If I were to return to the US, I would very much like to have cash in an HSA to use to offset the (much higher) cost of medical care. I would recommend that you always at least keep your deductible (typically $3-6K) in cash and invest amounts more than that. very nice post. Very insightful. If I’m able to max out my 401k this year, and thus dive into the HSA next year, those fees/expenses seem a reasonable price to pay to keep it simple and not maintain separate HSAs for employer vs. employee contributions. The key though is that there’s no expiration on when you need to reimburse yourself. Finally, as some people have mentioned, there is a worry that the law will change and there will be a requirement to withdraw the money the year you have the medical expense. This might be considered equivalent to a ‘free’ conversion from a Traditional IRA to a Roth IRA without the 5-year holding period the Roth conversion requires. So using the salary in the above example, if you contribute $5,000 to a Roth IRA, you will still initially pay tax on your full $100,000 salary but you won’t have to pay any tax when you withdraw the money from the Roth. She learned about the HSA account’s power from the Mad Fientist when she was home on short term disability after breaking her ankle at a work function. I have an HSA due to my HDHP with my employer. no HSA w/HSA Thks anyway. One troublesome thing about HSAs is also the requirement of having a high deductible plan at the time you decide to pull money from it in order to get all the benefits of the HSA (no penalty, no tax). I thought it was okay since I was given money to use towards my health care expenses. While it ensures tax free growth, you might want to actually use it to pay for any medical expenses. Now $3,200 of that is free money from the company put into the HSA. Hold on to those receipts for later. Am I missing something? Your S-corp can then make pre-tax HSA contributions for you. You could also try talking to your HR department to find out why they picked such a terrible custodian and see if you can convince them to switch one with better options! If so, I’d definitely take advantage of that first and then move on to the HSA. Does an HDHP need to be a _US_ HDHP to allow you to add money to the HSA? Her employer also offers an HSA. My employer gives me free health insurance. Wish I had found you sooner. I’ve done the math, for every 1k of income I will receive .80 cents extra in SS benefits per month. Also what happens if you lose the receipts? There was no room for optimization or cost/benefit analysis in this lifestyle. Good article, but it neglects the cost of taking the $200 from the checking account. 2. In theory you can do a trustee-to-trustee transfer (no limit how often), but the trustee losing money is going to make it painful and I always got the vibe that something would go wrong, maybe even accidentally-on-purpose. If not, I wouldn’t make a change that could stress you out just to have an HSA. A limit for family is 6000/year. I would like to check my understanding of some concepts: So money in the HSA just sits in there like a bank? Basically, what happens is that all the healthy employees see the advantages of an HSA, so they all opt for the HSA plan and shift money away from the traditional plan. Get Access! The only stipulation, other than “use it or lose it,” was that the FSA had limited use: i.e. You mentioned that you need to be enrolled in an HDHP when withdrawing money from an HSA but that is not actually the case. Hi Andy, you can make post-tax contributions to your HSA and then get those taxes back when you file your tax return so I’d say it’s still worthwhile. Thank you for getting in touch. When I go to the doctor, I can pay for my $200 yearly visit with my tax-free HSA funds directly but if I instead pay with cash or my normal credit card, I am able to withdraw that $200 from my HSA at a later time (to pay myself back for the qualified medical expense). You ask the hospital to put you on a payment plan. Your email address will not be published. Question: Why would you contribute to your IRA before you maxed out your 401k? So – based on these numbers, even though we’d be paying the whole deductible, it seems to me that it would make sense to open the HSA given the tax benefits. He doesn't have a seven-figure startup. Examples: Is it likely that somehow this window will be sufficient justification to allow us to get an HSA? My employer’s EPO plan was costing me $865/year, with no in-network deductible, a $1000 out-of-pocket max and $10 copays for doctors visits. That would be pretty ridiculous if that was true. FSAs are use it or lose it, however, there is a provision called