Nickeling and diming out of the HSA

[porcupine]

For the most part, we do not plan to touch the HSA until retirement. However, I was considering whether it would be a good idea to withdraw the nickel and dime costs each year on an annual basis just to save future headache? For instance, prescriptions that don't really go through the insurance, as a result of which we don't really have good backup (this is another of my questions - what kind of backup is ideal?). I would want to get it out of the way asap and not have it as a potential withdrawal 20 years or so down the line.

For other expenses, where we have PDF files downloaded from the insurance website, we could save them hassle-free on the hard drive or the cloud. These costs can be reasonably withdrawn way into the future (because the backup will be authoritative).

- Porcupine

[bottlecap]

I don't understand the question. If you just pay small occasional costs out of your HSA but leave the lionshare intact, how does that prevent future headache?

JT

[archbish99]

Example: We hit our out-of-pocket max for the year in January. There are little things from earlier in the month for $17, $40, etc. and then there's the $4200 charge that popped the top off. What the OP is proposing is that rather than track 20-100 receipts per year from now until retirement, track the 1-2 big receipts per year (or all expenses that are on the year-end EOB summary) and reimburse the others to reduce the number of items floating around. The receipts for the reimbursement then become tax documents for the current year and only need to be kept 3-7 years rather than 30-40.

It's a simplification, though one could arguably just get an envelope, total the little receipts, and write the total on the envelope. Treat that as one "receipt" unless you're audited. If you later withdraw all those items in a single transaction, even better.

[bottlecap]

Example: We hit our out-of-pocket max for the year in January. There are little things from earlier in the month for $17, $40, etc. and then there's the $4200 charge that popped the top off. What the OP is proposing is that rather than track 20-100 receipts per year from now until retirement, track the 1-2 big receipts per year (or all expenses that are on the year-end EOB summary) and reimburse the others to reduce the number of items floating around. The receipts for the reimbursement then become tax documents for the current year and only need to be kept 3-7 years rather than 30-40.

It's a simplification, though one could arguably just get an envelope, total the little receipts, and write the total on the envelope. Treat that as one "receipt" unless you're audited. If you later withdraw all those items in a single transaction, even better.

I see. OP's idea doesn't seem like a bad one, although it's a little bit of a hassle to me to withdraw just small amounts, especially since I figure that if I live long enough, I will have plenty of medical expenses anyway. But definitely keeping track of big receipts is a good idea.

I also like the envelope idea and might try that. In some sense, your HSA could then be used as an emergency fund of sorts. Pick the envelope in the amount you need and make your withdrawal.

JT

[burma7734]

I have a new HSA, but was just planning to use it sort of as another IRA. Put my max in each year and pay my current expenses out of pocket. I did not appreciate sort of retroactive reimbursement you proposed, till I just answered my own question by reading the wiki http://www.bogleheads.org/wiki/HSA I had assumed you could only pay current year expenses with HSA.

So, as I understand you would accumulate your medical expense records till retirement, then use them to justify tax free withdrawals from the HSA. I keep track of medical expenses with a Quicken category. I guess I should start scanning receipts as supporting documents too.

To the OP.... I guess you could look at paying your current "nickle and dime" expenses as a sort of tax diversification. Using some of the HSA money under current tax regulations and rates while holding the rest for future withdrawals.

Thanks for the insight!

[vital15]

Are you saying you can withdraw say $1000 in 2015 for medical costs you paid out of pocket in 2012, as long as you keep your receipt from 2012? I was not aware of this.

I also am contributing to but not touching my HSA. I figured I'd have plenty of healthcare costs in retirement to spend it on.

Nevermind: answered above. Thanks!

[bUU]

We thought that to be a great idea until we learned that my spouse's HSA starts charging fees once she was no longer an employee. Worthwhile checking that if you're trying to use an HSA to save for retirement.

[Midpack]

We had intended to save our HSA funds, but the investment options are the equivalent of MMFs with essentially zero yield. So we use the funds to pay for every legitimate medical expense that comes at us. Since it's losing ground in real terms, spending it now makes sense to me. YMMV

[gerntz]

To me, an HSA is a way to avoid taxes on income, not a primary investment vehicle. Mine has limited investment choices vs. other investment options. Also, the higher your taxes rates, the more you use the HSA the more you avoid spending greater amounts cutdown after taxes income. I'd be trying to conserve that.

[porcupine]

It appears that most - if not all - of you have gotten the gist of what I was proposing. To reiterate, though:

- you cannot use HSA money to retroactively pay medical expenses from the past.

