Using an HSA for long-term tax/investment benefits

[ohgillian]

I just found out that DH has had access to an HSA at work for a few years, but we haven't used it b/c he hasn't been on the HDHP. I am trying to educate myself on the HSA's long term financial benefits. The basics of what I've read so far is that people tend to use them in the short term for medical expenses but their real powerhouse is when you use them for long-term investment/planning. That's literally as far as I've gotten. I will continue to research on my own but if anyone can help me out that would be great, too. Thank you!

[Pom]

We’ve never taken a penny out of our HSA. That feels very fortunate to be able to say that and that we haven’t needed it. Ours is invested, growing and sitting (mostly) at Fidelity. We want to use it to subsidize medical costs for the period between retirement (H is shooting for age 60) and Medicare eligibility.

www.google.com/amp/s/www.forbes.com/advisor/retirement/hsa-heath-savings-account-retirement-planning/%3famp

[goldengirlz]

I’ve been skeptical about using an HSA over other retirement savings but I didn’t have the best experience with mine. For one thing, you really need to do your research on fees. I had one with leftover money in it from my old job ... but it’s pretty much gone now, eaten away by fees. (Maybe I should have rolled it over somewhere but I didn’t know any better at the time.)

I guess the advantage is that the earnings aren’t taxed when they’re used for qualified medical expenses.

More here on fees: www.google.com/amp/s/www.cnbc.com/amp/2017/07/03/watch-out-for-high-fees-hiding-in-your-health-savings-account.html

I didn’t have a choice while I was employed by my old company and then I forgot about it. I looked at it some time after I left and was like, whoa, where’d all my money go!?! It soured me on both HDHPs and HSAs. Like, it annoyed me on principle. HDHPs are marketed like this great cost savings invention but really the only entities that truly benefit are employers, insurers and banks.

[chpmnk1015]

In the years my company had them, i used HSAs... when i left one company there were fees if I stayed. SO i moved it to my credit union.. there are no fees but i am not earning anything on it either. Soo.. we think we will use it for braces and stuff coming up. But, i was happy with it when i was eligible.. and if i had the opportunity i would do it again.. they made nice interest when i did have them..

[sunshinedaydreams]

The really beneficial thing about HSAs is that they are triple tax advantaged.

1 - The money you put in is pre-tax
2 - If you invest it, the growth is tax-free
3 - Not taxed on withdrawal

We contribute to, and max ours, every year for that reason. We're DINKs, and don't have significant family medical expenses at this point. So we pay anything we owe now OOP and are leaving our HSA for the gap between retirement and Medicare, like PP.

To kind of address PP's comments about leaving the job and fees - I found out when I switched jobs recently that you can roll your HSA like a 401k. Not sure what options you have if you leave for another job that doesn't have an HSA, though. I didn't look into that.

[puppylove64]

I don’t think anyone has said this yet, but HSAs aren’t subject to SS and Medicare tax! Your 401k contributions are. That is an extra 7.65% tax savings on top of the federal and state taxes! Watch out for fees in the account

[dancingirl21]

My Dad has one that he has contributed to for a long time. He retired recently at 60 and is using it to bridge the gap between now and Medicare, and after he’s of age for Medicare, for any out of pocket expenses. Seems like a beneficial program.

[jewel]

California currently considers HSAs to be a regular investment account, so contributions and gains are taxable 👎 I have no idea if other states do this also, but it was the first year that turbo tax prompted me for this info (These numbers are not provided by my HSA account because they assume that all states follow the federal standard). So, it’s super fun now.

[dontlook]

Like the pp said, we use ours because of the triple tax advantage. Anything over $2,000 in our account can he invested. We max out our contributions to it. We use ours quite a bit for normal medical bills as we have 3 kids and someone always needs something lol. The plan is to keep building the investment to use as we near retirement/into retirement.

