Investing in an HSA - Tax Efficiency

[mukramesh]

Hi All,

I currently have a Health Savings Account (HSA) with a balance that is 100% cash (the Core position that can be used to pay for qualified medical expenses). I do consider this part of my Permanent Portfolio.

To increase my tax efficiency, I am considering using these funds to invest in either Stocks or Bonds while paying for medical expenses out-of-pocket with taxable money. Has anyone done any analysis on how Stocks and Bonds should be split between an HSA and a 401k/IRA?

I am not really finding any good info via Google. Most tax efficiency articles just lump HSAs, 401ks, and IRAs together.

[Xan]

An HSA is /almost/ identical to a traditional IRA in terms of tax treatment.  The only significant difference (for now, anyway; all this can change at any time) is that there's a 20% penalty for early withdrawal (for non-health expenses) rather than a 10% penalty for early withdrawal from an IRA.

That can be mitigated if you save your receipts; then you can do reimbursements rather than early withdrawals.

Basically, as far as a PP is concerned, I think your HSA would just be an extension of your traditional IRA.

[mathjak107]

the hsa money can come in real handy to pay medicare and medical expenses in retirement . i am sorry i didn't contribute more to the hsa instead of the 401k . great source of tax free money .  now we are paying medicare , dental and our medicare supplement  with  after tax dollars from the ira/401k money .  what a big savings using the hsa money .  .

[fi50@fi2023]

I may mine out at the family contribution level and invest it in Vanguard mutual funds.  I keep all receipts (to the extent my wife remembers) and let the money grow until retirement, when it will be used as a tax fee bucket.

[Ugly_Bird]

Hi All,

I currently have a Health Savings Account (HSA) with a balance that is 100% cash (the Core position that can be used to pay for qualified medical expenses). I do consider this part of my Permanent Portfolio.

To increase my tax efficiency, I am considering using these funds to invest in either Stocks or Bonds while paying for medical expenses out-of-pocket with taxable money. Has anyone done any analysis on how Stocks and Bonds should be split between an HSA and a 401k/IRA?

I am not really finding any good info via Google. Most tax efficiency articles just lump HSAs, 401ks, and IRAs together.

you can structure your PP in such way that HSA is a part of your cash. Only thing is that APY there is usually very low.

[ochotona]

If you get an external HSA going, I think you can do a tax-free transfer of funds once a year out of your workplace HSA, and then invest those as you see fit. HSABANK.COM is connected to TD Ameritrade.

[sophie]

That's exactly what I did.  I shift funds periodically to HSA Bank, keep a bit more than the required amount in the cash account (because they increase the minimum balance to avoid fees every year), and funnel the rest into TD Ameritrade where you can buy any investment product you want.

It's quite a nice deal.  Depending on how your state treats HSAs and how good you are at keeping track of medical expenses, it's as close to a tax-free account as you'll get.  And if you "charge" withdrawals to prior medical expenses that you paid for with after-tax dollars, you can withdraw money (tax and penalty free) at any time.

I was surprised this managed to survive Obamacare, but I will keep this up as long as it lasts!

[mukramesh]

I think your HSA would just be an extension of your traditional IRA.

I think this answers the question. So essentially I would put in the asset that has the highest growth prospects in the HSA, similar to a traditional IRA. I guess this would be... stocks?

Thanks!

[Tyler]

Some HSA accounts can have relatively high fees, but if you find a good one I think it's a great deal.  My current one doesn't have a brokerage window and only acts like a health checking account, but the fees are basically nonexistent and I just lump it in with the PP cash.  Perhaps if it grows larger I'll roll it over into one with more investing flexibility (like HSAbank + TDA), but even as a tax-deferred cash account it's a great way to minimize income taxes each year. 

[mukramesh]

I have one with Fidelity through my employer's health plan and they pay all fees (other than trading fees).

It has a brokerage window (Fidelity trades iShares and US Treasuries for free) and I can also use it to invest in our 401k funds. Seems like a great deal to me

I will likely put the HSA funds towards the Equity portion of my PP next time I rebalance.

[Ugly_Bird]

Some HSA accounts can have relatively high fees, but if you find a good one I think it's a great deal.  My current one doesn't have a brokerage window and only acts like a health checking account, but the fees are basically nonexistent and I just lump it in with the PP cash.  Perhaps if it grows larger I'll roll it over into one with more investing flexibility (like HSAbank + TDA), but even as a tax-deferred cash account it's a great way to minimize income taxes each year.

Same here. Mine was from previous employer through Peoples Bank. I guess there is no need to keep it there any longer. Should rollover to HSAbank and take advantage of the flexibility. Thanks for the idea!

Andrei.

[dragoncar]

I'm in CA so my HSA is taxable at the state level.  So what I did was buy the long bonds directly in a brokerage window.  The 3ish percent it throws off is state-tax exempt, and fed-tax exempt because it's in the HSA.  At least the interest pays for the fees, but I no longer have a HDP so I'm not contributing any more.  Not sure it was ever worth the hassle and might just liquidate it at the next opportunity (medical expenses).  The brokerage window is through TD Ameritrade that charges obscene spread to sell bonds.

[ochotona]

HSABANK charged me $25 to close my account and transfer funds to another HSA Custodian. Is that even legal?

[MachineGhost]

HSABANK charged me $25 to close my account and transfer funds to another HSA Custodian. Is that even legal?

Yes, read the fine print.