Portable Bliss

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It’s no secret that I’m the tax dodgingest liberal that you’re ever going to meet.

In a certain light this is hypocritical.

I honestly believe in the power of government to make positive differences in it’s citizens lives. (Think the social safety net, education, antitrust enforcement, infrastructure investment, security, scientific seed money….) and yet here I am trying to avoid paying my “fair share” in taxes.

But in another light it is merely rational. It is the governments job to raise money, and is the individual’s job to act in a rationally self-interested way.

Besides, people like me who are earning income (through labor), with a salary at the lower end of the top 1% of the pay scale, tend to pay the highest marginal tax rates around.

(Not looking for sympathy here, believe me.)

Besides if I were to choose to turn a blind eye and not to take advantages of the quirks in the tax code that benefit me, then I would have to label myself a sucker. (Very much like the conservative and ill-informed patient whom I spoke with by phone over the weekend who had not signed up for health insurance despite being low income with a chronic and expensive health condition. I asked him why he had not signed up for low-cost subsidized health insurance, and he replied, “oh yeah like Obama’s going to make everything alright.”

Talk about cutting off own your nose to spite your face.

But we could go around in circles for days on hypocrisy and stupidity. Let’s instead move on to something a bit more actionable.

The biggest tax break for most people is investing in their own retirement accounts.

The home mortgage interest deduction is also pretty sweet, but maxing out your retirement accounts is usually the most economically powerful tax avoidance strategy by a longshot.

And at one point or another we’ve talked about all of the different ways to place your saved money preferentially in tax advantaged investment accounts.

We’ve talked about 401(k)s, we’ve talked about backdoor Roth IRAs, and we’ve talked about stealth IRAs (health savings accounts.)

But the more I think about stealth IRAs, the more convinced I become that health savings accounts are the best retirement accounts of all.

And there are really three reasons for this.

But before we get to those reasons, let’s review the basic fundamentals of the stealth IRA.

  • They are only available in conjunction with high deductible health insurance plans.
  • There is a limit to how much you can contribute each year (this year it’s $6550 for a family.)
  • The money is contributed on a pretax basis.
  • The money is withdrawn tax-free, if used for healthcare.
  • Healthcare expenses can be “carried forward.” In other words if you spend a thousand dollars to have your appendix taken out this year, you can keep that $1000 in your account allowing it to grow and then pull it out at any point in the future, tax-free.
  • They are portable.

For a higher income individual, I am increasingly convinced that stealth IRAs are the best things since sliced bread.

And here is why.

When you load up your HSA with your maximum contribution, and then you pay for your medical expenses out-of-pocket, leaving your money in your HSA to grow like a retirement account in perpetuity , then you are truly getting a retirement account that has more structural advantages than any of your other retirement accounts.

Why do I say this?

1. You contribute pretax money to an HSA.Ā 

Unlike a Roth IRA you’re getting 100 cents in value for every dollar contributed to an HSA. So we can see that an HSA is better than a Roth 401K, a Roth IRA, or a backdoor Roth IRA when it comes to contributions.

2. You can withdraw the money tax-free.Ā 

This is in contrast to IRA’s or 401(k)’s . When you remove your money from those accounts in retirement you’re taxed at your marginal income tax rate. So it is clear that an HSA is superior to a 401(k) or IRA when it comes to withdrawals.

3. You can really do what you like with your money in terms of investments.

Unlike other employer-based retirement accounts (401(k)s, 403(b)’s 457’s, etc.Roth’s), HSA’s can be moved from the provider that your employer selects, into any provider that you choose, even before you leave your employer, or turn 59 1/2.

And I recently took advantage of just this with my own HSA.

You see, the investment selections from the provider selected by my employer were pitiful. (Think the cheapest fund being an S&P 500 fund with an expense ratio of 0.9! ) This was simply inexcusable. And it made me seethe with anger.

anger-management-in-watford

How an expensive S & P fund makes me feel

But unlike my 403B/457 funds I was free to move HSA funds whenever and to wherever I wanted. So I chose to move them to a new account with HSA Bank. And I was able to invest the funds intelligently. (I.e. in low-cost index funds from Vanguard.)

