converting from FSA to HSA

I can only speak to this one part of your query. The answer will depend on whom you have the HSA with. Some may have restrictions in the investment area, others DO NOT.

Generally speaking you are permitted to invest some portion of the HSA Savings account in a mutual fund. That choice MAY be restricted. You will need to inquire of the HSA Administrator. Cal Lester CLU

That is correct, your dependent can't open his own HSA, but you can open one that includes your dependent in the coverage.

There are annual limits to what you can contribute, tied to the amount of the HDHP (high-deductible health plan) you have, so "pre-loading" isn't allowed. If you are going to use the HSA at all, I imagine you'd always want to make the maximum contribution allowed.

Is your decision being driven by losing employer-provided group health coverage for one or both of you? I'm guess family coverage through your employer if available will be a better deal than an HSA. On the other hand, if your health remains good, you can use the balance in the HSA for any purpose, not just medical expenses, without additional penalty after age 65.

You might want to spend some time with IRS Pub 969 to learn more. Also check your state rules; California for example does not allow HSA's and treats them like ordinary savings accounts (no deduction for contributions, earnings are taxable).

-Mark Bole

thank you. if it is restricted, how does the money grow?

I think the issue here is people throw around HSA to mean the health plan also. But in reality, it's a combination of HDP (high deductible health plan) + HSA (health savings account). The HSA is under your name -- the HDP plan covers you and your kids. So the rule would be the owner of the HDP + HSA cannot be claimed as a dependent. For the people you cover with this plan and use the HSA to pay the deductibles, their only requirement is that they are not covered by another health insurance plan.

This is dependent on each HSA administrator. Again, not the health plan but the people at the bank/mutual fund company that manages the account. Typically, most HSA administrators will require you to have about $2000+ or 1 years worth of deductibles before you can transfer the overage to mutual funds. Some HSA administrators don't have limits but will charge fees for low money market/savings account balances. And rare few don't care.

For example, my company is going with Patelco Credit Union. They only have savings accounts paying 5%+. However, they have no minimum balance requirement. Since I'm in complete control of the account, I can at any time transfer any amount I want to Health Saving Administrators (the company) to buy Vanguard mutual funds. Health Savings Administrators (the company) is designed to be an add-on account to your regular HSA account so they don't have any balance minimums for investments.

Part 1: No, you can pay out of pocket and have until forever to repay yourself out of HSA contributions. So it terms of paying deductibles, it doesn't matter if you pre-fund or post-fund.

Part 2: Yes, you want as much tax-free growth as soon as possible. Change your view of the HSA -- it's a super-IRA so fund it before anything else. It may very well be even better than a 401K w/ matching (depending on how much match and the quality of investments). When spent on medical, it's the only tax vehicle that is free from taxes both on contribution and withdrawal -- hence you are getting matching from the federal+state government equal to your combined tax bracket. Employer matching on funds would make it the ultimate retirement account. Hence, plan your investments around the HSA and aim for fully funding the HSA every year.

Not so, because the FSA (flexible spending account, a.k.a. Section 125) he already has is exactly the same -- free from taxes on contributions and withdrawals when used for medical.

Compared to individual health insurance premiums and itemized deductions (Schedule A), the HSA is probably a better deal, but only because of the limits imposed on medical itemized deductions. Compared to employer-subsidized group health coverage including an FSA, not so clear.

Be careful when comparing to an IRA. While there are some similarities (especially if you have a balance available at age 65), the HSA unlike an IRA is strongly tied to your medical expenses. You have to pay HDHP premiums, and if you have *any* medical expenses (not just co-pays, but the whole bill) you're going to be drawing down the balance to pay them.

It's hard to see how you are going to realistically build up a significant balance in the HSA. A younger single person in excellent health, then maybe yes.

-Mark Bole

The restriction is usually that you MUST INVEST it in either thier proprietory fund, or interest account. Cal