Great thought experiment (or actual experiment, in your case!). I am definitely not frugal by nature, and I'm always thinking about the value of my time when making decisions that will cost me either time or money. Personally, I would be very inclined to just pay for the EPO plan and do away with the decision making and price shopping that comes with every healthcare need, especially with young children. The additional stress is not worth the benefits the HSA offers. Plus, you're not getting the deduction or tax-deferred growth in SF!
Loved your concept of Return on Hassle. There's just too much uncertainty with the HDHP/HSA plan. That one time I enrolled in one few years ago based on my own past health care expenses and projections was the same year I needed to undergo an ER visit followed by a procedure. That coupled with a few other urgent care, paediatrician visits, and prescriptions. I made my decision then that I'll always just stay with my Kaiser HMO plan that's predictable and less stressful.
How have people handled it if it both you / your partner have access to HDHPs and there's extra money given by the employer for the HSA? My partner and I are at two different employers and if we opt for family coverage, we get more HSA dollars from our companies, but those family plans also have higher limits. Is it best to both opt for family and have each other's as secondary?
Very interesting! I created a similar model with a key difference — I live in nyc and nobody takes insurance. Think it’s important to note that your calculations don’t factor in out of network deductibles & maximums. And please don’t get me started on the cost when a provider doesn’t accept insurance and the actual cost is higher than the plans allowed amount. Great job, very interesting and informative; Just want to call this out for anyone in a similar situation to me. PPO ended up being the best in my case… though don’t ask me what my monthly spend on healthcare is 🙃. At least some of it’s tax deductible when I file
I went through the same experiment and went back to E/PPO. We have two kids, and our one son has ADHD and the cost of his medications ($25 vs $350) and weekly mental health visits pushed us to paying out the family maximum deductibles. Also I had the same delay in seeking medical attention because I knew the cost was going to be high. It was an easy choice to switch back.
I don't see it as a huge benefit since dividends are pretty small, and so saving federal taxes on dividends isn't much. Plus buying/selling isn't super valuable to me since:
1. You can't use the money if you sell before you're retired, and
2. I plan to hold the majority of my investments for a long time without selling anyways
But "it grows tax free" is always highlighted in a way that makes me think people view it as a big deal -- like it unlocks exponential growth in a unique way -- so curious if I'm missing something!
There is the tax drag that occurs on the dividends, but even more significant would be the capital gains when you ultimately sell to use the funds. This is the "growth" that is tax free.
You mention that for the HSA, "withdrawal would still be subject to ordinary income taxes."
So it seems that either you have to pay capital gains taxes when you sell the funds in your brokerage account, or you can use an HSA to "grow the funds tax free" but then need to pay taxes when you withdraw the funds.
So again it seems like it's not a huge tax savings win to me. What am I missing?
My confusion was just around the term "tax free growth", which I often see discussed as an advantage that's on the same order of magnitude as, for example, Pre-Tax In (in your language above). However, seems to me they're different orders of magnitude (though of course still beneficial):
Pre-tax In could save you thousands a year
Tax free growth (i.e. no taxes on dividends, and no taxes on capital gains but you still pay ordinary income tax on withdrawals) seems to be worth, idk, ~a couple thousand dollars over your lifetime
A major benefit of accounts that allow pre-tax contributions during your working years is the deduction that comes with those contributions. If you're in a middle to high tax bracket, the deduction is especially meaningful. It is likely (though not guaranteed) that you'll have a lower income in retirement when you pay ordinary income tax on withdrawals.
The tax-free growth is a nice benefit that becomes more valuable as you de-risk over time, adding investments like bonds with higher yields, the income from which would otherwise show up on your tax return. Having tax-deferred retirement or HSA accounts also allows the opportunity for tax alpha via tax location optimization.
Great thought experiment (or actual experiment, in your case!). I am definitely not frugal by nature, and I'm always thinking about the value of my time when making decisions that will cost me either time or money. Personally, I would be very inclined to just pay for the EPO plan and do away with the decision making and price shopping that comes with every healthcare need, especially with young children. The additional stress is not worth the benefits the HSA offers. Plus, you're not getting the deduction or tax-deferred growth in SF!
