragoran]

It's not a 401k and is truly inaccessible until then as far as I can tell (I have a 401k as well :P).


Thats a good strategy that we are going to use as well.  Receipt and documentation management becomes more important of course.

[boarder42]

It's not a 401k and is truly inaccessible until then as far as I can tell (I have a 401k as well :P).


Thats a good strategy that we are going to use as well.  Receipt and documentation management becomes more important of course.

its not truly inaccessible.  if you assume you'll have 0 medical costs ok i guess so.  but to be able to shelter 6650 a year per couple from fica and fed/state taxes ... regardless of your other savings vehicles adds value. and you shouldnt HAVE to withdraw from an HSA for non medical reasons prior to 59.5 if you have saved properly otherwise.

[Spork]

It's not a 401k and is truly inaccessible until then as far as I can tell (I have a 401k as well :P).


Thats a good strategy that we are going to use as well.  Receipt and documentation management becomes more important of course.

its not truly inaccessible.  if you assume you'll have 0 medical costs ok i guess so.  but to be able to shelter 6650 a year per couple from fica and fed/state taxes ... regardless of your other savings vehicles adds value. and you shouldnt HAVE to withdraw from an HSA for non medical reasons prior to 59.5 if you have saved properly otherwise.

He is referring to his particular work retirement plan... not an HSA.

[CptJack83]

Another reason to consider maxing out your HSA...I'm relatively young (33) and max mine out, and I have not yet made a withdrawal. I don't think it is unrealistic to think the US will go to some form of Single Payer health care system at some point in my lifetime prior to me having old age related high medical expenses.  If this does happen what do you suspect will be made of existing HSA accounts?  In a medicare-for-all type system, individual out of pocket costs would be minimal.  I think in that case HSA accounts would be allowed to be rolled over to an IRA.  Do you agree that being allowed this rollover is the most likely outcome? If so that is more reason to max your HSA. 

**Note I'm not endorsing Single Payer Health Care so don't make this political...just trying to anticipate future political events and position myself accordingly**

[Clean Shaven]

If there were Medicare-for-all, or something similar, there would likely still be out-of-pocket costs (e.g. the different "parts" of Medicare that you have to pay for).  Hopefully, HSA funds would be usable under such a system.

[CptJack83]

Yes there would still be some out of pocket costs, but not nearly as much as there would be under the current system.  And the contribution limits are based on the current system.  Based on the current rules, you could easily hit your 50's with over $300K in your HSA.  Under a medicare for all type system, I don't think you could ever spend that much.   Again this is all speculation, so who knows.

[Spork]

Worst case: you can withdraw without penalty at 65 and just pay the taxes.  I suspect if they made a ubiquitous medicare for all, they'd minimally let you roll it over or pull it out and pay tax.