Why the general advice to have treasuries in CA HSA?

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moneyzone
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Why the general advice to have treasuries in CA HSA?

Post by moneyzone »

I am in CA. started HSA this year.
I do not understand few things like, hold treasury in HSA.

with HSA,
I save on Federal taxes this year by reducing amount in box 1 of w2.
I will save federal taxes on earnings/dividend/distributions.

with HSA in CA,
I have to pay CA tax on div/distribution this year(non treasury investment).
I will pay CA tax on capital gain when I sell funds in the future(even treasuries).

By having only treasury in CA HSA, no tax on interest but there will be a tax on capital gains. So I have to track the cost basis.
So, what is the rational behind having only treasuries in the HSA? save state tax on interest only? with 3%(for comparison BND yield is currently 1.39% only) interest on 50k HSA account, interest is $1500 yearly. with highest CA tax bracket of 12.3% that is $185 yearly saved in the tax. not to mention growing HSA account to 50k with all the treasuries in it and with yearly new contribution limit will at-least take 10-12years.

So, what am I missing. why a general advice to have treasuries in the HSA for CA residents. Only reason I can think of is if you treat HSA as your fixed income investment for overall AA.
HSA, even in CA, saves federal taxes, that is better compared to taxable account. Why even treat HSA as a fixed income account in AA?
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Re: Why the general advice to have treasuries in CA HSA?

Post by MrJedi »

I don't think the general recommendation is to only hold treasuries in HSA. The strategy is if you do plan to invest in treasuries, you may as well put them in the HSA where you can get some tax advantage and put your other investments in other accounts where dividends will not get taxed every year. If you do not plan to hold a treasury fund, then you should just invest as normal.

Also I will add that this probably made a much bigger difference in the past when bonds were paying much higher. With yield so low now, most bonds are naturally tax efficient because they produce less income (and thus less tax).
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Re: Why the general advice to have treasuries in CA HSA?

Post by JBTX »

I've never heard of a specific recommendation to put treasuries in an HSA. It may or may not make sense, depending on numerous factors.
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Re: Why the general advice to have treasuries in CA HSA?

Post by Soon2BXProgrammer »

One form of government isn't allowed to tax the other per the tax code... So if you hold treasuries, CA wont tax the interest. Therefore, if you only buy treasuries and you don't sell.. there is almost no tax work for an HSA in CA.

The alternative approach is to pick a single ETF/mutual fund such as "VT" and buy and never sell, and just recognize the dividends on your CA taxes.

If you sell in CA, regardless of what you bought, you have to deal with capital gains/losses on your CA tax return.

I'm not a fan of holding treasuries, i hold VT in my HSA. (I hold all my bonds in a pretax 401k)
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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grabiner
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Re: Why the general advice to have treasuries in CA HSA?

Post by grabiner »

The issue isn't the tax work, but the tax cost.

No matter what you hold in your IRA or 401(k), the percentage lost to taxes is the same (zero for a Roth account, and your retirement tax rate for a traditional account). In an HSA in CA or NJ, you will pay a tax cost for dividends on a stock fund, and for capital gains when you sell. You will pay a tax cost for dividends on corporate bonds, with little or no capital gain when you sell. If you hold Treasuries, you will pay no tax cost for dividends. In CA, you will have a capital gain or loss when you sell, but the gain or loss will be very small since bonds get almost all their return from dividends. In NJ, you will not have a capital gain or loss because NJ does not tax capital gains on Treasury bonds or "qualified investment funds" which hold them.

Thus, if Treasuries (including TIPS) are appropriate for your investment needs, holding them in your HSA makes sense. If you plan to hold something like Total Bond Market, you could split this and hold Treasuries in your HSA and corporate bonds in your IRA/401(k).

But if you don't hold any bonds, or if you want to hold fixed income in another account because of unusually good options (TSP G fund, TIAA Traditional Annuity), then you shouldn't hold Treasuries in your HSA just for the tax benefit; hold a stock index fund there and pay the tax cost.
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zincTwo
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Re: Why the general advice to have treasuries in CA HSA?

Post by zincTwo »

I use a TSM ETF (ITOT) in my HSA. I am planning on leaving CA before the funds will be drawn, so I will experience the tax free growth...so I want to maximize that growth.

Being in CA is a pain for tracking the tax lots (in the situation where I may not leave CA). So I let my monthly payroll contributions temporarily stay in the core moneymarket. Once or twice a year, I do a larger 'buy' into the EFT. That way I only need to track 1 or 2 basis' a year, rather than 24.
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Re: Why the general advice to have treasuries in CA HSA?

Post by Ed 2 »

moneyzone wrote: Sat Apr 10, 2021 9:45 pm I am in CA. started HSA this year.
I do not understand few things like, hold treasury in HSA.

with HSA,
I save on Federal taxes this year by reducing amount in box 1 of w2.
I will save federal taxes on earnings/dividend/distributions.

with HSA in CA,
I have to pay CA tax on div/distribution this year(non treasury investment).
I will pay CA tax on capital gain when I sell funds in the future(even treasuries).

