Should I contribute to an HSA or just Brokerage?

Investing
#1

Looking for some advice on contributing to retirement/HSA and/or just our brokerage account.
A little back story, my wife and I are both very early in our careers(25 and 27) but we are looking to retire hopefully by 45 to start living a life filled with family and travel. We currently both max out our Roth IRA, Roth 401K and we contribute to our combined brokerage account weekly ($500/ invested into VOO,VGT,VUG OR VTI. Each week we rotate). With zero debt.
So my questions are:

  1. at what point do we lower our contribution to our 401K to help fund the time frame from retirement to when we can pull out of our retirement accounts?
  2. Is funding an HSA over just our regular brokerage account needed? When we both have Roth IRAs and Roth 401Ks? She eligible for one I am not.

We are on the fence about the HSA right now, knowing what the $3,000 yearly contribution could turn out to be in 40 years, but knowing we are going to need to fund 20+ years until we can pull from the retirement accounts.

#2

Hi JJ,

Amazing job for maxing out your Roth IRA, Roth 401K, and investing $500/week into your brokerage account!

In a perfect world, you would want to continue to max out your retirement accounts and increase your savings into your brokerage account as your salary increases. If possible, at no point you would lower your contribution to your 401ks.

Based on my quick calculation, you are putting away about $26,000 into your brokerage account, $12,000 into your ROTHs, and about $39,000 into your ROTH 401ks each year. Which mean about 33% of your savings are going into non-retirement account.

Assuming you want to retire at age 45 and you live until age 100, you would need to fund 55 years of your expenses.

You will be able to access your IRAs without any penalties starting age 59 1/2, therefore you only need to use your non-retirement account to fund approximately the initial 15 years of your early retirement. The initial 15 years is only about (15/55) 28% of your retirement!

Given that you are already contributing about 33% of your saving into your non-retirement account, it appears you are on track to fully fund the first 15 years of your early retirement.

Of course this is just a ball park estimate. I believe it is wise to review this number annually just to make sure you are on track to have enough saved up for the initial 15 years of your early retirement. This calculation also does not take into account the longer time frame that your retirement accounts have to grow.

Funding an HSA over a brokerage account is mathematically better for your wife due to the tax benefits of a HSA. Based on the previous assumption, it looks like you are on track to fund your initial 15 years of early retirement, therefore it may be best to fund the HSA.

If you are tight on cash flow and do not want to decrease your contribution to your brokerage account, then you may consider decreasing your Roth IRA or Roth 401k by $3,000 to fund the HSA.

HSA > ROTH

Good luck!

#3
  1. You would want to finalize your withdrawal strategy around age 40 if you plan to retire at 45.

Since the “5 year rule” for Roth conversions applies to rollover Roth 401ks, you most likely want to have tax free or lowest taxable income during the Roth conversion periods.

  1. The HSA would help with the 5 year rule and your five years of living expenses and has many tax advantages, including lowering your taxable income to be Roth eligible.

Also try to focus on travel and family as much as you can while working hard and planning early retirement. I’ve met a few in the early retirement crowd who experienced burnout and wish they would’ve traveled a bit more and spent time with family sooner.

Best of luck and sounds like you’re doing great right now!

#4

Keep in mind that if you pull funds from an HSA before the age of 65 other than for qualified medical expenses, you’ll have to pay a penalty as well as the taxes due.

Another thing about HSAs that often times gets overlooked is that it doesn’t have a very favorable after death distribution scenario, unless you’re married and then it transfers directly to your spouse.

Lastly I’ll point out that if you and your wife are both eligible for the HSA you can invest a combined total of $7300 next year