Triple tax advantaged Health Savings Accounts, or HSAs, can be one of your most powerful retirement savings vehicles, but not many Americans know how to fully utilize them.
As a financial mutant, I’ve wondered the best approach to funding an HSA. Is it better to dollar-cost average through the year (general best practices for investing), or fully-fund the HSA at the beginning of the year to maximize the amount of time that the new annual limit is being invested?
Another factor in this question is that I would probably be dollar-cost averaging through employer payroll vs funding with the full lump sum from cash on-hand (and taking the tax deduction when filing taxes). It sounds like from your article that the latter approach would incur FICA taxes, while dollar-cost averaging through my employer would bypass FICA taxes.
In general, maximizing the account at the beginning of the year will win more often then not since markets go up most years (assuming your HSA dollars are invested). You can make lump sum contributions to your employer HSA. You may then be able to transfer those funds to an outside HSA, if your employer allows it, after getting the FICA tax break.
As long as you're enrolled in an HSA-qualified high-deductible health plan (HDHP), it's never too late to open your HSA. In fact, you can open an HSA anytime (as long as you have eligible HDHP coverage).
I’ve been saving/investing with an HSA for many years now. Switching to a HDHP meant more risk initially, so I increased my emergency cash. But, after 1-2 years of maxing it out, it the risk was essentially gone and while some years I have higher health expenses, over the longer term, in my situation, my costs are lower. My HDHP covers my son and I who are low-risk. My wife has her own non-HDHP plan. This mix works best for us. My employer matches my HSA contributions some, so that makes it even better.
I do keep some of my HSA in lower-risk target date funds to reduce the risk of a year where I reach my $14k health insurance out-of-pocket maximum.
I’ve not yet had to spend any HSA funds. As was mentioned in the article, I keep my health care receipts. The most practical method I’ve found is to keep only receipts above $100. It’s just too tedious to keep so many small expense receipts.
I am still looking for a really good electronic receipt system (in addition to the physical receipts). I have found that my physical receipts can fade over many years. An ideal electronic system would be a smartphone app with storage in an open & independent system of my choosing that I also backup. I have not found a good one. Spreadsheets and pictures are tedious. Anyone else have something good? My HSA is through Fidelity.
Good stuff Daniel!
As a financial mutant, I’ve wondered the best approach to funding an HSA. Is it better to dollar-cost average through the year (general best practices for investing), or fully-fund the HSA at the beginning of the year to maximize the amount of time that the new annual limit is being invested?
Another factor in this question is that I would probably be dollar-cost averaging through employer payroll vs funding with the full lump sum from cash on-hand (and taking the tax deduction when filing taxes). It sounds like from your article that the latter approach would incur FICA taxes, while dollar-cost averaging through my employer would bypass FICA taxes.
In general, maximizing the account at the beginning of the year will win more often then not since markets go up most years (assuming your HSA dollars are invested). You can make lump sum contributions to your employer HSA. You may then be able to transfer those funds to an outside HSA, if your employer allows it, after getting the FICA tax break.
Nice!! Thank you!
Question, I have a HDHP but I dont have a HSA account open yet. can I
open an HSA account mid year?
Yes, as Adam said!
As long as you're enrolled in an HSA-qualified high-deductible health plan (HDHP), it's never too late to open your HSA. In fact, you can open an HSA anytime (as long as you have eligible HDHP coverage).
Perfect! Thank you so much!
I’ve been saving/investing with an HSA for many years now. Switching to a HDHP meant more risk initially, so I increased my emergency cash. But, after 1-2 years of maxing it out, it the risk was essentially gone and while some years I have higher health expenses, over the longer term, in my situation, my costs are lower. My HDHP covers my son and I who are low-risk. My wife has her own non-HDHP plan. This mix works best for us. My employer matches my HSA contributions some, so that makes it even better.
I do keep some of my HSA in lower-risk target date funds to reduce the risk of a year where I reach my $14k health insurance out-of-pocket maximum.
I’ve not yet had to spend any HSA funds. As was mentioned in the article, I keep my health care receipts. The most practical method I’ve found is to keep only receipts above $100. It’s just too tedious to keep so many small expense receipts.
I am still looking for a really good electronic receipt system (in addition to the physical receipts). I have found that my physical receipts can fade over many years. An ideal electronic system would be a smartphone app with storage in an open & independent system of my choosing that I also backup. I have not found a good one. Spreadsheets and pictures are tedious. Anyone else have something good? My HSA is through Fidelity.