By having only treasury in CA HSA, no tax on interest but there will be a tax on capital gains. So I have to track the cost basis.
So, what is the rational behind having only treasuries in the HSA? save state tax on interest only? with 3%(for comparison BND yield is currently 1.39% only) interest on 50k HSA account, interest is $1500 yearly. with highest CA tax bracket of 12.3% that is $185 yearly saved in the tax. not to mention growing HSA account to 50k with all the treasuries in it and with yearly new contribution limit will at-least take 10-12years.

So, what am I missing. why a general advice to have treasuries in the HSA for CA residents. Only reason I can think of is if you treat HSA as your fixed income investment for overall AA.
HSA, even in CA, saves federal taxes, that is better compared to taxable account. Why even treat HSA as a fixed income account in AA?
Because California doesn’t give any tax deductions on Iran’s doesn’t recognize it basically. You will end up paying tax on potential gains in your HSA . Only one way to avoid it to invest in TIPS
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Re: Why the general advice to have treasuries in CA HSA?

Post by retired@50 »

moneyzone wrote: Sat Apr 10, 2021 9:45 pm
I will pay CA tax on capital gain when I sell funds in the future(even treasuries).
What if you move out of CA?

Regards,
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Re: Why the general advice to have treasuries in CA HSA?

Post by anon_investor »

BroIceCream wrote: Sun Apr 11, 2021 11:48 am I use a TSM ETF (ITOT) in my HSA. I am planning on leaving CA before the funds will be drawn, so I will experience the tax free growth...so I want to maximize that growth.

Being in CA is a pain for tracking the tax lots (in the situation where I may not leave CA). So I let my monthly payroll contributions temporarily stay in the core moneymarket. Once or twice a year, I do a larger 'buy' into the EFT. That way I only need to track 1 or 2 basis' a year, rather than 24.
Where do you keep your HSA? I heard fidelity has good HSA statements that help you track your dividends.
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Re: Why the general advice to have treasuries in CA HSA?

Post by zincTwo »

anon_investor wrote: Sun Apr 11, 2021 12:10 pm
BroIceCream wrote: Sun Apr 11, 2021 11:48 am I use a TSM ETF (ITOT) in my HSA. I am planning on leaving CA before the funds will be drawn, so I will experience the tax free growth...so I want to maximize that growth.

Being in CA is a pain for tracking the tax lots (in the situation where I may not leave CA). So I let my monthly payroll contributions temporarily stay in the core moneymarket. Once or twice a year, I do a larger 'buy' into the EFT. That way I only need to track 1 or 2 basis' a year, rather than 24.
Where do you keep your HSA? I heard fidelity has good HSA statements that help you track your dividends.
My HSA is at Fidelity, and love the investment options. The statements are useful, but because they don't generate any 1099* info, you can't electronically import them for CA tax forms..must be entered manually (hence my desire to minimize tax-lots/purchases).
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Re: Why the general advice to have treasuries in CA HSA?

Post by anon_investor »

BroIceCream wrote: Sun Apr 11, 2021 1:35 pm
anon_investor wrote: Sun Apr 11, 2021 12:10 pm
BroIceCream wrote: Sun Apr 11, 2021 11:48 am I use a TSM ETF (ITOT) in my HSA. I am planning on leaving CA before the funds will be drawn, so I will experience the tax free growth...so I want to maximize that growth.

Being in CA is a pain for tracking the tax lots (in the situation where I may not leave CA). So I let my monthly payroll contributions temporarily stay in the core moneymarket. Once or twice a year, I do a larger 'buy' into the EFT. That way I only need to track 1 or 2 basis' a year, rather than 24.
Where do you keep your HSA? I heard fidelity has good HSA statements that help you track your dividends.
My HSA is at Fidelity, and love the investment options. The statements are useful, but because they don't generate any 1099* info, you can't electronically import them for CA tax forms..must be entered manually (hence my desire to minimize tax-lots/purchases).
Personally, I would just keep a spreadsheet. But I like to always be fully invested. Do you tax loss harvest to increase your cost basis?
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moneyzone
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Re: Why the general advice to have treasuries in CA HSA?

Post by moneyzone »

grabiner wrote: Sun Apr 11, 2021 10:12 am The issue isn't the tax work, but the tax cost.

No matter what you hold in your IRA or 401(k), the percentage lost to taxes is the same (zero for a Roth account, and your retirement tax rate for a traditional account). In an HSA in CA or NJ, you will pay a tax cost for dividends on a stock fund, and for capital gains when you sell. You will pay a tax cost for dividends on corporate bonds, with little or no capital gain when you sell. If you hold Treasuries, you will pay no tax cost for dividends. In CA, you will have a capital gain or loss when you sell, but the gain or loss will be very small since bonds get almost all their return from dividends. In NJ, you will not have a capital gain or loss because NJ does not tax capital gains on Treasury bonds or "qualified investment funds" which hold them.

