Ask the grumpies: how to find an HSA provider

FF asks:

Do you have any thoughts/advice on choosing an HSA provider?

I already have the ACA plan figured out. I first check whether my doctors are in-network. Next, I come up with a detailed list of what I expect to need based primarily on my expenses for the current year. I then calculate what I would pay for the entire year under each plan I’m considering, taking into account both premiums and OOP expenses (including before/after deductibles and copays). This can get very complicated. I also calculate the worst-case scenario (total premiums plus OOP max). This year, for the plans I was considering, the answer was the same for both the expected and maximum scenarios. Plus the HDHP + HSA will have further tax advantages.

What I’m concerned about now is the Health Savings Account, which is not offered via the ACA, but separately through financial institutions if you have a compatible health plan. So far, the most useful information I’ve found is from Consumer Reports: https://www.consumerreports.org/health-savings-accounts/how-to-choose-a-health-savings-account/

People who have high deductible health care plans (HDHP) are allowed to put money into a Health Savings Account (HSA) which functions basically as a super-charged IRA that can only be spent for medical purchases.  By supercharged, we mean the money isn’t taxed going in and the earnings aren’t taxed going out.  It’s pretty amazing.  (Note that these are different than Flexible Savings Plans, which are sometimes called Health Spending Accounts just to be really confusing– these have to be used up each year or the money goes back to the employer, just like a dependent daycare account.)  By IRA, we mean an individual retirement account that functions as a tax-advantaged bucket for retirement savings.  (FF already knows all this.)

Back when I last looked at HSA, there weren’t a whole lot of options– you basically went with what your employer offered you because that was what was available, and most employers offering HDHP also put money into the HSA themselves because that money came with tax benefits for them.  Having outside HSA didn’t make a lot of sense because there was no market for them.

Today there’s a market for HSA outside of individual employers, which means that there are a lot more options for HSA.  Many places that you can stash an IRA will also let you do an HSA.  What you should be looking for in an HSA is similar to what you should be looking for in an IRA provider, with a few additional wrinkles.

First off:  If your employer offers an HSA contribution, chances are that’s going to have to go into the HSA account that they have chosen.  According to that consumer reports article FF linked to, you can keep that HSA account open, let the employer money go into it, but then transfer to an outside HSA account if you want.  I have never found it easy to move money from work accounts to outside accounts, but depending on fees, this may eventually be worth it.

Second:  As the consumer reports article notes, you need to know if you’re going to need the money long-term or short term.  If you’re credit-constrained or have high medical expenses, then you will need to use the money right away.  That means you need an HSA account that has things like savings accounts or certificates of deposit for safe money.  If you’re not credit constrained, then it makes sense to just think about this as another retirement account, which means you want something that has access to low cost index funds in the stock market and maybe in the bond market too, depending on what’s available in your other retirement accounts for diversification purposes.  So, if you need short term then make sure the HSA has short term options.  If you need long term, make sure there are long term options.

Third:  Compare fees.  This part is just like with an IRA.  You want the lowest fee funds.  Watch for hidden fees.

So… that’s pretty much all of my thoughts on the topic.  The consumer reports article you linked to looks really good to me.  It’s not saying anything stupid AFAIK and covers everything I thought of.

Grumpeteers who have purchased HDHP for use with your HSA, what do you recommend?

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Vanguard Admiral Shares are pretty cool

I wanted to add a little more international exposure to our portfolios (if I’m reading things correctly, the IRA Roth is a great place to put international exposure because there might be higher taxes with international stock gains?  I’m not 100% clear on this– I also read something that said the opposite), so when we recently did backdoor Roths, I put the money into an international index and an international ETF.   The index (VGTSX) has an expense ratio of .18% and the ETF (VXUS) has an expense ratio of .11%.

If I have 10K invested, then I can convert my VGTSX investor shares into  VTIAX admiral shares, which will decrease the expense ratio from .18% to .11% (same as the ETF).   For most of the index funds that have admiral shares at Vanguard, the switch from more expensive investor shares to cheaper admiral shares occurs when the account has more than $10,000 invested in that specific index.  Basically Vanguard gives you a discount on the index if you have a lot invested in them.

My 2017 IRA investment was only $5,500, but it is a new year so I contributed another $5,500, which, if the stock market doesn’t crash, adds up to more than 10K, meaning I should be able to switch to admiral shares to get the lower cost fund.  So that’s what I’ve done.

I’m wasn’t entirely sure where to invest DH’s IRA this year.  He had less invested overall and thus needs less international exposure and already had the lower cost ETF.  (I know that since we’re living in a community property state that I should be looking at our accounts as a complete whole, but since I don’t know what the future will hold, I want to make sure that he’s also protected.)  I will have to see what holdings he currently has one of these days.  I suppose we’re due for one of those financial fitness days sometime so I can go through and readjust our assets etc., but maybe I’ll wait another year.  We’ve got a lot of stuff going on and can afford to put it off, especially since I’m not really sure what asset mix we should be aiming for in the first place.  In the end  I gave him more VXUS.

Do you pay attention to expense ratios?  How do they change your investment patterns?  Any preferences between Index vs ETF?

