Using HSA money in TDAmeritrade SDBA

[foglifter]

I shared on the forum my dissatisfaction with a "bad 401(k)" a couple of years ago. The time is flying and things change to the better - first, my employer switched to ADP and now I can put 50% of my 401(k) fund into a brokerage account! The latest bad-news-turned-good was a huge APY rate drop at my HSA at Adirondack - from 3% down to 1%. Well, thanks to some of you who shared a word about HSABank I moved my HSA there and opened a self-directed brokerage account at TDAmeritrade.

Now I'm having an analysis paralysis - only 25% of my total annual tax-qualified contributions ends up at a "bad" account (the core portion of my 401(k) with an S&P500 index fund charging whooping 0.4% ER). The other 75% can be invested to anything (Roth IRA, 401(k) SDBA, HSA SDBA). My first desire was to dump all the HSA money into VTI and be done with it, but I decided to hold off and think whether this is the best choice. My state doesn't recognize HSAs hence the contributions and earnings are taxed (the effective tax rate is ~5%). I know some people here buy TLT to avoid the state tax, but I already own individual Treasury bonds in my Roth for the bonds portion of my PP. I also can buy FLBAX in my 401(k), which has recently become available with just 10K minimum and is cheaper than TLT ER-wise.

I really want to choose VTI as it's quite tax-efficient and my HSA is the only place where I can buy it commission-free. This would be a good alternative to a high-expense equity index in my 401(k).

What do you think? 

[Pointedstick]

I wouldn't invest the entire HSA in a single asset. While it can be tempting to consider that space as simply an extra tax-advantaged bucket to put more PP assets in, remember that it's first and foremost for medical expenses! You don't want your ability to pay those to be entirely dependent on the performance of the stock market. If there's any single asset I'd put in an HSA if I had to, it would be cash. You could actually make a mini-PP inside your HSA using all those juicy commission-free ETFs that TDAmeritrade offers.

[KevinW]

I wouldn't invest the entire HSA in a single asset. While it can be tempting to consider that space as simply an extra tax-advantaged bucket to put more PP assets in, remember that it's first and foremost for medical expenses! You don't want your ability to pay those to be entirely dependent on the performance of the stock market. If there's any single asset I'd put in an HSA if I had to, it would be cash. You could actually make a mini-PP inside your HSA using all those juicy commission-free ETFs that TDAmeritrade offers.

+1

You need the HSA to be stable in case you ever need to tap it. I would treat it as a separate portfolio aside from the rest of your PP, and fill it with a mini-PP, PERM, PRPFX, or failing that, a conservative Boglehead portfolio.

The 0.40% ER is high for a stock index fund, but it's not ruinous. It sounds like you can use cost-effective funds for everything else so your portfolio-wide ER should be reasonable. I'd just use that fund until a better option arises.

[foglifter]

Thanks for your thoughts, Pointedstick and KevinW.

I looked deeper into the tax issues and decided to stick with Treasury products to avoid the California tax mess. Basically the feds tax me later and CA taxes me now. But if I start using that money for non-medical expenses after I turn 65 the feds will want to tax me and CA won't - but if I move to another state then that state might want to tax me again... oh well, maybe I'm thinking too much about this and my HSA will be used only for medical expenses (e.g. Medicare premiums). My out-of-pocket health expenses don't exceed a few hundred $$$ a year and so I really treat my HSA as a retirement account. But I like Pointedstick's position on considering HSA money as cash. I'm thinking about cash, TIPS, intermediate or long Treasuries (TIP, IEI, TLT). Perhaps a mix of those.

As to that "bad" index fund... I think I can buy FSTVX in the "better half" of my 401(k) instead and use the "bad half" for cash (stable value fund) or buy PIMCO Total Return, which at least justifies its ER. 

[Greg]

I'm a newer federal government worker and trying to learn more information about the HSA Bank. Hopefully some of you on here can help with some of my questions.