Thus, if Treasuries (including TIPS) are appropriate for your investment needs, holding them in your HSA makes sense. If you plan to hold something like Total Bond Market, you could split this and hold Treasuries in your HSA and corporate bonds in your IRA/401(k).

But if you don't hold any bonds, or if you want to hold fixed income in another account because of unusually good options (TSP G fund, TIAA Traditional Annuity), then you shouldn't hold Treasuries in your HSA just for the tax benefit; hold a stock index fund there and pay the tax cost.
Thanks for the replay.
For treasury,
In taxable Account
Interest/Ordinary Div: tax cost at bracket for both Fed and State
Capital Gain tax/Qualified Div: reduced fed tax cost for long term capital gains, CA tax at bracket

pretax 401k/IRA
Interest and capital gains: tax cost at retirement bracket, interests grow tax deferred.

HSA
Interest/Ordinary Div: no Fed tax and CA state tax
Capital Gain: no Fed tax, CA tax at bracket

For non-treasury,
In taxable Account
Interest/Ordinary Div: tax cost at bracket for both Fed and State
Capital Gain tax/Qualified Div: reduced fed tax cost for long term capital gains, CA tax at bracket

pretax 401k/IRA
Interest and capital gains: tax cost at retirement bracket

HSA
Interest/Ordinary Div: no Fed tax and CA state tax
Capital Gain: no Fed tax, CA tax at bracket

So, even for stocks or TSM HSA looks better than Taxable as fed taxes are saved. For high tax bracket people that is significant fed tax savings. I do see the point that for treasuries HSA is better than taxable/pretax 401k,IRAs. But Roth is even better, but still people don't hold treasuries in Roth as they want to hold high growth in there.

For now, I am going to hold TIPS in HSA and if/when market goes down shift to TSM. anyway HSA balance is tiny and not changing the overall AA by much currently.
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moneyzone
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Re: Why the general advice to have treasuries in CA HSA?

Post by moneyzone »

retired@50 wrote: Sun Apr 11, 2021 11:55 am
moneyzone wrote: Sat Apr 10, 2021 9:45 pm
I will pay CA tax on capital gain when I sell funds in the future(even treasuries).
What if you move out of CA?

Regards,
I am not actively planning to move out of CA in retirement. If that happens that would be good but not planning keeping that as possibility currently.
Even if I do not move out of CA, HSA still saves Fed taxes, that is still a saving compared to Taxable account.
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Re: Why the general advice to have treasuries in CA HSA?

Post by eye.surgeon »

People seem to worry about this too much. Don't let the tax tail wag the dog. A HSA in California is still a tax advantaged account at the Federal level, and thus is still advantageous.

I live in California and have total stock market in my HSA since day 1. My accountant does my taxes, I don't care that it takes him 15 minutes to calculate the state tax due. There is no federal tax, nor do I plan to retire or make qualified withdrawals as a California resident because like (seemingly many) Californians with significant assets I plan to retire elsewhere, thus I will not be paying California state tax after retirement
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Re: Why the general advice to have treasuries in CA HSA?

Post by grabiner »

eye.surgeon wrote: Mon Apr 12, 2021 3:14 pm People seem to worry about this too much. Don't let the tax tail wag the dog. A HSA in California is still a tax advantaged account at the Federal level, and thus is still advantageous.
And that is the reason for the advice to hold Treasuries in the HSA only if Treasuries are appropriate for your investments. Once you have decided to hold them, you want to hold them in the most tax-favored account. If you have a good reason not to hold Treasuries at all, then something like Total Stock Market is a good choice for the HSA.
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Re: Why the general advice to have treasuries in CA HSA?

Post by JD2775 »

eye.surgeon wrote: Mon Apr 12, 2021 3:14 pm People seem to worry about this too much. Don't let the tax tail wag the dog. A HSA in California is still a tax advantaged account at the Federal level, and thus is still advantageous.

I live in California and have total stock market in my HSA since day 1. My accountant does my taxes, I don't care that it takes him 15 minutes to calculate the state tax due. There is no federal tax, nor do I plan to retire or make qualified withdrawals as a California resident because like (seemingly many) Californians with significant assets I plan to retire elsewhere, thus I will not be paying California state tax after retirement
I have mine 100% in VFIAX (due to lack of better choices) and live in CA. I wonder if I can just leave it there for the next 15 years and right before I retire and start making withdrawals move it to Fidelity and some treasury bond fund. Hmmm. EDIT: Or maybe I'll just leave the state when I retire like you plan to :)
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Re: Why the general advice to have treasuries in CA HSA?

