budgeting for healthcare costs

[simple girl]

It's complicated, but you could do both things. Designate X in the HSA to cover a year's deductible, so invest it very conservatively, and then anything above X gets put towards a longer term investment. If the portion designated to cover the deductible gets drawn down, then replenish it before adding more to the longer term investment.

Or, you could keep your fund for paying the deductible outside the HSA, and use the HSA only for long-term investing.

It comes down to that "fungible" thing about money.

This is complicated, but I like it. I will consider both of these options, too. HSA charges a fee every quarter for < $20K so I may wait to start a 2nd account inside the HSA until I get to $40K.

Thanks!

 

[MichaelB]

Yes, this helps, thank you. It is nice to see someone else consider using it like an FSA instead of as an investment tool. I'm still waffling as to how we want to do it. Financially it feels safer to me to use it like a FSA b/c we will be following a close budget in order to FIRE. I'm running scenarios both ways in FireCalc.

I think it makes sense to use the HSA to pay current medical expenses when you already have a large component of tax deferred savings in your portfolio. The marginal value of one more deferred tax account may not be meaningful.

Another scenario where it might make sense is when you are no longer saving and you also do not itemize deductions. Using an HSA in that case effectively allows you to take the standard deduction and deduct your medical expenses.

Using the HSA as an investment vehicle makes most sense when you are still interested in building your tax deferred portfolio.

 

[audreyh1]

This is complicated, but I like it. I will consider both of these options, too. HSA charges a fee every quarter for < $20K so I may wait to start a 2nd account inside the HSA until I get to $40K.

Thanks!

Aren't you allowed several investments in the HSA account?

With HSA administrators, I have $X set aside in a "debit", i.e. cash account at HSA bank, and the remainder invested in a couple of mutual funds. You can exchange from the mutual funds to the debit account and vice versa at any time. Any payment for medical expenses, including self reimbursement, goes through the debit account. There is one annual fee and then some % of the mutual funds paid in fees each quarter. There is no fee on the cash (debit) account itself.

Regardless - you can always use a spreadsheet to track funds set aside. You don't have to physically have multiple accounts.

 

[simple girl]

I think it makes sense to use the HSA to pay current medical expenses when you already have a large component of tax deferred savings in your portfolio. The marginal value of one more deferred tax account may not be meaningful.

Hmmm...61% of our funds are in tax deferred savings. Something to consider for sure...would need to project how much we could potentially grow that fund without touching til age 65 and see if it seems worth the added value.

Another scenario where it might make sense is when you are no longer saving and you also do not itemize deductions. Using an HSA in that case effectively allows you to take the standard deduction and deduct your medical expenses.

This is our situation. Thank you for pointing that out!

 

[easysurfer]

Yes, this helps, thank you. It is nice to see someone else consider using it like an FSA instead of as an investment tool. I'm still waffling as to how we want to do it. Financially it feels safer to me to use it like a FSA b/c we will be following a close budget in order to FIRE. I'm running scenarios both ways in FireCalc.

You're welcome. For me, I decide to treat my HSA as a separate thing outside of an investment tool. This makes the planning easier for me.

The account is with HSA Administrators, Vanguard Wellington, but I don't track the value as part of my investments or anything. Instead, as long as there's a positive balance to cover the medical expenses, I'm a happy camper. The other stuff like tax savings, is just a bonus in my mind. As I mentioned in the previous post, my HSA serves as bridge until medicare.

 

[simple girl]

Aren't you allowed several investments in the HSA account?

With HSA administrators, I have $X set aside in a "debit", i.e. cash account at HSA bank, and the remainder invested in a couple of mutual funds. You can exchange from the mutual funds to the debit account and vice versa at any time. Any payment for medical expenses, including self reimbursement, goes through the debit account. There is one annual fee and then some % of the mutual funds paid in fees each quarter. There is no fee on the cash (debit) account itself.

Regardless - you can always use a spreadsheet to track funds set aside. You don't have to physically have multiple accounts.

Yes, sorry, I misspoke and used the word account. I meant fund. Yep, it is a quarterly mutual fund account fee per fund. I have to admit - I didn't realize they charged a fee on funds until recently (DUMB! ). Too busy and distracted the last couple of years to even notice. Now that life has calmed down and I am taking the time to investigate I have realized this. I should have kept what we did invest so far in just their debit acount like you did until it grew to $20K, then transferred it. Instead I had put it in the Vanguard MM acct. Imagine my surprise when I finally took a close look and saw all those fees from my acct. LOL At least it wasn't a huge costly mistake.

So....I think what you are saying is a great plan. I will keep over $20K in a mutual fund and let that grow. I'll keep a certain amount in the debit account that will cover the difference between what I budget for my yearly HSA contribution and our max OOP on our healthplans. We'll reimburse what we need after the year is over and whatever is left over (if any) will go into the mutual fund that we let grow.

Thanks so much everyone for helping me think this through!!!

 

[audreyh1]

Yes, sorry, I misspoke and used the word account. I meant fund. Yep, it is a quarterly mutual fund account fee per fund. I have to admit - I didn't realize they charged a fee on funds until recently (DUMB! ). Too busy and distracted the last couple of years to even notice. Now that life has calmed down and I am taking the time to investigate I have realized this. I should have kept what we did invest so far in just their debit acount like you did until it grew to $20K, then transferred it. Instead I had put it in the Vanguard MM acct. Imagine my surprise when I finally took a close look and saw all those fees from my acct. LOL At least it wasn't a huge costly mistake.

So....I think what you are saying is a great plan. I will keep over $20K in a mutual fund and let that grow. I'll keep a certain amount in the debit account that will cover the difference between what I budget for my yearly HSA contribution and our max OOP on our healthplans. We'll reimburse what we need after the year is over and whatever is left over (if any) will go into the mutual fund that we let grow.

Thanks so much everyone for helping me think this through!!!

Oh you are welcome! Yes - I would say to use that debit account as the place to stash the money to cover annual expenses as needed, then the rest can be invested. The nice thing with the HSA Administrators setup is that there is no fee on the HSA Bank part of it. I think if you have an HSA Bank account directly there is $2.50 maintenance fee every month until you reach $5000. Maybe that annual $30 gets paid out of the $45 we pay HSA Administrators - I don't know.

HSA fees are never going to be super low. HSAs are more costly to administer and also there is not as much competition, and the funds invested aren't nearly as high as in a regular discount brokerage. So I don't sweat the fees on the funds in the HSA account - especially since I can pay the overall fee outside of the account.

We've been adding to our HSA account for tax deferred savings because our IRAs are only 10% of our investments. So we are taking advantage of the only tax-deferred option available to us as retirees until each of us reaches Medicare age. So our strategy is likely going to be different from yours. We intend to ultimately use those funds to pay for Medicare premiums as allowed.

Our HSA are going to save us over $2500 in taxes owed for 2014. That's been a huge incentive.