Tax advantaged accounts contribution changes in 2019

Contribution limits for 401k, 403b and most 457 plans are increased to $19,000.
For people over 50 - catch-up contributions are additional $6,000.

Traditional IRA and Roth IRA: $6,000.
For people over 50 - catch-up contributions are additional $6,000.

HSA: $3,500 for single and $7,000 for family.
For people over 55 - catch-up contributions are additional $1,000.

 

What to do with health savings account (HSA)?

Health savings account is the new reality for almost everyone.
In the mind of most it is only connected to out-of-pocket medical expenses. But actually there is more...

In 2018 a single person can contribute a maximum of $3,450 per year into the health savings account. A family can contribute $6,9000 per year (actually it is only $6,850 - the amount was retroactively decreased by $50 in March 2018). All contributors have to have a high deductible health care plan as a requirement.
After age of 55 you can add an extra $1,000 per year. 

Starting at age 65 you will be on Medicare and you can't contribute to the HSA anymore, but you still can use this money for qualifying expenses.
   

Here is a summary of HSA features:

1.  Contributions are tax-deductible (you can set up deductions which will be taken from your pay check before tax or you can pay one time sum and deduct it from taxes at the time of tax return, see explanations below). 

2. The account grows tax-free (dividends, gains and accumulated interest are not taxed at the year end).

3. For approved medical expenses the withdrawals are tax-free (qualified expenses are copays, deductibles, coinsurance, dental and vision expenses and some other. Insurance premiums don't qualify. If you use the money from HSA for non-qualified expenses, you have to pay income tax on that amount (plus a 20% penalty if you’re under 65).

 4. HSA is not to confuse with FSA. The money in FSA (Flexible Spending Account) has to be used up by the end of the year or it will disappear.
The money in HSA will stay, it is yours. If you change your employer, it is still yours. 
Some employers contribute some amount to your plan and that money is yours too.

Here is some elements of an HSA that not everyone is aware of: 

1. After age of 65 HSA turns into a sort of traditional IRA account which favors medical expenses: you contribute money pre-tax, it grows tax-free and the withdrawal amounts are taxed at your ordinary income rate unless they are qualified medical expenses. 
There are no minimum required distributions at age of 70½ like in other retirement accounts (401k and IRAs). 

2. The money going into HSA via payroll deduction (via Cafeteria plan) is not subject to FICA (Federal Insurance Contributions Act, the amount goes toward Social Security and Medicare). 401k and IRAs contributions are subject to FICA and the difference here is 7.65% (Social Security 6.2 % and Medicare 1.45%).
If you use an HSA account not trough your employer and contribute money post-tax, there will not be savings of those 7.65%. There is also no mechanism to get it back or refunded. If you have more than one account, it would make sense to make all or at least majority of your contributions trough payroll deduction.

3. Not all HSA accounts are the same. They vary dependent on institution: a simple checking account or an investment account with mutual funds or even investment accounts with possibility to invest directly in stocks (for example Fidelity HSA). 

Most people just go with the HSA account offered trough employer.
If every year you use up all money you put that same year, a checking account will work just fine.
If you have none or very little expenses and money accumulates, it would be nice to invest at least part of it.
If you got stuck with a simple checking account but want to use investment opportunities for your money, what can you do?  

You can open your own HSA with the institution of your choice. Just go with a reputable company/bank and choose an account type dependent on your risk profile and needs.

How to avoid loosing the 7.65% (FICA) if you decide to open an account separate from your employers account?
It can be done. You will still use payroll deductions for your contribution and send the money to the employer related HSA. Then you will transfer the money to your own HSA.

This can be done specifically with HSA-to-HSA transfer. Par Fidelity customer support the transfers can be done any time and they are unlimited if the transfer is bank to bank. 
If it is a rollover, there is a 60 days limit to finish the transaction. 
This transfer is usually not associated with any costs and has to be initiated from the institution you want the money to go to.
You can request HSA-to-HSA transfer forms, fill them out and request the transfer. It usually takes 2 weeks. 
I transfer the entire cash amount every year, once a year, and that goes from a checking HSA to my HSA with investment capabilities. Investment accounts usually have maintenance/management fees (for example mine has $12 per quarter).  The account fees may vary from bank to bank. 

Some HSAs with investment capabilities have minimum required amount to start investing and that amount can be as high as $4,000. I picked one without any minimums.


How much is the 7,65% FICA difference in real numbers?

If you calculate the 7,65% on the yearly contribution amounts it is $260 for singles and $516 for family.
Some may say that this reduction of your contribution to the Social Security will reduce your future Social Security benefits. That is correct but I personally would prefer $561 per year in my own hands and not as nebulous promise in the future. 

If you are born in 1960 and later, your full retirement age defined by Social Security Administration is 67 years. Currently you can contribute to the HSA till age of 65, and in time from 55-65 you can put in an additions $1,000 (additional FICA savings of $76 per year).

If I decide to maximize my Social Security benefits and make all HSA contributions avoiding payroll deduction, this fill amount to $12,112 (7.65% FICA, calculating with contribution limits for 2017,  $516*22 (22 years till age of 65) + $76.5*10 (10 years of additional $1,000 contributions) = $12,112).

I don't know how big of a role will that amount play in increasing the social security benefits. The retirement age may be moved again and the benefits may be reduced. There are so many uncontrollable elements, that I just prefer to have that money, invest it myself and not hope to increase an uncertain benefit by an uncertain amount.


Some estimate that lifetime out-of-pocket health care costs for a 65 year old person retiring this year will be approximately $400,000. A rare HSA even successfully invested will come up to that amount.
If I take an example of someone of an 42 years old with contributions he doesn't use, invests all the money with an average of 5% yearly growth, in 23 years he will have approximately $250,000.