I believe we should be able to do this with any employer based retirement account, but sadly this is not the case. Employees are forever at the mercy of their employers ill-informed or even corrupt decisions when it comes to choosing investments for their own retirement accounts.

If you’re interested in your options for where to move your current HSA account,this was an article that I found particularly actionable from the Whitecoat Investor.

Enjoy.

Are you currently participating in an HSA through your work or the health care exchanges?

Why or why not?

As always, your comments are eagerly anticipated.

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7 Responses to “Portable Bliss”

  1. Lynda April 23, 2014 at 3:40 am #

    My husband works for one of the top international companies. He is not given the option of the HSA, I hoped he would be. I have major health issues and we normally meet the out-of-pocket insurance requirement by May of every year. I have an accounting background, he doesn’t. He has always made the decision of what to deduct for his medical fund (not insurance, separate). Every year he has been upset because he deducted too much. His company makes money available every year, and under new rules, it rolls over.

    I insisted on being involved this year. Medicare normally picks up what BCBS doesn’t pay in my case, and he refuses to see doctors. I decided to take the out-of-pocket amount, divide in half (higher than the deductible) and withdraw that amount from his pay yearly and put that in his medical fund with the company. That is much less than he was deducting. Then the matching amount he deducts and puts in an outside savings account in our name that gets .99% interest. If we need that for medical expenses, it is there for that. If it isn’t used, it is ours and accrues.

    Ps. We live in Richmond.

    • Miles Dividend M.D. April 23, 2014 at 8:31 am #

      Lynda,

      Thank you for commenting.

      I’m not sure I follow what type of plan you and your husband are participating in. If the money rolls over year-to-year then it can’t be a flexible spending account. And you mentioned that health savings accounts are not available to you.

      I’d be interested to know what the account is classified under.

      In any case it sounds like your accounting background is serving you well. It would be nice for you to get more than 1% return on your investment though.

      By Richmond, do you mean Richmond Virginia?

      AZ

  2. Robert April 23, 2014 at 7:03 am #

    Liberal hypocrisy, you say? Time for me to wade in again, since this blog post highlights not only the hypocrisy (you said it!) of being a tax-dodging liberal but also of being a fan of HSAs and of employee choice in retirement investments. šŸ˜‰


    HSAs are truly wonderful! The government agrees to steal less of your money so that you have more to spend on your family’s needs. Quite an innovation indeed! Very generous of them. I learned about HSAs and their advantages several years ago but sadly that was only a couple years before I retired so I only got to enjoy the benefits for a short time. (I still use them but tax advantages are minimal in my retirement income bracket).


    Although HSAs ultimately received bipartisan support, their historical roots are in the heavily contested MSAs introduced by Republican Daniel Archer. Democrats generally fought it; Republicans latched onto it as an alternative to Hillary Clinton’s healthcare reforms. HSA legislation passed when MSAs were due to expire (12/31/03). The original vision (of Republican sponsors) for HSAs to become a retirement and medical benefit savings vehicle was not fully realized as opponents clipped its wings (you can’t pay premiums from it, for example). Still, it represents an alternative economic model to socialized medicine. It is doubly hypocritical for the tax-dodgingest liberal Democrat supporter to be an HSA fan. šŸ˜‰


    As for 401(k) investment options, your liberal hypocrisy shines through once again. 401(k) plans are a type of qualified pension plan, offering employees and employers tax advantaged pension arrangements. The IRS requires that plans be administered according to fiduciary standards. Employers fear that if employees mismanage their investments, they (the employer) may be sued by employees for violating that standard; they also risk IRS prosecution/tax penalty. Thus, companies offer a limited set of investment options, restrictions on trading frequency, and employee education/guidance–all to show that they acted as prudent trustees.


    This paternalistic attitude–not trusting individuals to do what is in their own best interest–is typical of liberal government programs. To be fair–many individuals do a lousy job managing their affairs and lives; the question is, should they be accountable, or should we protect them from themselves and in the process stifle the freedom of others who ARE capable of managing their own lives? There aren’t easy answers, since I think we can both agree that at some level protection is needed (for example, people with low IQ and education who may be targeted by smart financial scammers). The question is where to draw the lines. I think liberals tend to favor excessive control that overly restricts liberty and doesn’t let personal accountability factor enough into economic policy. They gain political power by being those who “protect” others. Almost a protection racket–keep us in power, pay us taxes, and we’ll protect you from yourselves and others.