the “uniform coverage rule” that requires the annual value of the employee’s election be available on the first day of the plan year. Absolutely! Any thoughts? As a self-employed individual, we are required to obtain insurance in the government marketplace. At some point I would expect with a high enough medical utilization, the non-HSA plan may be a better deal. My state didn’t make them tax free until a few years ago. (I know you would love to max out both of them!). If you do one transaction a year through their brokerage ($14.95 commission fee) then there are no HSA fees. I’m already investing enough to get the full match, but it isn’t totally maxed out. Yes, you may need to start paying account maintenance fees after leaving your job so you’ll need to run the numbers to see if the tax-free growth outweighs the additional fees. In a nutshell: Contribute your HSA. I’m guessing that will hit my 2017 taxes — and I’m not clear yet if gains will be taxed as long term capital gains or income. A 401k is a powerful tool for reaching financial independence. PK :ƒ(R META-INF/PK Ò î˜N:ÿ® META-INF/container.xml]ŽË Â0 E÷‚ÿ f+5º“Ð ® ü‚˜Nk0™ M*ú÷Æ ¥¸œáÞsnÙ¼¼ O ¢eª`¿Ý @2ÜZê+ SW ©×«Ò0%m ‡¿p®SÌÉ ëh£"í1ªd ¤–Íè‘’šbj†@F Q Ì©³ ãt. Triple Tax Advantage. What is the advantage of this conversion? So, it really depends on where I end up during retirement. You must use all the money in a FSA by the end of the year or the government happily confiscates it and uses it to fund a shiny new $30,000 toilet they got their eye on. Any custodians you would recommend I look at that offer both those? So I would be losing $1400 on prescription costs, but saving $1200 in taxes, $120 on prescription, and $450 on pass-through contributions for a total of $1770. Success! We run myself through W-2 and have zero employees. :) Draggon This is because, while it may be true that your medical expenses now could loose out to inflation, most medical expenses don’t happen when people are young in life. That will cut into your growth a bit. ITs like a big roth account. Site title of www.madfientist.com is Mad Fientist - Financial Independence and Early Retirement. In my case the premiums of the HMO plan were so much higher than the HSA plan that there was almost no circumstance where I would have been better off on the HMO. I suppose I’m wondering, how long you can keep this streak going without worrying that they won’t “honor” your receipts. My question is if I roll over the account, does that reset the start date and nullify my old receipts? The interest on that money would still be in my account accruing tax free, and that money I withdrew (tax free) would go to whatever else I would want it to go to. I tally up say, $12,000 of receipts and withdraw $12,000 from my HSA and it is a tax free withdrawal. I know I’ll have a bunch of money in the HSA, but I’d like to consider that another FI vehicle instead of a use for health care (since it can’t be used for premiums anyway…?). You’d be giving up tax-free growth but the additional returns could make it worth it, assuming you invest the after-tax money that you didn’t spend on medical expenses. If your institution that holds your HSA account does not allow investment you can change it to someplace else that does. Being able to avoid FICA taxes may outweigh any benefit from lower fees. You have to elect to invest that into an investment account for growth correct? Later in 2016 I made $2000 payroll contributions to my HSA . (You are allowed to make withdrawals for excess contributions without penalty up until tax deadline in case you make a mistake, same for prior-year contributions. Any gains thereafter I would not count as these…, How are you calculating RSUs as part of the $750k? Safe travels to Scotland when you head that way. Join over 100,000 others on the Mad Fientist email list and start tracking your progress in the FI Laboratory! Hi George, I’m hoping to be FI sometime in the next few years, but I’ve yet to research the best way to cover health care. It sounds like you are in a pretty solid financial situation. My company just made a HSA an option for us this year. ), Access Funds Through Internet Withdrawal: $2 per transaction. Check out https://payflex.com/, they offer Vanguard Index Funds. Is it still worth it to open one up and contribute? It would take many years before that ate through your savings from the 7.5% FICA and income tax deferment, and the more you contributed the less it would matter. So, now your total cost of healthcare this year is $2400 and you’re getting a federal tax savings on your $2400 investment (but paying state income tax on this.). Your considerations are not only tax and retirement growth, but business