HSA in CA: Stock Index Funds or Treasury Bills/Bonds

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jpc4zd
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Joined: Wed Oct 27, 2021 3:36 pm

HSA in CA: Stock Index Funds or Treasury Bills/Bonds

Post by jpc4zd »

Emergency funds: About 7 months of expenses

Debt: Mortgage (Rate: 2.625%, Balance: $268,742.98, Months Remaining: 352, Don't plan to pay this off early)

Tax Filing Status: Single

Tax Rate: 12.4% Federal, 4.3% State (low due to itemizing deductions (~20k, including mortgage interest and SALT), and using AGI)

State of Residence: California

Age: 35

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: ~40% of stocks (trying to keep it around the market cap)

Current Asset allocation: 91.3% stocks (39.1% international)/8.7% bonds (re balance in July)

Portfolio Size: $200,000

Current retirement assets

Taxable at Vanguard
3% Vanguard Total Stock Market Index Fund Admiral Shares (tVTSAX) (0.04%)

401k at Vanguard
19% Vanguard Target Retirement 2050 Trust Select (closest ticker is VFIFX) (0.045%)
Company match: 3.5%
401(k) Fees: $27/year ($6.75/quarter)

Roth IRA at Vanguard
31% Vanguard Target Retirement 2050 Fund (VFIFX) (0.15%, decreasing to 0.08% in February 2022)

Traditional (Rollover) IRA at Vanguard
47% Vanguard Target Retirement 2050 Fund (VFIFX) (0.15%, decreasing to 0.08% in February 2022)

Contributions

New annual Contributions
$23,323 401k ($19,500 individual, and $3,823 employer contributions)
$6,000 Roth IRA
$3,000 taxable (for retirement, not short term goals)
Retirement saving rate: 29.6% (using gross pay and employer match)

Available funds

Funds available in his 401(k)
Vanguard Target Retirement Income Trust Select (VTINX) (ER: 0.045%)*
Vanguard Target Retirement 2015 Trust Select (VTXVX) (ER: 0.045%)*
Vanguard Target Retirement 2020 Trust Select (VTWNX) (ER: 0.45%)*
Vanguard Target Retirement 2025 Trust Select (VTTVX) (ER: 0.045%)*
Vanguard Target Retirement 2030 Trust Select (VTHRX) (ER: 0.045%)*
Vanguard Target Retirement 2035 Trust Select (VTTHX) (ER: 0.045%)*
Vanguard Target Retirement 2040 Trust Select (VFORX) (ER: 0.045%)*
Vanguard Target Retirement 2045 Trust Select (VTIVX) (ER: 0.045%)*
Vanguard Target Retirement 2050 Trust Select (VFIFX) (ER: 0.045%)*
Vanguard Target Retirement 2055 Trust Select (VFFVX) (ER: 0.045%)*
Vanguard Target Retirement 2060 Trust Select (VTTSX) (ER: 0.045%)*
Vanguard Target Retirement 2065 Trust Select (VLXVX) (ER: 0.045%)*
Baird Core Plus Bond Fund Class Institutional (BCOIX) (ER: 0.30%)
Dodge & Cox International Stock Fund (DODFX) (ER: 0.63%)
Dodge & Cox Stock Fund (DODGX) (ER: 0.52%)
Vanguard Explorer Fund Admiral Shares (VEXRX) (ER: 0.30%)
Vanguard Institutional Total Bond Market Index Trust (VBTIX) (ER: 0.028%)*
Vanguard Institutional Total International Stock Market Index Trust (VTIAX) (ER: 0.08%)*
Vanguard Institutional 500 Index Trust (VFIAX) (ER: 0.014%)*
Vanguard Mid Cap Index Fund Institutional Plus Shares (VMCPX) (ER: 0.03%)
Vanguard PRIMECAP Fund Admiral Shares (VPMAX) (ER: 0.31%)
Vanguard Real Estate Index Fund Institutional Shares (VGSNX) (ER: 0.10%)
Vanguard Retirement Savings Trust II (ER: 0.25%)*
Vanguard Small Cap Index Fund Institutional Plus Shares (VSCPX) (ER: 0.30%)
Vanguard Wellington Fund Admiral Shares (VWENX) (ER: 0.16%)

*Using closest ticker symbol since some Vanguard Institutional Funds don't have a ticker

Questions:
1. I will be opening a HSA next year, and since CA doesn't give any special tax treatment for HSA, Since I'm a single filer, and itemize deductions, would it still be beneficial to use bonds over index funds (like VT or VIT/VXUS)?

2. For using bonds, is there any reason to use treasury bills over notes or bonds (like I-bonds)?

3. The company sponsored HSA is with HealthEquity, Is there any reason to use another company, like Fidelity?
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grabiner
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Re: HSA in CA: Stock Index Funds or Treasury Bills/Bonds

Post by grabiner »

Welcome to the forum!
jpc4zd wrote: Wed Oct 27, 2021 5:28 pm Tax Rate: 12.4% Federal, 4.3% State (low due to itemizing deductions (~20k, including mortgage interest and SALT), and using AGI)
The tax rate you should use for investment decisions is your marginal tax rate, not your average rate. If you are in the 22% federal and 9.3% CA tax bracket, then you pay 31.3% tax on ordinary income and 24.3% on qualified dividends and long-term gains, so these are the numbers that you would use in deciding what to hold in your taxable account.

To decide where to hold the HSA, you need to check the terms of your company's agreement. It is common for employees in a company-sponsored HSA to have fees waived. However, even if fees are waived, the investment options may be inferior; if they are, then you can roll the money into a Fidelity HSA and invest in anything you would like.

For asset allocation, view the portfolio as a whole. If you want to have 10% of your portfolio in bonds, your HSA can be all bonds, with more stocks in your other accounts. Your 401(k) has excellent options in all asset classes, so you can use your chose of stock holdings there if you want to go away from the target-date funds. (Since there is no Total Stock Market, you would have to either hold the US index in your other accounts, or piece together Total Stock Market from the 500, mid-cap, and small-cap indexes.)

And in CA, the advantage of Treasury bonds is that they are exempt from CA tax. If you hold a stock index fund in your HSA, you will pay CA tax on the dividends, and on the capital gain if you still live in CA when you sell the fund to pay medical expenses. If you hold a Treasury bond fund, there will be no CA tax, and any capital gain will be small.

If you are not expecting to use the fund for medical expenses for a long time, and still want to invest it in Treasury bonds for tax reasons, a natural choice would be long-term TIPS. If you have a Fidelity HSA, you could invest in individual TIPS, or use the ETF LTPZ for convenience.
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Re: HSA in CA: Stock Index Funds or Treasury Bills/Bonds

Post by Afty »

jpc4zd wrote: Wed Oct 27, 2021 5:28 pm 3. The company sponsored HSA is with HealthEquity, Is there any reason to use another company, like Fidelity?
As the previous poster said, HealthEquity may waive fees as long as you are at your current employer. But if and when you leave, HealthEquity will start charging fees, and they do not allow transferring HSA investments in kind to another custodian. So you will either have to pay their fees for the rest of your life, or liquidate the investments, pay CA tax on the gains, and then transfer the cash somewhere else. Though I guess if you’re holding bonds this may not be a big deal.
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