HSA management questions when on the cusp of retiring (AA, funds to buy, saving in retirement, depletion)

[AbbA]

Hello ER's and those on the way there ,

PS. After I wrote the below post, it ended up being very long...appologies for that.

I didn't know where my question would fit better: in this subforum or in "Hi, I am...". I chose this one because my spouse is still working and I have not for the last 25 months. I'll make a post in the other subforum too because I'll have tons of questions regarding our portfolio, spending, conversions, etc etc next year.

Knowing that HSA is not good to be left to heirs and best to be depleted by the holder of the HSA or his/her surviving spouse, it seems to me that it should be managed independently of IRAs, Roth IRAs, and taxable accounts. It almost like a 529 Plan (unless the residual balance is transferred for a different beneficiary) because it has a finite timeline to be used up and I think that's the thinking I used when chosing to be quite aggressive in my spouse's HSA.

When an HSA and high-deductible insurance plans were introduced at his company 10 years ago, we switched from PPO to them. I've scanned doctor invoices, EOB's, and payment proofs for the time we want to claim our expenses against the HSA. I hope the HSA administrator will not get fussy because we won't have EOB's for some dental work like implants and orthodontia.

Since I didn't have a clue what to invest in and with so many choices in Fidelity's brokerage plus ETF's getting so much attention in the media, I invested the majority of his HSA yearly maximums in ITOT (Total Stock Market ETF) and a little in "Fidelity Freedom Idx 2035 Fund Inst'l Prem.(FFEZX)" for the last 2.5 years, just because I heard that HSA needs some diversity . So, today's AA is 90% in ITOT and 10% in FFEZX. Like they say, fools can win sometimes too thanks to the bull market. So, this short background story brings me to the pressing questions I've got today because I don't know how to manage his HSA going forward .

- My spouse would like to work another 2-3 years and retire by 59 (I'll be 53 then). He will save in the HSA until he retires (or is laid off). Question: Since saving in HSA is allowed without earned income, is it worth it saving in it after he retires and before he signs up for Medicare? Let's assume that we would have enough money in the taxable account to do that. I am wondering if such saving benefits really outweigh the hassle of making sure we have the right health insurance plan for that HSA.
- Is the younger spouse allowed to save in her HSA when the other is on MC?
- Now, my most pressing question is what AA would be appropriate for our HSA and what bond funds/ETFs to buy? Bonds and bond funds are very confusing to me, but I would be OK to buy a fund or ETF because I know that close to 100% equities now is probably way too agressive. I read Kiplinger magazine recently. It likes Fidelity Total Fund (FBND) and Dodge&Cox Income (DODIX) as a core bond fund in a bond portfolio. Would one of them (both?) fit for our HSA?

I would like a simple and reasonable AA so I don't need to think about its management except for an occasional rebalancing. I like JL Collins advice for equities: Get a total stock market and call it a day

If anyone can share thoughts and advice I would appreciate it. TY.

 

[audreyh1]

We got HSA compliant plans before Medicare and invested accordingly, reducing our AGI by that amount which was also welcome.

In terms of your AA - that really depends on how long you plan to wait before drawing on the HSA to cover qualified medical expenses. You can always leave a portion in MM funds or low volatility investments to cover some expected medical expenses and invest the remainder aggressively. As we got closer to when we planned to start drawdown of our HSAs we became more conservative overall. We are currently using them to cover our Medicare Part B premiums so we always have enough in MM funds to cover a year’s worth. Since you can reimburse for medical expenses later you actually have quite a bit of flexibility.

Some people like to hold on to their HSA as long as they can, investing aggressively for long term growth. Others look at how they will use those funds and when, coming up with a drawdown plan that helps guide the AA. Different strokes.

 

[RunningBum]

Look at what an HSA contribution saves you in taxes. That's probably your HSA contribution * (your fed tax rate + your state tax rate) + the increase in ACA subsidy if you take it off your MAGI. Divide that by 12 and reduce your ACA premium for HSA compliant policies, and compare premiums and all the other factors you should consider like doctors in plan, deductible, Max OOP, co-pays, and whatever else.

If the ACA subsidy cliff comes back, and reducing your income by your HSA contribution is what keeps you short of the cliff, that's a whole lot more benefit to add to the HSA plan, probably the deal maker, but still look at the other factors.

Last year was the first year I picked a non-HSA plan because of a lower premium and deductible with a bronze plan. For 2025 I'll be back to an HSA plan.

I skimmed over the spousal questions since I'm single, sorry.

I wanted more fixed income for my overall AA, and it worked out pretty well to keep the half I have expenses (with receipts) for in fixed income, the rest in total stock. I will definitely pull from the HSA to the extent of my receipts before touching my Roth for the poor inheritance factor reason you gave. Trying not to touch it now, but with window replacement likely next year I may have to.

 

[xlf11]

Just transferred HSA to Fidelity this year and my portfolio is about 20% each for IVV/SCHD 20%DGRO. 10/15% JEPI/JEPQ and 15% TLTW. So it will produce enough income each year to cover PartB and normal expenses for the next 10+ years. Will start reimbursement this or next year around 70.