1.) I was reading about a fee if you don't keep $5000 in the HSA Account that you'd receive a $3.00 monthly fee. It looks like from the attached flyer: (http://www.hsabank.com/~/media/files/am ... erview.pdf), that it can't be $5000 in investment accounts. Do you guys then keep $5000 in your HSA account earning very little and anything over that you can put in the investing account through TDAmeritrade? Or do you just say screw it I can earn more from investing that $5000 and pay the $3.00 monthly fee so that frees up your cash for investing instead?

2.) This might not be able to be answered by you guys (I'll call HSAbank about this as well) but if I started the bank in February of 2013, can I contribute to 2012 IRS Contributions or can I only contribute to 2013. I ask this because then it frees me up for investing more since I could invest for 2012 and 2013 contributions rather than just 2013.

That's all I've got for now. Thanks guys and gals for your help in advance.

[foglifter]

1.) I was reading about a fee if you don't keep $5000 in the HSA Account that you'd receive a $3.00 monthly fee. It looks like from the attached flyer: (http://www.hsabank.com/~/media/files/am ... erview.pdf), that it can't be $5000 in investment accounts. Do you guys then keep $5000 in your HSA account earning very little and anything over that you can put in the investing account through TDAmeritrade? Or do you just say screw it I can earn more from investing that $5000 and pay the $3.00 monthly fee so that frees up your cash for investing instead?

That's right - the 5000 is what  one should keep in the core HSA account to avoid the $3 fee.

I keep 5K in the core account and invest the rest. I intend to use the SDBA part for LTTs and TIPs only to avoid the state taxes so the rate of return on my HSA won't be very high. and so I don't feel like I lose that much be earning 0.6% on those 5K.

[Greg]

1.) I was reading about a fee if you don't keep $5000 in the HSA Account that you'd receive a $3.00 monthly fee. It looks like from the attached flyer: (http://www.hsabank.com/~/media/files/am ... erview.pdf), that it can't be $5000 in investment accounts. Do you guys then keep $5000 in your HSA account earning very little and anything over that you can put in the investing account through TDAmeritrade? Or do you just say screw it I can earn more from investing that $5000 and pay the $3.00 monthly fee so that frees up your cash for investing instead?

That's right - the 5000 is what  one should keep in the core HSA account to avoid the $3 fee.

I keep 5K in the core account and invest the rest. I intend to use the SDBA (Self-Directed Brokerage account) part for LTTs and TIPs only to avoid the state taxes so the rate of return on my HSA won't be very high. and so I don't feel like I lose that much be earning 0.6% on those 5K.

Thanks for the quick reply. I've found hsabank's interest rate structure for their core account, for $5000 it ain't even as pretty as 0.6%: (http://hsabank.com/hsabank/Accountholde ... _Fees.aspx), it looks like it'd be 0.3%.

For that kind of money, I'm thinking eventually it is worth just scrapping the $5000 keeping in the core account, pay the $3 a month, and invest the whole thing in any assets you believe would offset that $3 a month charge + 0.3% you would have gotten normally.

EDIT: Added spelled-out acronym for SDBA above in case others didn't know what is was.

[foglifter]

Oops, it seems that they dropped the rates  as of 2/19... yeah, 0.3 is too low. But the question is how low could I get in terms of the core balance. If I keep just 3K then I should earn at least 2.1% (36/2000 + 0.3) on those 2K moved to the TDA account. Going lower than 3K, let's say to 1000, will trigger another $2.50 bringing the annual amount of fees to $66, although the required break-even yield would be a tad lower - 1.95% (66/4000 + 0.3). I think we're talking pennies, I just want to keep things simple. Also, I want to avoid any state-taxable income in my SDBA (if I opted for a higher yield).

I think it all depends on the purpose one uses their HSA SDBA account for: if you want to invest in all kinds of things to build a separate PP/VP and you have decent amount of HSA funds (at least low 5 figures) then yes, fees  shouldn't be a problem.