tax and actuarial. – I expect to reach my deductible of $1400 due to prescription costs, which would otherwise cost me $120 under my current health plan. My assumption is that the deduction for the HSA contribution will offset my withdrawal from my IRA, rendering it tax free. What you want to do is find a good HSA account, and once a year you can withdraw the contributions from your employer-sponsored HSA and roll them over into the good one. We should put him forward for a civic award for doing this. He’s now living in Glasgow, Scotland, his wife’s hometown. Since you’re a smart Mad Fientist reader though, I suggest you disregard the medical aspect of the account and simply think of it as a special retirement account that you are able to contribute to when you are enrolled in a high-deductible health plan. It is my understanding that once your deductible is reached, you can start to use FSA funds to pay for medical expenses. The main administrators seem to have fees of around $60/year plus a percentage of the total assests…. So hypothetical situation: You pay out of pocket for all medical expenses until you are age 65 and you don’t withdraw any money to cover your receipts. It’s a very good account that hopefully doesn’t lose its great tax benefits in the future. Welcome, Peter! I wanted to point out another advantage of an HSA account with high deductible health plans. That’s great news, Alan! Tax documents are such a pain to interpret so that’s a great idea calling the hotline to ask questions. If you have an eligible health plan, you can contribute up to a certain amount per year (~$6900 for a family next year) which is put into the account pre-tax* and then you can invest that money and whatever it grows to you can take out tax free if used for qualified medical expenses at any point in your life. Also, though this is common sense: no ‘double-dipping’ allowed: using the same QME for multiple HSA distributions and/or using a QME that was deducted on Sched A in any tax year. the mader be emi. That’s crazy CA doesn’t recognize HSAs pre-tax! Next question – can I use both an FSA and an HSA? The HSA was introduced in the early 2000s and it is the only savings vehicle that offers a tax advantage with each contribution, a tax-advantaged growth (invested contributions) AND tax-free distributions (when you take the money out). I’ve always been a proponent of HSAs, but now I’m not so sure – especially living in California, one of the two states in the country that doesn’t recognize HSAs as pre-tax income. I feel like I’m probably missing something :). What I love about the Mad Fientist is that he’s a retired Software Engineer. My monthly cost (pre tax) for the plan I’ve been using is $195 and the HDHP is $19. Using my HSA funds guarantees me a ROI that is 2.5 times greater than what I would average in the Stock Market. Let’s say I have a HDHP/HSA combo for 2017 and 2018. I was mistaken regarding federal asset protection of retirement accounts. Taking the difference between my wages and that amount tells me that my automatic payroll deductions for HSA contributions, as well as my portion of medical and dental insurance premiums that automatically come out of my paycheck, are not subject to FICA taxes. I Scan all my receipts, medical docs, any correspondence and load it to google drive. ”. They still come out ahead because of all the people who lose unused portions of FSA at year end. You’re a healthy 20 something with 40 years until retirement. Husband is covered thru family plan at my employer with HDHP and contribute to family HSA. This is great, but even for the cheapest Bronze plan to qualify for an HSA monthly premiums are over $500 for us. Waaayyyy too many comments to read them all…. I’m sure the money is in some basic checking account of some sort. Free money! Ooops sorry for some reason I read your total contribution would be $3950 instead of $2950 you are correct! Thanks in advance for your time. Please try again. It helps that my employer chips in $1000 for the year also. I’ve been able to “make money” by not needing to spend that free money from my employers. It’s a $1080 fee for the year, but with the lower deductible instead of $1000 in healthcare spending, it’s more like $350 due to the low deductible and co-insurance. Eventually, when I have a medical expense, can I use the money in the HSA? Over the long run, I will be less reliant on an already stressed system, because I will be able to pay for more of my own medical expenses, so I can’t imagine the government would be too concerned with me maxing out my HSA and letting it grow for years/decades until I need to use it. The HSA benefits will probably outweigh the risks 99% of the time (at least for people who read financial independence blogs). However the article says: “The ultimate retirement account is better known as a Health Savings Account, or HSA.”