 

[SecondCor521]

Hello ER's and those on the way there ,

PS. After I wrote the below post, it ended up being very long...appologies for that.

Not really that long, honestly.

I didn't know where my question would fit better: in this subforum or in "Hi, I am...". I chose this one because my spouse is still working and I have not for the last 25 months. I'll make a post in the other subforum too because I'll have tons of questions regarding our portfolio, spending, conversions, etc etc next year.

No worries. We're pretty chill here.

Knowing that HSA is not good to be left to heirs and best to be depleted by the holder of the HSA or his/her surviving spouse, it seems to me that it should be managed independently of IRAs, Roth IRAs, and taxable accounts. It almost like a 529 Plan (unless the residual balance is transferred for a different beneficiary)

No such thing except between spouses. When the surviving spouse dies, the balance is taxable income and the account is no longer an HSA. See Publication 969 (2023), Health Savings Accounts and Other Tax-Favored Health Plans | Internal Revenue Service.

because it has a finite timeline to be used up and I think that's the thinking I used when chosing to be quite aggressive in my spouse's HSA.

When an HSA and high-deductible insurance plans were introduced at his company 10 years ago, we switched from PPO to them. I've scanned doctor invoices, EOB's, and payment proofs for the time we want to claim our expenses against the HSA. I hope the HSA administrator will not get fussy because we won't have EOB's for some dental work like implants and orthodontia.

Since I didn't have a clue what to invest in and with so many choices in Fidelity's brokerage plus ETF's getting so much attention in the media, I invested the majority of his HSA yearly maximums in ITOT (Total Stock Market ETF) and a little in "Fidelity Freedom Idx 2035 Fund Inst'l Prem.(FFEZX)" for the last 2.5 years, just because I heard that HSA needs some diversity . So, today's AA is 90% in ITOT and 10% in FFEZX. Like they say, fools can win sometimes too thanks to the bull market. So, this short background story brings me to the pressing questions I've got today because I don't know how to manage his HSA going forward .

- My spouse would like to work another 2-3 years and retire by 59 (I'll be 53 then). He will save in the HSA until he retires (or is laid off). Question: Since saving in HSA is allowed without earned income, is it worth it saving in it after he retires and before he signs up for Medicare? Let's assume that we would have enough money in the taxable account to do that. I am wondering if such saving benefits really outweigh the hassle of making sure we have the right health insurance plan for that HSA.

I think so, as long as:

1. You have the money to contribute from taxable, and
2. You'll use the HSA balance up before your joint lifetime

Choosing the right plan isn't that hard. Find all the HSA eligible plans, and choose the one you like. On my ACA marketplace, they are plainly labeled, and in fact there is a checkbox to only show HSA plans if you want. (Other states' marketplaces may differ.)

- Is the younger spouse allowed to save in her HSA when the other is on MC?

Yes, assuming they are an eligible individual (i.e., enrolled in an HSA eligible health plan only).

- Now, my most pressing question is what AA would be appropriate for our HSA and what bond funds/ETFs to buy? Bonds and bond funds are very confusing to me, but I would be OK to buy a fund or ETF because I know that close to 100% equities now is probably way too agressive. I read Kiplinger magazine recently. It likes Fidelity Total Fund (FBND) and Dodge&Cox Income (DODIX) as a core bond fund in a bond portfolio. Would one of them (both?) fit for our HSA?

I don't like answering AA questions because I think it's highly individual. Age, risk tolerance, health status, marital status, other assets all could come into play.

 

[AbbA]

Thank you all for your responses. xlf11 provided his AA and it's good for me to get an idea at least.

You know, since HSA becomes taxable after the 2nd spouse dies, this sounds to me the same as an heir receiving an IRA unless it must be withdrawn right away (unlike 10 years windows for the IRA's).

I didn't know that HSA contribution is tax deductible, but I also forgot to mention in my OP that we'll be making Roth IRA conversions most likely. So many factors and variables to consider. After reading your answers, I might leave HSA's AA as is for now or only move $20k to fixed income which is the amount of medical, dental, and vision related expenses we accumulated over the years. I will revisit HSA considerations next year when we know more (hopefully) about ACA related policies and new rules in 2026 and later.

Reading RunningBum's first paraghraph made me scratch my head. It's like a data analysis science to me whose never seen ACA marketplace yet, so elaborate and intricate at the same time.
<"Look at what an HSA contribution saves you in taxes. That's probably your HSA contribution * (your fed tax rate + your state tax rate) + the increase in ACA subsidy if you take it off your MAGI. Divide that by 12 and reduce your ACA premium for HSA compliant policies, and compare premiums and all the other factors you should consider like doctors in plan, deductible, Max OOP, co-pays, and whatever else.'>

I will write a post about our NW, expenses, and cashflow next. I thought HSA can stand on its own but I was was wrong.