Switching away from Roth to Traditional retirement savings as a form of protest– even if it is suboptimal monetarily

The general conventional wisdom is that if you think you’ll be in a higher tax bracket now than at retirement, you should put tax-advantaged retirement (IRA/401(k)/403b/457b etc.) money in traditional retirement savings rather than in Roth savings.  That means you don’t pay taxes now, but you pay taxes later.  If you think you’ll be in a lower tax bracket at retirement, you should put your retirement money in Roth because you pay the taxes now, but will not have to pay taxes on the earnings later.

I have assumed that while our income will likely be lower in retirement, our tax brackets have a very good chance of being higher because they’ve been at historical lows and because we didn’t fix Social Security and Medicare when we had the chance, most likely we’ll be paying for big chunks of those out of general revenue (indeed, that’s the argument the last trustee of SS [Trump has not appointed any trustees, which is bad] made at a very depressing talk he gave recently).  So that would imply that for optimizing our wealth, we should do Roths now and pay the taxes now and live large on tax-free earnings later.  Of course, I’m not 100% sure that that’s going to happen or even that the US government will keep its promises about the tax-free status of the Roth vehicle.

So what I’ve been doing, as I tend to do when I have no idea what to do, is I’ve been using a 1/n heuristic.  Half my retirement money goes in traditional.  Half my retirement money goes in Roth.

If the Republicans pass their tax plan, chances are it will make even more monetary sense for me to put money in Roths– pay those taxes now because there’s no point trying to get my AGI down.

And yet… the Republicans are going to dig a huge hole in the national debt with their “no taxing rich people/no spending on investing in our future/spend a lot on the already rich and powerful” plans.  The US government is going to need my money more later when good people are in charge and the Republicans will have to face what they’ve done to the US sooner if they get less tax money now.  So I’m feeling like it will be patriotic to squeeze them now and pay more in taxes several decades down the line.  Even if that means that we end up with a smaller net worth when we die.

So… even though it’s a bit of paperwork for me… I think I’m going to change over all of my retirement savings to traditional.  Because the US government will need that tax money later.  I know it’s only a drop in the bucket for the US, especially given that they want to increase the deficit by well over 1.5 trillion this year alone, but I do what I can.

Of course, Republicans could mandate that all preferred retirement savings be in the form of Roth so they get taxed now instead of later.  And it sounds pretty likely that they’re going to make it so government employees can’t take advantage of both the 403(b) and the 457, which will cut my optional retirement saving in half.  That’s a way to punish high earning government employees (particularly those who don’t get much in the way of direct employer contributions) and a way to get good people to not want to work for the government (so either salaries would have to increase or other benefits would increase).  But I suspect these politicians don’t want competent people working as civil servants.  And they want to punish state and local employees, because why not.

How do you decide between Traditional and Roth options?

Ask the grumpies: How do you reduce your taxable income if you’re high income?

Michelle asks:

What if you make more than 186K jointly and want an option for reducing your taxable income? Can you still invest in an IRA?

Standard disclaimer:  We are not professionals.  Consult a professional with fiduciary responsibility and/or do your own research before making important monetary decisions.

In 2017, if you make more than $133,000 you can purchase a traditional IRA but doing so will provide no tax benefit (more than 118K, and you only get a partial tax benefit).  You can roll that traditional IRA over into a Roth IRA, but Roth IRAs do not reduce your taxable income this year.  Roth IRAs decrease your taxes on earnings in the future when you start living off those retirement assets.  (That 186K number is the beginning limit for the Roth IRA.)

What can you do to reduce your taxable income?

1.  Contribute the maximum to a traditional 401(k)/403(b)/457 through your work if that’s available– if you have Roth versions that these won’t decrease your AGI (taxable income) this year, just at some point in the future.  If you have both a 403(b) and a 457, you are allowed to contribute to the max for each (but you can only contribute a total of 18K to all your 401(k) options, although if your company offers a mega backdoor roth option, that’s a way to shelter future income by putting away up to 36K this year)
2. Contribute to an HSA (health savings account) through your work if that’s available.
3. Pay a lot of interest on a mortgage (not the best idea for your finances overall, but it may decrease your AGI depending on where it hits compared to the standard deduction).
4. Sell stocks or other investments at a loss.  If the loss is big enough you may be able to carry those losses over to future years.  Again, it’s nicer to get profits than to get losses, but there’s a little benefit in terms of decreasing your AGI.
5. Donate a bunch to charity, or start a donor-advised fund to donate a bunch of charity in the future and to get the tax break now (you won’t get the tax break later when you actually give the money away though).  Again, be aware of standard deductions and alternative minimum taxes.
6. Something I don’t understand called a “bond fund swap” which sounds a bit sketchy, but a lot of tax dodging saving stuff is sketchy.
7. Have a baby or adopt a kid (again, not an overall money saving strategy, but it will help your AGI).
8. Pay a lot in state taxes possibly by moving to a place (for work!) that has higher taxes.  (See above about not overall money-saving.)
9. Those moving expenses that aren’t reimbursed may also be tax deductible.
10. Have a bunch of job-related expenses.
11. Plan when you pay your home-owners taxes so that they make the most tax sense, which may mean doubling your payment one year and not paying it the next (this will depend on your other deductions and the standard deduction).
12. Keep all your receipts for itemized deductions, even little things like $5 donations.
13. Marry someone who makes a lot less than you do.  (Or divorce someone who makes close to what you make.)
14. Pay alimony.
15. Put off taking retirement income until you have to.
16. If you have high medical expenses (>10% of your AGI), bundle them as much as you can into one year.
17. If you have self-employment income, look into the SEP and Solo 401(k).  Also make sure you’ve accounted for all business expenses and maybe make some business expenses.  You may also be able to do some dodgy things about paying your kids as employees.
18. If you have a rental property, make sure you document your costs.
19. You can deduct some money for qualifying education expenses.