[steamboat185]

We love ours for the tax advantages. You can also pull medical claims against it at anytime regardless of when they were incurred. We have 10-15k of claims that could be claimed from the last 10 years at anytime, which I consider our backup emergency fund. Once you hit retirement age you can pull the money out like and IRA and you avoid all taxes. It’s been a great way for us to throw a bit more money away for later (and incredibly privileged to do so).

[ohgillian]

Thanks for all the replies. Several of you mentioned fees; I'm having a hard time getting good info about that from H's open enrollment stuff but will keep digging. I was surprised when jewel said that CA taxes HSAs, but I looked it up and that's true for both CA and NJ. ( goldengirlz, maybe another reason you weren't a fan!)

I do want to share what I learned about the taxes and penalties at withdrawal for anyone else who reads this thread (hi, i am not a CPA, lol):

- Withdraw before age 65 for non-medical purposes: pay income taxes and 20% penalty.
- Withdraw before age 65 for medical expenses: no taxes, no penalty
- Withdraw after 65 for non-medical purposes: pay income taxes, no penalty.
- Withdraw after 65 for medical purposes: no taxes, no penalty.

I think I've got that right.

I will continue to look into it a bit more and have this on the list for my next call w/my planner. Thanks everyone.

[kadams767]

ohgillian, it wasn’t clear from your post if you were aware of this and are switching to the HDHP plan, but in case you didn’t know, you do have to be on an HDHP insurance plan in order to contribute to an HSA.

[jewel]

ohgillian - I have no idea what’s happened with Ca and the tax situation. We’ve had an HSA for around 5 years and this is the first time TT has prompted me to adjust for the Ca rules. Maybe I’ve inadvertently overclaimed for the last few years, or maybe it’s a recent change. I have no idea!!

Another thing to look at - you do not have to use the employer’s designated HSA account. When we first got ours, I think it was through Wells Fargo or another major bank, arranged by the employer. I ended up switching it to an account of my choosing, because their fees were much lower, it was easier to adjust my contributions, and I could choose to invest my funds in vanguard accounts.

[ohgillian]

Mar 22, 2021 21:45:58 GMT -5 jewel said:

ohgillian - I have no idea what’s happened with Ca and the tax situation. We’ve had an HSA for around 5 years and this is the first time TT has prompted me to adjust for the Ca rules. Maybe I’ve inadvertently overclaimed for the last few years, or maybe it’s a recent change. I have no idea!!

Another thing to look at - you do not have to use the employer’s designated HSA account. When we first got ours, I think it was through Wells Fargo or another major bank, arranged by the employer. I ended up switching it to an account of my choosing, because their fees were much lower, it was easier to adjust my contributions, and I could choose to invest my funds in vanguard accounts.

Thanks! I was reading something similar on Boglehead forum to this effect. H's plan comes with an employer contribution though so that may be a complicating factor.

[ohgillian]

For anyone following along at home, the NYT did an article on HSAs last week.

www.nytimes.com/2021/03/19/business/health-savings-accounts-tax-break.html

[RockNVoll]

We use ours as a triple tax-advantaged savings vehicle, have never withdrawn from it, and don't plan to until sometime in retirement. We're lucky to be able to cash flow any medical expenses in the meantime, and extra lucky that we're both generally pretty healthy and have minimal healthcare costs. As you summed up above, so long as your withdrawals are for medical expenses no matter what your age, the money is yours completely tax free. There are no other investment vehicles with that level of flexibility.

The only downside I've found is definitely the fees. The HSA administrator generally takes their pound of flesh on top of whatever the underlying funds charge. However, I think these have gotten better over time with more competition in the market, and the long-term investment gains generally outweigh these costs so the math works out for us.

[freshsqueezed]

ohgillian are you a fed? I was thinking you are...

[ohgillian]

Mar 24, 2021 12:17:09 GMT -5 freshsqueezed said:

ohgillian are you a fed? I was thinking you are...

No, thanks though!  

ETA: Details deleted

[freshsqueezed]

ohgillian ahhh ok never mind then