. I think you have to have a certain income to make this work. As an attendee of Broke University, I didn't really think about an HSA (Health Saving Accounts). My small business had a health plan that wasn’t eligible but we just switched to one that is. Due to balance, I’ve been getting the “better” 0.2% rate. I can almost guarantee that I will hit my maximum or at least come close every year, would an HSA still be beneficial? You can roll over $500, at least. In other words, the HSA turns into the equivalent of a Traditional IRA once you hit 65. -You must maintain a balance of at least $2,000 in a 0.05% apr savings account before you can invest funds. There must be a way to figure out under what circumstances paying with after-tax money is the better solution. Wondering if you could help me out with…. Thanks Tony. Also, if you leave your company before year-end, you could spend your whole annual FSA and only contribute through the months you worked. Thanks for the great article. I currently fund some but I do not max it out. So, we only had three viewings. The Mad Fientist does a great write up about HSAs….essentially cashflow all medical now (keeping all the receipts), then treat it as a Traditional IRA when you retire (cashing in those receipts). Agree, This only works if you don’t get sick. The bank my employer chose (UBM) only offers high expense ratio, actively traded funds. use the $7,000 to reimburse myself, or pay the $10,000, and keep the $7,000 in the HSA each year. There are HDHPs where they start to pay upfront before exhausting the deductible, but these are not the HSA eligible plans. The files sort perfectly in the order in which you will likely reimburse yourself from your HSA account in the future. The catch is I’ve over-contributed from my last employer (had no idea until I called just now) so would need to withdraw that to avoid taxes/penalty which I really don’t want to do! These all get put in a folder on my computer and backed up to multiple locations. I wasn’t worried about leaving money in the HSA but I am worried about Uncle Sam :), My proposal comes from a guy longing to be FI but still on the road to freedom, i.e. Even have my kids lookin inti it. Assuming you reach the age of 65 and have not accumulated enough medical receipts to fully liquidate your account, the HSA can be used for ordinary expenses in the same way that a Traditional IRA can be used for any expenses after standard retirement age (note: withdrawals for qualified medical expenses will continue to be tax free but withdrawals for all other expenses will be taxed as income). HSA contribution: $6900 HSA contribution, 3% growth, in 30 years: $16,748. You’re very welcome! MF, do you have a post dedicated to someone who is an independent contractor- think consultant- and how to best save for retirement? Considering there’s no cost to her current plan, does it still make sense for her to use an HSA? Looks like the long term benefits are close to outweighing the cost, still undecided. Age 38 to Age 55: $7,000/year x 17= $119,000 Join over 100,000 others on the Mad Fientist email list and get instant access to my FI Spreadsheet! If your employer doesn’t offer a good option, your best bet may be to go with Health Savings Administrators. HDHP: $16547 (*includes $6900 investment), PPO vs HDHP investments in 30 years (at 3% interest) – WITHOUT FEES ADDED, IF USED FOR QUALIFYING MEDICAL EXPENSES (TAXED OR NOT TAXED), PPO: $19945 ($3937 in cap gains tax, CA) Is there something similar for self-employed/1099? I’m way late to the party here but just want to thank you for this post. It is not a high-deductible plan. Might be a good thing to call out for those people who know when their FI date will be :D – Van, Loved this article. Thanks! It’s like a Roth IRA. The savings in FICA taxes is 2.35% * $3,300. But using these plans as a back door to higher retirement asset levels seems like a distortion of the health insurance market that only benefits a few. In the event of an IRS audit, you will be required to produce receipts for any medical expenses for the amounts that have been reimbursed from your HSA…. The Mad Fientist does a great write up about HSAs….essentially cashflow all medical now (keeping all the receipts), then treat it as a Traditional IRA when you retire (cashing in those receipts). For example, if I change employers (or retire) in 2022 and it makes sense to change my HSA custodian, can I rollover my existing HSA and sometime later claim reimbursement for a 2020 medical expense?