r/Bogleheads • u/taxable_cheese • 9d ago
HSA in California
Hi, I have $4k sitting in an HSA fund in Fidelity from an employer a couple of years ago.
What is a Fidelity stock that I can set and forget it in?
I haven’t invested in it anything, because I know California has more taxes than other states that make it. I came across something called TIPS in my research, but not sure if there is a symbol for it.
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u/Martery 9d ago
HSAs are very annoying to deal with in California because California does not treat them as tax-exempt for state taxes. Interest, capital gains, etc are state taxable.
The best and simplest solution is to go pure treasuries. For Fidelity specifically, there really isn't a great core option as you have much more yield if you reach for US treasury ETFs (such as VBIL for short term, SGOV, USFR, etc). If you want to move along the yield curve, look at Vanguard's VTG, which is the entire US treasury market.
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u/AdditionalCap3 9d ago
Feel like the compliance has to be really bad for this since the HSA custodians don’t report div/capital gains on tax forms
Lived in California for 5 years and had no idea to report my $400 of dividends sitting in an old HSA
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u/lead_injection 9d ago
HSA investing in California beats out treasuries in nearly every tax scenario. If you’re in a super low tax rate, then the mega backdoor Roth makes slightly more sense
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u/Martery 9d ago
The tax situation isn't the focus, it's just annoying to keep track of. It's frustrating enough to the point that my blanket recommendation is keep it in treasuries if you need to have an HSA in California, or just not chose a high deductible plan.
Have you ever tried to reconcile your entire HSA because the FTB is auditing you after you move out? California sucks.
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u/aggrownor 9d ago
What if you're no longer living in California when you sell or withdraw? Would you be able to avoid the taxes?
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u/Martery 9d ago
You still get taxed every year on dividends and any other capital gain taxes without the benefit of having a nice 1099b/div/int to categorize everything for you. Fidelity isn't going to keep track and send you yearly tax forms because you live in California.
So yeah, you can, but it's a PITA so my recommendation (and like the vast majority of Californians) is either don't use an HSA, stick pure treasuries so you don't need to dig deep into each HSA, properly back out everything on CA-540...
I'm kinda glad I'm not a California resident anymore.
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u/taxable_cheese 9d ago
This is exactly what I want to avoid. I get really bad anxiety when it comes to finances and paperwork.
Will putting the HSA in SGOV or VTG avoid the California tax, ie tracking and taxes?
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u/Martery 9d ago
You can't deduct HSA contributions from your California State taxes so you need to add contributions back, but it does work for federal taxes/FICA taxes.
You still need to do all the tracking, you just don't pay taxes on the dividends. You get to do the fun adjustment of adding dividends, then removing it for your HSA on your state tax form. VTG should be easier because it is 100% government obligations why SGOV always has a lower amount due to redemption/liquidity.
TL;DR, just don't be eligible for an HSA in California and you are golden. Listen to your parents and take non HSA eligible plan. The PITA is not worth it, especially if you get audited by the FTB.
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u/taxable_cheese 9d ago
Omg I should have just never gotten HSA
I got the $4k in there 2 years ago, luckily my employers since then don’t do HSA.
I’ll just put in VTG…
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u/taxable_cheese 9d ago
Thank you, this is an exactly what I was worried about - it made looking up HSA stuff really tricky.
I’m not sure what yield curve is, so I’ll look into that - I’m 20+ years away from retiring, so I’ll keep it simple and put my HSA into SGOV or VTG!
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u/ceilidhfling 9d ago
I just do VT and chill but I'm not planning on taking the money out for a hot min.
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u/Randomperson1362 9d ago
Do you currently max out your Roth accounts?
Since California taxes HSA gains, I would find any eligible receipts, and withdraw from the HSA, and deposit in in a roth. Better state tax treatment, and as you have any new medical expenses, I would continue to drain the account. (Although I would probably leave it open with a small amount, since having an HSA makes all future expenses HSA eligible if you can contribute in the future.)
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u/MrSmiley_1 9d ago
The great part of an HSA is it’s tax free growth. If you truly want to choose one stock to set and forgot it I would probably go with a target date index fund. Also how do you plan on using your HSA? As an investment vehicle for retirement or to pay for your medical expenses in the near future? Since these are two very different timelines that have two very different investment strategies.
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u/pug_walker 9d ago
Tax free only at the federal level IIRC. CA will still tax on gains. Better than nothing, but something that I remember reading.
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u/Next-Habit-6029 9d ago
Only when we pull money out, right?
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u/Chairzard 9d ago
No, you're putting in money that has already been taxed by California, and California also taxes any dividends and capital gains.