[Greg]

Since as soon as you start using the investing account you get the $3.00 charge but not if you just keep it in the HSA core account, I think I might delay my own contributions into the HSA until the end of the year. Then in late December I pile in the total for 2013 contributions and then I can pile in the 2014 contributions when January 1st rolls about. That way I have $6000+ in the account by then and I can start the investing account faster and trying to recoup the losses of the $3 per month.

Also for me, my employer (federal government) pays for the $2.50 account maintenance fee so I don't have to worry about any minimums for that, just the $5000 in core or the $3.00 charge.

[sophie]

Since as soon as you start using the investing account you get the $3.00 charge but not if you just keep it in the HSA core account, I think I might delay my own contributions into the HSA until the end of the year. Then in late December I pike in the total for 2013 contributions and then I can pile in the 2014 contributions when January 1st rolls about.

I'm planning to do the very same thing.  It's not worth having the TD account for only $1K.

To put HSA Bank's fees and rates into perspective, I switched to it from the Chase HSA that my employer so thoughtfully picked out.  More fees than you can count (e.g. $5 per withdrawal, any amount), no investment options, and interest rate of 0.02%.  Sayonara.

[BearBones]

2.) This might not be able to be answered by you guys (I'll call HSAbank about this as well) but if I started the bank in February of 2013, can I contribute to 2012 IRS Contributions or can I only contribute to 2013. I ask this because then it frees me up for investing more since I could invest for 2012 and 2013 contributions rather than just 2013.

Not sure if anyone answered this. Pretty sure you have untill April of each year to make contribution for prior year, so can dump in both 2012 and 2013 contributions now.
http://www.hsaadministrators.info/event ... tant-dates

BTW, has anyone used HSA Administrators (see link above)? Looks like max fee is $85/year to invest in selection of Vanguard funds.

[foglifter]

2.) This might not be able to be answered by you guys (I'll call HSAbank about this as well) but if I started the bank in February of 2013, can I contribute to 2012 IRS Contributions or can I only contribute to 2013. I ask this because then it frees me up for investing more since I could invest for 2012 and 2013 contributions rather than just 2013.

Not sure if anyone answered this. Pretty sure you have untill April of each year to make contribution for prior year, so can dump in both 2012 and 2013 contributions now.
http://www.hsaadministrators.info/event ... tant-dates

Yes, between January 1st and April 15th one can contribute for the previous year. I made the 2012 contribution a couple weeks ago in my HSABank account. The page gives you a choice of a year. They also make it very easy to track how much you have contributed for each year and what the IRS limit for each year is. All on one page - very convenient.

I also like the fact that all types of money movement - contributions, withdrawals, transfers to/from SDBA are handled in one location. The transfers are pretty fast - 1 business day.

One tiny detail worth mentioning: when you open an HSABank account they put a penny into your account as an "account opening deposit". This penny is treated as a current year contribution! I checked with the rep and they confirmed that this deposit is to be treated as your own contribution. So, if you plan to max out your contribution make sure that you don't go over the limit or they will snap you with a fee. In case of a family coverage this means the maximum contribution for 2013 is $6449.99. 

[Greg]

2.) This might not be able to be answered by you guys (I'll call HSAbank about this as well) but if I started the bank in February of 2013, can I contribute to 2012 IRS Contributions or can I only contribute to 2013. I ask this because then it frees me up for investing more since I could invest for 2012 and 2013 contributions rather than just 2013.

Not sure if anyone answered this. Pretty sure you have untill April of each year to make contribution for prior year, so can dump in both 2012 and 2013 contributions now.
http://www.hsaadministrators.info/event ... tant-dates

BTW, has anyone used HSA Administrators (see link above)? Looks like max fee is $85/year to invest in selection of Vanguard funds.

Thanks for the update BearBones. Maybe I'll contribute for 2012 nearing the end of March and then put in more after that. More tax-deferred space. Yay.