    The concept of tax-advantaged pension savings is itself a liberal concept, based on the idea that employees are not wise enough to save for their future retirement on their own. “Tax savings” offered by 401(k)s are just the employee’s own money given back to them. Instead of taking it in taxes, the government lets them keep it as tax “savings”. This is how big government uses the tax code to drive all kinds of policy, not just pensions. If they let us keep our money in the first place, they wouldn’t be able to use tax “savings” to drive our behavior. So, for you to advocate in the direction of increased employee control of their own money is an illiberal concept. Mandating that employees have to save for retirement and dictating “safe” ways to do that is the liberal approach. The liberal in you should like restrictive 401(k)s compared to less restrictive HSAs!


    Social Security preceded (by several decades) 401(k) accounts as a pension program. As in a 401(k), you set money aside for future retirement benefits, matched by your employer. Unlike 401(k), this is mandatory. (And, in this case, the money actually goes to fund current beneficiaries instead of sitting in your personal account, but I digress, and prefer not to get into Ponzi scheme arguments). Republicans have in the past tried to get Social Security converted into savings accounts and with options to invest in equities. Democrats fiercely resisted, so it hasn’t happened. What you dislike about 401(k) plans is exactly what Democrats have fought to retain in Social Security.


    Having said all this, Republicans are often as “big government” as liberal Democrats. Republicans are happy to take our money and give it to defense contractors and oilmen. Republicans are happy to restrict freedom in our homes and bedrooms. Republicans can be just as hypocritical as Democrats. I say a pox on all their houses!

  3. Miles Dividend M.D. April 23, 2014 at 8:44 am #

    Robert,

    Thanks as always for your thought-provoking comment.

    You’ll forgive me, but I’m not going to go whole hog down the rabbit hole!

    On the policy level, I am not in favor of HSA’s. Why? Because thery’re regressive. The benefit the rich and have no effect on the poor. And arguing that they have any effect on ensuring the uninsured (as an alternative to Clinton’s health care plan) is quite obviously Unconvincing. I’m not aware of uninsured rates decreasing with the introduction of HSAs, (because they didn’t.)

    My hypocrisy then is in taking advantage of something but I do not believe in politically. And why do I commit this act of hypocrisy? Because it is a law that is available for me to use as a 1%er. It is personally beneficial to me, and so I use it.

    As to whether or not retirement plans should be portable, they already are when you’re 591/2. Obviously if you’re allowed to move your money to a self directed IRA at age 59 1/2 despite still working for the same company, such a transaction s not a breach of the fiduciary standard. Why then should 401K’s not be portable at age 40 or 35 or 20? The only Group such a restriction protects are shyster Wall Street types who can rope whole groups of employees into high-priced funds by selling benefit administrators on them. In our pay to play political system I’m quite confident that this is why such a restriction exists.

    AZ

    • Robert April 24, 2014 at 6:15 am #

      You can rollover 401(k) to IRA earlier than 59-1/2 if you change employers. I believe the issue really is what I highlighted; the laws regarding trustee responsibilities for qualified pension plans (of which 401(k) plans are just one type) are quite specific. Employers, perhaps especially those offering matching funds, have responsibilities under the law. And, it is amazing how short-sighted some people are about their funds (witness the large amount of borrowing from 401(k) funds early on, leading to that being more restricted later). I was at a retiree seminar once where a number of people talked about having refused to participate in a 401(k) program because they didn’t want the company to keep any of their money, despite a generous matching program that was available. It amazed me. I am torn between regulation and letting stupid people act stupidly!

  4. Sebastian April 24, 2014 at 3:50 pm #

    Thank you for your article. I wasn’t aware that I could chose another HSA administrator in addition to the one my employer is providing. I did some investigation and it seems I can. I will read the Whitecoat Investor article to figure out the best one for me.

  5. Miles Dividend M.D. April 24, 2014 at 4:05 pm #

    Sebastian,

    That’s great. It is always a good feeling to provide actionable intelligence!

    I’m pretty happy with HSA bank so far.

    Alexi

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