Portable Bliss

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. 

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. 

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.

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.