Efund + HSA -- question

LovingWill

I haven't posted in years but enjoy reading occasionally.  I have a question for you.  

Do you think it is a legitimate argument to have a smaller Efund as long as you have an HSA that would cover your deductible [should something catastrophic happen medically] ?  So let's say your Efund goal is $30,000 but you have a great HSA so you decide $25,000 is adequate Efund.

I know there are a lot of variables to consider so I wanted to get your opinions.

Right now, I want to build up my Efund more [it's at about 5 months but if I lose my job.. husband's job won't cover the bills] but feel like it makes more sense to max out my HSA right now because I will get some tax savings out of that.

lbonga1

I would definitely max the HSA. The money you put in it grows completely tax free if used for medical expenses. If you don't end up needing it anytime soon, then even better! It's likely you'll have higher medical expenses when you're older, but by that time it's had time to compound.

hoffse

I would max out the HSA.  We consider ours part of our e-fund because we tend to be very low users of health care.  We are going to TTC in the fall, and we won't even tap into it then because we will have enough notice/time to save for those bills.  For us, it's a back-up so we don't have to dip into our e-fund for catastrophic health care.  We have nearly 2 years' worth of our OOP max in there right now, and that's a great feeling.

A 5 month e-fund is great.  If you did lose your job, surely your husband's job would cover enough that it would stretch longer than 5 months?

The other thing about HSA's is it's kind of like a triple play from a tax perspective - you get a deduction in your contribution year, it grows tax free (that's a double dip, and there are VERY few times the IRS lets you do that), and you can withdraw it whenever you need it as long as there are qualified health care expenses that match your withdrawal.  

The crazy thing is you don't have to make withdrawals in the same year you have those health expenses.  You could have expenses from your 20's that you bank and withdraw in your 60's, as long as you have a receipt.  A lot of HSA accounts actually have digital "vaults" where they will hold receipts so you can withdraw that money at any time after you incur the expense.  This makes them incredibly flexible.

It seems like health costs are only going up, and that will probably be the single biggest line item in anybody's budget during retirement. For this reason, plenty of people use HSA's as another form of retirement account.

hoffse

I mean to add - we keep 1 year's worth of max expenses liquid in our account.  We invest everything over that. 

smerka

If you are planning on having kids I absolutely would. We just switched to a HDHP with HSA. For the month of January, we owe $3,000 and our OOP maximum/deductible is $5,200. Yes I have one kid with autism but it is really easy to rack up medical expenses with kids.

short+sassy

I max out my HSA every year, though I do use about half of it throughout the year anyway.  Generally speaking, most people use an e-fund for unexpected expenses and/or job loss.  And an unexpected injury/illness would fall into that category.  So it does make sense to take an HSA into consideration, for how much to keep in an e-fund.