Advice/Experience Request on HDHP & HSA

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Advice/Experience Request on HDHP & HSA

Postby ivesjl » Fri Feb 01, 2013 12:44 pm

Can someone please explain why everyone treats HSA funds like an investment vehicle. The HDHP is a great way to lower insurance premiums while still insuring against major medical expenses, but I don't understand why you would want to add funds in excess of the yearly deductible. Are other bogleheads counting this as part of their investment portfolio? Or do you just consider it a tax advantaged part of your emergency fund?


For reference:
Boglehead Wiki article
"Successful investing is all about common sense." | ~ John Bogle.
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Re: Advice/Experience Request on HDHP & HSA

Postby jimmyrules712 » Fri Feb 01, 2013 2:17 pm

I think the theory is if you are already maxxing out all other tax advantaged space then using an HSA account as another retirement account and paying for medical expenses out of pocket may be better than investing in a taxable account and paying medical expenses out of the HSA. That way the investment growth happens in a tax deferred account. If you save the receipts for all medical expenses you pay out of pocket then anytime in the future you can withdraw those amounts from the HSA penalty free. After 65 I believe the HSA balance can be withdrawn penalty free for any reason.

As an example:

Scanario 1:
You "Max out" your hsa for 2013 ($6,250 for family) and spend all of it on medical expenses this year and you invest $6,250 in a taxable account using after tax money. The end result of scanario 1 is you have nothing in your HSA and $6,250 in a taxable account.

Scenario 2:
You "Max out" your hsa for 2013 ($6,250 for family) and invest it. You use the $6,250 you would have put in a taxable account and pay your medical expenses out of pocket with after tax money. The end result is you have $6,250 in a tax deferred HSA and nothing in the taxable.

In both scenarios the same amount of after tax and tax advantaged money is used. If you do that for 20 years, would you rather have all that invested money be in the taxable account or the HSA?

This scenario only makes sense if you're already maxxing out your tax advantaged space. If you're not maxxing out your IRAs and 401ks then there's no reason to pay the medical out of pocket.

I personally would like to invest my HSA, however since I am unable to max out my other retirement accounts I am still paying for my medical expenses out of my HSA.
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Re: Advice/Experience Request on HDHP & HSA

Postby wander » Fri Feb 01, 2013 3:40 pm

ivesjl wrote:Can someone please explain why everyone treats HSA funds like an investment vehicle. The HDHP is a great way to lower insurance premiums while still insuring against major medical expenses, but I don't understand why you would want to add funds in excess of the yearly deductible. Are other bogleheads counting this as part of their investment portfolio? Or do you just consider it a tax advantaged part of your emergency fund?
For reference:
Boglehead Wiki article

Each person treats it differently. In my case, I am relatively healthy and do not plan to use the HSA account for medical expenses; when doctor's office bills us, I can always pay with cash. By doing that, I do not expect to touch that money anytime soon, and that allows me invest all the HSA money and treat it as part of my total portfolio.
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Re: Advice/Experience Request on HDHP & HSA

Postby ivesjl » Fri Feb 01, 2013 3:48 pm

There seems to be some limit to how much you would want to contribute to the HSA, though.

This comes from the Bogleheads wiki:

"Once you have retired, you can withdraw from the HSA an amount equal to your past medical expenses plus any current expenses tax-free, and withdraw from your other accounts for non-medical expenses. HSAs can be used to pay medicare premiums and other medical expenses in retirement."


My understanding is that you can only withdraw money equal to previous expenses. If this is true, then access to the HSA funds are restricted by past expenses, and I don't really want lots and lots of my investment portfolio tied up in an HSA.
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Re: Advice/Experience Request on HDHP & HSA

Postby wander » Fri Feb 01, 2013 4:14 pm

ivesjl wrote:My understanding is that you can only withdraw money equal to previous expenses. If this is true, then access to the HSA funds are restricted by past expenses, and I don't really want lots and lots of my investment portfolio tied up in an HSA.

At retirement, you can only withdraw money equal to medical expenses for tax free. Other than that, you will be taxed as normal Traditional IRA because it has never been taxed.
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Re: Advice/Experience Request on HDHP & HSA

Postby mhc » Fri Feb 01, 2013 5:28 pm

ivesjl wrote:There seems to be some limit to how much you would want to contribute to the HSA, though.

This comes from the Bogleheads wiki:

"Once you have retired, you can withdraw from the HSA an amount equal to your past medical expenses plus any current expenses tax-free, and withdraw from your other accounts for non-medical expenses. HSAs can be used to pay medicare premiums and other medical expenses in retirement."


My understanding is that you can only withdraw money equal to previous expenses. If this is true, then access to the HSA funds are restricted by past expenses, and I don't really want lots and lots of my investment portfolio tied up in an HSA.


Many people believe in retirement that medical expenses is one of the larger pieces of your living expenses. These people do not believe that it will be hard to use up all of the money in an HSA on medical expenses. I fall into this camp. I also save all of my receipts so that I can easily withdraw that amount at any time.

Take a look at what is covered: http://www.irs.gov/publications/p502/index.html

HSA is the best tax advantaged account possible.
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Re: Advice/Experience Request on HDHP & HSA

Postby BL » Fri Feb 01, 2013 5:39 pm

I agree. At worst, it will be taxed like any other tax-deferred IRA in retirement. At best, it will not be taxed ever because you use it for qualified medical expenses.
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Re: Advice/Experience Request on HDHP & HSA

Postby tainted-meat » Fri Feb 01, 2013 5:54 pm

I am healthy and haven't been to a doctor in 5 years. I use the HSA as an extra tax preferred shelter and invest the monies in mutual funds. In my opinion the HSA is the best tax preferred vehicle. You pay no taxes on it if taken directly from your paycheck. The HSA allows you to avoid payroll (FICA) taxes as well which neither the 401k nor Roth can avoid. If used to pay for medical expenses you pay no taxes or penalties which I would think becomes a very large expense in retirement. Once you turn 65, you can withdraw monies for non-medical expenses as well and not pay penalties. However, income tax would be owed.

Personally, I would contribute to an HSA before anything else if I didn't have enough money to max out all tax preferred accounts. It really is the best of all worlds.
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Re: Advice/Experience Request on HDHP & HSA

Postby tainted-meat » Fri Feb 01, 2013 6:01 pm

Saving your receipts is a great strategy. It allows you to use the HSA as an emergency fund.
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