Post by quantAndHold »

JD2775 wrote: Mon Apr 12, 2021 9:44 pm
eye.surgeon wrote: Mon Apr 12, 2021 3:14 pm People seem to worry about this too much. Don't let the tax tail wag the dog. A HSA in California is still a tax advantaged account at the Federal level, and thus is still advantageous.

I live in California and have total stock market in my HSA since day 1. My accountant does my taxes, I don't care that it takes him 15 minutes to calculate the state tax due. There is no federal tax, nor do I plan to retire or make qualified withdrawals as a California resident because like (seemingly many) Californians with significant assets I plan to retire elsewhere, thus I will not be paying California state tax after retirement
I have mine 100% in VFIAX (due to lack of better choices) and live in CA. I wonder if I can just leave it there for the next 15 years and right before I retire and start making withdrawals move it to Fidelity and some treasury bond fund. Hmmm. EDIT: Or maybe I'll just leave the state when I retire like you plan to :)
You have to pay the state tax on the dividends every year. That is all.

I moved out of CA for four years, then moved back. Of course I sold everything in my HSA to realize the gains the week before I moved back...
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Re: Why the general advice to have treasuries in CA HSA?

Post by JD2775 »

quantAndHold wrote: Mon Apr 12, 2021 11:27 pm
JD2775 wrote: Mon Apr 12, 2021 9:44 pm
eye.surgeon wrote: Mon Apr 12, 2021 3:14 pm People seem to worry about this too much. Don't let the tax tail wag the dog. A HSA in California is still a tax advantaged account at the Federal level, and thus is still advantageous.

I live in California and have total stock market in my HSA since day 1. My accountant does my taxes, I don't care that it takes him 15 minutes to calculate the state tax due. There is no federal tax, nor do I plan to retire or make qualified withdrawals as a California resident because like (seemingly many) Californians with significant assets I plan to retire elsewhere, thus I will not be paying California state tax after retirement
I have mine 100% in VFIAX (due to lack of better choices) and live in CA. I wonder if I can just leave it there for the next 15 years and right before I retire and start making withdrawals move it to Fidelity and some treasury bond fund. Hmmm. EDIT: Or maybe I'll just leave the state when I retire like you plan to :)
You have to pay the state tax on the dividends every year. That is all.

I moved out of CA for four years, then moved back. Of course I sold everything in my HSA to realize the gains the week before I moved back...

Yep, I have been doing that every year. It's been pretty minor thus far. I am more concerned looking further down the line once I actually start withdrawing money
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Re: Why the general advice to have treasuries in CA HSA?

Post by h2cycle »

quantAndHold wrote: Mon Apr 12, 2021 11:27 pm
JD2775 wrote: Mon Apr 12, 2021 9:44 pm
eye.surgeon wrote: Mon Apr 12, 2021 3:14 pm People seem to worry about this too much. Don't let the tax tail wag the dog. A HSA in California is still a tax advantaged account at the Federal level, and thus is still advantageous.

I live in California and have total stock market in my HSA since day 1. My accountant does my taxes, I don't care that it takes him 15 minutes to calculate the state tax due. There is no federal tax, nor do I plan to retire or make qualified withdrawals as a California resident because like (seemingly many) Californians with significant assets I plan to retire elsewhere, thus I will not be paying California state tax after retirement
I have mine 100% in VFIAX (due to lack of better choices) and live in CA. I wonder if I can just leave it there for the next 15 years and right before I retire and start making withdrawals move it to Fidelity and some treasury bond fund. Hmmm. EDIT: Or maybe I'll just leave the state when I retire like you plan to :)
You have to pay the state tax on the dividends every year. That is all.

I moved out of CA for four years, then moved back. Of course I sold everything in my HSA to realize the gains the week before I moved back...
Did selling the week before to reset cost basis actually work?
I thought California looks at total year income/etc then take a portion?
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Re: Why the general advice to have treasuries in CA HSA?

Post by grabiner »

h2cycle wrote: Tue Oct 17, 2023 1:29 pm
quantAndHold wrote: Mon Apr 12, 2021 11:27 pm I moved out of CA for four years, then moved back. Of course I sold everything in my HSA to realize the gains the week before I moved back...
Did selling the week before to reset cost basis actually work?
I thought California looks at total year income/etc then take a portion?
It works almost completely. For nonresidents and part-year residents, CA computes your tax based on your total income, then multiplies by the fraction of your income taxed by CA. Capital gains on intangible assets such as mutual funds are taxed only by your state of residence, so they are not CA taxed if they are realized before you move to CA.

For example, if you have $52K of income earned while a CA resident, and $100K total income, your tax is 52% of the CA tax on $100K. If you add another $4K of capital gains earned before you move to CA, your tax is 50% of the CA tax on $104K, which is only very slightly higher.
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