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HSA in New jersey. First timer

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  • HSA in New jersey. First timer

    My group is now finally offering a HDHP (horizon myway) with an HSA set up with Mellon Bank. Unfortunately I do live/practice in NJ, which is one of 3 states that do not recognize HSAs for state tax purposes (so basically my w2 for federal will show 3300 less than my w2 for NJ). Im making 300,000 dollars as an individual filer so I am in a high tax bracket. I have 2 main group of questions:
    1- Since I mainly plan on using the HSA as a stealth IRA, am I losing all of the “triple benefits” of it because I live in a state that will still tax that money? I know the contributions will be taxed, but will any earnings on the invested money in HSA also be taxed by NJ? Do any of your readers who have HSA live in New Jersey (or california for that matter) and have experience with it? Should I use an HSA that offers treasury investments that are protected against state taxes but offer lower potential returns?
    2- Regarding Mellon Bank (my group and Horizon’s preferred HSA provider). My group tells me that I can choose any HSA provider that I want and they will fund it from payroll (so Im guessing that money will be all pretax with the same federal tax benefits even if I dont use Mellon Bank). My group’s advisor said that they have an agreement with Mellon Bank in which Mellon Bank “does not charge administration fee” for the HSA account. However I dont have any of that in writing, and reading internet reviews of Mellon Bank make me hesitant to use them, especially since they only offer 22 funds, and only 2 (their vanguard options) have low ERs. the ER alone will eat up any administration fees I may occur with other HSAs. Furthermore, they do not offer any TIPS or funds that would be tax exempt in NJ if I chose to go that route. After A LOT of reviews of HSAs, it seems the safest bet is HSABank (the provider I believe WCI has his money in) to link it with TDameritrade. Although I may incur fees from my payroll in addition to the HSA bank fees (which would be around $66/year). Any advice on if I should ignore my group’s advice and set up the fund with HSABank, and if its worth just paying the NJ taxes to get a (potential) better return with vanguard or ishare EFTs vs. finding an investment that is more tax friendly to a NJ resident?
    any and all advice is welcome, thanks

  • #2
    Congratulations on having access to an HSA! As of today, you are losing some tax benefits at the state level only. However, it appears there is pending legislation to correct New Jersey's backward approach to HSAs. I haven't read through the bill, but I doubt you will get any deduction for prior contributions. Probably will grandfather in any current accounts.

    otoh, at the federal level, you still have a triple-tax free account. Federal deduction, tax-free growth, and no tax on distributions used to pay for qualified medical expenses. NJ currently allows a deduction for unreimbursed medical expenses in excess of 2% of your AGI, which would include distributions from HSAs used to pay for QMEs. (n/a to you but throwing this for a complete answer).

    You will definitely benefit at the federal level from making maximum use of your HSA, where the tax bite is the worst. Hopefully, your legislature will pass NJ S474.

    As for the provider, my radar goes up any time a group has an agreement with a provider. This probably indicates that the provider has a complicated fee structure that is being fed via the particular funds offered. You can compare offerings here. Looking over the list, I was pretty impressed with The HSA Authority. No fees and quite a few Vanguard funds if that's what you're interested in.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087