Loved your concept of Return on Hassle. There's just too much uncertainty with the HDHP/HSA plan. That one time I enrolled in one few years ago based on my own past health care expenses and projections was the same year I needed to undergo an ER visit followed by a procedure. That coupled with a few other urgent care, paediatrician visits, and prescriptions. I made my decision then that I'll always just stay with my Kaiser HMO plan that's predictable and less stressful.
Such a great topic Andre! I am going through this decision right now.
I thought it would be timely! Those open enrollment mailers should start arriving soon.
How have people handled it if it both you / your partner have access to HDHPs and there's extra money given by the employer for the HSA? My partner and I are at two different employers and if we opt for family coverage, we get more HSA dollars from our companies, but those family plans also have higher limits. Is it best to both opt for family and have each other's as secondary?
Just remember that the $8,300 family limit. So if you both have a plan, be sure to stay under $4,150 each including any employer matches.
(Note: 2025 limits are slightly higher at $8,550)
I would just run the numbers and see which option gives you the most free $$ and tax savings potential. It depends on the specifics of each plan.
Very interesting! I created a similar model with a key difference — I live in nyc and nobody takes insurance. Think it’s important to note that your calculations don’t factor in out of network deductibles & maximums. And please don’t get me started on the cost when a provider doesn’t accept insurance and the actual cost is higher than the plans allowed amount. Great job, very interesting and informative; Just want to call this out for anyone in a similar situation to me. PPO ended up being the best in my case… though don’t ask me what my monthly spend on healthcare is 🙃. At least some of it’s tax deductible when I file
I went through the same experiment and went back to E/PPO. We have two kids, and our one son has ADHD and the cost of his medications ($25 vs $350) and weekly mental health visits pushed us to paying out the family maximum deductibles. Also I had the same delay in seeking medical attention because I knew the cost was going to be high. It was an easy choice to switch back.
I've always been a bit confused by the "It grows tax-free" benefit.
Don't investments in your regular brokerage account grow tax free as well, so long as you're not frequently buying and selling?
No taxes on the dividends or even when you buy and sell. Similar to other retirement accounts.
Unfortunately in CA you would still pay State taxes though.
How much do you value that at?
I don't see it as a huge benefit since dividends are pretty small, and so saving federal taxes on dividends isn't much. Plus buying/selling isn't super valuable to me since:
1. You can't use the money if you sell before you're retired, and
2. I plan to hold the majority of my investments for a long time without selling anyways
But "it grows tax free" is always highlighted in a way that makes me think people view it as a big deal -- like it unlocks exponential growth in a unique way -- so curious if I'm missing something!
There is the tax drag that occurs on the dividends, but even more significant would be the capital gains when you ultimately sell to use the funds. This is the "growth" that is tax free.
You mention that for the HSA, "withdrawal would still be subject to ordinary income taxes."
So it seems that either you have to pay capital gains taxes when you sell the funds in your brokerage account, or you can use an HSA to "grow the funds tax free" but then need to pay taxes when you withdraw the funds.
So again it seems like it's not a huge tax savings win to me. What am I missing?
Name me another account that gives you better tax savings? There isn't one!
Pre-Tax in. You instantly reduce your taxable income.
Tax free growth. No taxes on dividends each year or any capital gains from selling.
Tax free out when you use it like I am suggesting, saving up your medical receipts or using it for long term care.
Again, tell me a better account?
Don't disagree!
My confusion was just around the term "tax free growth", which I often see discussed as an advantage that's on the same order of magnitude as, for example, Pre-Tax In (in your language above). However, seems to me they're different orders of magnitude (though of course still beneficial):
Pre-tax In could save you thousands a year
Tax free growth (i.e. no taxes on dividends, and no taxes on capital gains but you still pay ordinary income tax on withdrawals) seems to be worth, idk, ~a couple thousand dollars over your lifetime
A major benefit of accounts that allow pre-tax contributions during your working years is the deduction that comes with those contributions. If you're in a middle to high tax bracket, the deduction is especially meaningful. It is likely (though not guaranteed) that you'll have a lower income in retirement when you pay ordinary income tax on withdrawals.
The tax-free growth is a nice benefit that becomes more valuable as you de-risk over time, adding investments like bonds with higher yields, the income from which would otherwise show up on your tax return. Having tax-deferred retirement or HSA accounts also allows the opportunity for tax alpha via tax location optimization.