Grumpy Nation, what other suggestions do you have to lower Adjusted Gross Income?

Ask the Grumpies: What to do 10 years before retirement?

First Gen American asks:

 Things to think about/do now when you are ~10 years from retirement…assuming the cash side is all set.

Sadly, #2 and I completely came up with a big old blank when we discussed this question. Personally, #1 has trouble thinking about next week, so a 1 year plan is out and a 10 year plan is pretty unthinkable. She realized while contemplating this question that in 10 years, her 10 year old will be 20 and will probably no longer be living at home. Crazy! And difficult to contemplate. That’s another world from now. (Kids got lots of extra hugs.) Ten years is a long time!  I also suspect that even if it’s a year before retirement I might think, “Let’s worry about what to do next, you know, after retirement. When I have time.” If I retire.

#2 also says, “keep living your life”. And, “How can you be bored if you have books?”

We came up with a lot of good ideas, but they were all about the cash side, which in this question is already set. If the money tells you it’s 10 years until retirement… keep working? Earn more money? Don’t quit? So, uh, you should read the getting the most of your social security book (or run through the software if that’s more your style), but again, that’s money stuff.

Fortunately a lot of these Early Retirement gurus spend time thinking about the non-monetary parts of retirement.  So we’re punting and linking to Our Next Life.  Here’s their https://ournextlife.com/ten-questions-to-retire-early/ . Not all 10 questions are about money. So maybe that will help?

Grumpy Nation, what better advice do you have for First Gen American?

Ask the Grumpies: TIAA-Cref vs. Vanguard Lifecycle funds

CPP asks:

Do you guys have any opinions on TIAA-CREF Lifecycle funds versus Vanguard? I am currently in the former, but I could change if it makes sense. I have this feeling you guys addressed this on-blog, but I couldn’t find the post. Happy New Year!!!

This one is pretty easy.  Vanguard lifecycle funds (aka Target date funds) are almost at-cost.  The fees are almost the same as the fees would be if you put together the already-low-cost index funds that make their lifecycle fund.   TIAA-CREF charges extra for the convenience.  Vanguard will save you hundreds if not thousands of dollars over the course of your investing career.  (IIRC, it is a factor of 10 difference if you do this in an IRA, but within your 403(b) plan you will have to look at the fees yourself.)

That said, there are some complications.

1.  TIAA-CREF will send out a representative to talk to you, fill out forms for you, etc.   If you’re unlikely to do anything without someone holding your hand, this is a reason to stick with TIAA-CREF.   I do not know if Vanguard will do this for you, as we do not have the Vanguard option at our school, but my guess is you would do things over the phone if you want help.

2.  TIAA-CREF and Vanguard have slightly different ideas about what appropriate investment paths and allocations are.  My personal belief is that I don’t know any better than either TIAA-CREF or Vanguard (and they don’t really know either).  Still, you may have strong beliefs that may or may not be correct and one or the other program may better fit these beliefs.

Additionally, TIAA-CREF is not one of the 403(b)/401(k) companies that is actively trying to rip you off.  Even though their fees are higher than those for Vanguard, they’re still among the lowest in the industry.  With new legislation about transparency, fees for the entire industry may be dropping, so it may make less of a difference what lifecycle fund you choose in the future.

It’s Christmas Eve and a random reminder to invest for retirement

Because it’s not like anybody is going to be reading our blog today anyway.  Heck, *we* won’t be reading our blog!

Next year is kind of exciting for IRA lovers because the amount you can save in an IRA is going up.   In 2012 you could invest $5000 per person.  In 2013 you can invest $5500.  How cool is that?

401(k) and 403(b) limits are also going up.  Last year, a mere $17000.  This year, a full $17500.

With time and compounding these extra $500 tax-advantaged contributions will start to add up, especially if you’re married and it’s more like $1000.

Of course, with our state-employment options there’s no way we’ll be maxing out all our tax-advantaged accounts (457 limits are also going up another $500), so getting the additional $500 room isn’t helping us because we didn’t have the $39000 ($17000 + 17000 + 5000) to put away last year, much less $40500 this year (wouldn’t it be neat if we could get raises?  hahahahahaahaaaa *sigh*), but for all you folks that don’t have access to that 457 plan, try to use that new extra room to its fullest extent!