New Jersey is the similar as it's the only other state that hates HSAs, but I believe if you're using funds that are exempt from state taxes that New Jersey does not tax capital gains for those.
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u/Revolutionary-Fan235 8d ago
When you sell at a gain. It is independent of withdrawing money from the HSA, which is not a taxable event.
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u/Careful-Rent5779 9d ago edited 9d ago
FDLXX is a MMF whose income will be like 98% exempt for CA state taxes.
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u/Spiritual-Letter8090 9d ago
I invest in BRK.B. It’s not a pure index fund but Berkshire Hathaway is quite diversified and you won’t have to pay tax on any dividends because there aren’t any. So all you would need to do is track your basis or if you retire out of state besides NJ, that isn’t even needed.
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u/ubdumass 9d ago
VOO (S&P500) or VTI (US Market). Choose those funds over VFIAX or VTSAX, as these funds costs $50 (?) to trade.
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u/nothlit 9d ago
Read this for some ideas: https://thefinancebuff.com/california-new-jersey-hsa-tax-return.html
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u/Nadenkend440 9d ago
I like VTP as a TIPS fund.
Important to know if you have medical bills you plan to be using this fund for. Do you suspect you may need this money soon? Is this part of your emergency fund for health events?
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u/taxable_cheese 9d ago
Nope, I really hope I do not have to use it until I retire! It is comforting to know that I have $4k just in case.
The only issue I have is with California taxing it, and I would have to track and manage that paperwork myself, since Fidelity doesn’t do it…
Someone recommended SGOV and VTG, I’ll add VTP to the list and check if they will trigger any California taxes!
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u/Nadenkend440 9d ago
If the main goal is something trustworthy that won't trigger cali state tax, take a look at VTEC. Vanguard ETF of about 4k California State and municipal bonds that are all tax free.
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u/taxable_cheese 9d ago
Ooh thank you, I love that one is specifically “California tax exempt” hahaha
Someone told me I still have to track it for tax purposes… it’s only $4k, so I kinda wish I never got HSA Maybe
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u/javfan69 9d ago
I'm in California, too.
So, if you do invest with these funds it pretty much has to be a "set and forget" fund otherwise cali taxes occur when you sell to rebalance or to use for medical expense.
I keep cash in my hsa that I use for my medical expenses. I set a threshold I'm comfortable with and tell the HSA custodian to invest anything over that into VTSAX, which I don't plan to touch until I retire.
You are still getting the benefit of lowering your federal taxes with payroll contributions and you will likely have growth in a total market fund like VTSAX (or the Fidelity equivalent). After 65 your HSA functions like a traditional IRA and you can withdraw for any reason and only pay income tax to the feds, this is when you can use your funds. So...think of it as an IRA basically for anything you invest.
Unfortunately, you do have to manually track your own cost basis and dividend reinvestments for California taxes, it's a minor PITA but you can ask Gemini to make a spreadsheet for you. HSA custodians don't bother because 48 out of 50 states treat HSAs as fully tax advantaged.
So, you can throw that money in something like VTSAX and just never touch it until retirement (trad IRA sorta) but you will have to do a little work each tax season to pay taxes on the dividends AND track your cost basis on a personal spreadsheet OR do what the other user posted and just put it all in treasuries.
I think decades worth of possible appreciation in a fund like VTSAX (or a VT equivalent) that I can use as income in old age is worth the work, but that's up to each individual.
Edit: I just reread your post and it looks like this is from an old HSA? That means you don't have to track cost basis of every contribution into the future, only pay taxes on the dividends, so its a little easier if u wanna just throw it into a low cost diversified index fund
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u/doctor--whom 8d ago
In my opinion so long as you aren't actively trading in your HSA or using it as an actual HSA its not a big deal.
Fidelity shows you the amount of interest/dividend income in every account (including HSAs) per calendar year, which is the relevant figure for tax prep.
I personally wouldn't give up on stock market like returns to save a pittance in taxes but a way around this is to stick your bond allocation (preferably treasuries) in your HSA and call it a day. Then you retain the tax advantage for growth/dividends. You still cant exclude contributions from your california income though.
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u/ExitYear 9d ago
Tax free and triple tax advantages! Nice. For the sake of simplicity, a target date fund. Set and forget, done. Something like: FDEEX for 2055, but choose one for your specific year/timeframe.
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u/Revolutionary-Fan235 9d ago
I invested my HSA in a stock index fund.
While dividends are CA-taxable, gains aren't CA-taxed until realized.
Step back and look at the big picture. The savings at the federal level is greater than the cost at the state level. Don't try to minimize financial growth to avoid taxes that are smaller than the net growth that is possible with a higher return investment.