- I was planning only to reduce the hassle of storing all medical receipts. I did not really have a minimum/maximum dollar amount in mind; just that I would seek to annually reimburse ourselves for those expenses that fail to go directly through the insurance (for the most part, this includes the prescription medications). For the others, I/we can save the PDFs of the EOB that tells what we were responsible for and the corresponding credit card statement(s).

We thought that to be a great idea until we learned that my spouse's HSA starts charging fees once she was no longer an employee. Worthwhile checking that if you're trying to use an HSA to save for retirement.

There is a simple solution to this (which someone posted, then deleted). Transfer out to a different HSA as and when required. Alliant Credit Union has a no fee HSA option that you could use for this purpose.

We had intended to save our HSA funds, but the investment options are the equivalent of MMFs with essentially zero yield. So we use the funds to pay for every legitimate medical expense that comes at us. Since it's losing ground in real terms, spending it now makes sense to me. YMMV

Money is fungible. You could keep your cash (or cash equivalent) in the HSA and convert some of your more liquid assets to bonds and/or stocks. In other words, this is $$ that you would have had sitting in cash anyway, which will continue to sit in cash, but in a tax-advantaged environment.

- Porcupine

[555]

What difference does it make? You have to keep all the receipts anyway.

[supertreat]

We thought that to be a great idea until we learned that my spouse's HSA starts charging fees once she was no longer an employee. Worthwhile checking that if you're trying to use an HSA to save for retirement.

HSA's like IRAs are completely portable. You can open up multiple HSAs at the vendors of your choosing and transfer funds from one HSA to another - so if you're not happy with the one your employer contracts with you can simply transfer funds from that one to another of your choosing. I think HSA bank is one that is recommended because they offer brokerage services with TD Ameritrade and you can get cheap access to ETFs.

[porcupine]

What difference does it make? You have to keep all the receipts anyway.

Forever?

[burma7734]

I agree. Move your money to a new custodian if you don't like the fees. My employer has Fidelity as custodian so I can access all their funds commission free.... Looks like Vanguard is another option too.

https://personal.vanguard.com/us/whatwe ... lthsavings

[archbish99]

What difference does it make? You have to keep all the receipts anyway.

The difference is how long you keep the receipts. The receipts are tax documents for the year in which you take the distribution, meaning you have to keep them for at least 3 years (and preferably 7) after the filing date of that year's return.

If the expense and distribution are in the same year, you keep a 2013 receipt until 2020 at the outside. But if the expense is in 2013 and the distribution is in 2025, that receipt is a tax document for a year that hasn't happened yet. You need to keep it until 2025 + 7 = 2032.

Are you saying you can withdraw say $1000 in 2015 for medical costs you paid out of pocket in 2012, as long as you keep your receipt from 2012? I was not aware of this.

You can do this provided that the expense occurred after the HSA was opened. If you got a shiny new HSA in 2013, you can't reimburse yourself for a medical expense in 2012 at any time. However, you can reimburse yourself for a 2013 expense in 2020. (Under current law, at least. This would be something to monitor, if you choose this strategy.)

[Flux]

I recently learned that you can withdraw money from an HSA for non qualified medical expenses if you are over 65. So if I understand right, the HSA acts much like a 401k if you don't withdraw until age 65+. This of course assumes the tax code will be the same at that time.

Additional tax. There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. Report the additional tax in the total on Form 1040, line 60, or Form 1040NR, line 59, and enter “HSA” and the amount on the dotted line next to that line.

Exceptions. There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.

Source: http://www.irs.gov/publications/p969/ar02.html

[555]

What difference does it make? You have to keep all the receipts anyway.

Forever?

That's what I mistakenly thought but archbish99 explained how it works.

[porcupine]

What difference does it make? You have to keep all the receipts anyway.

Forever?

That's what I mistakenly thought but archbish99 explained how it works.

But you have raised a niggling doubt though. How do I prove in 2039 (or whatever) that I only claimed my prescriptions (in 2013) and not my doctor's fee as well? I need to find out exactly how these withdrawals are documented at tax time.

- Porcupine

[Easy Rhino]

I'm pretty sure you'll need the receipts (from whenever) to back up the withdrawal you make for the year that you make the withdrawal.

If you do withdrawals in 2013 for 2013 expenses, you'll need to keep 2013 receipts with it.

If you do withdrawals in 2039 for 2013 expenses, you'll need to save the 2013 receipts until 2039 (and then after in case of audit).

Our out of pocket healthcare spending is fortunately low the last few years, so we go ahead and use my HSA when we can. If I ever get a monster out of pocket charge I may consider saving the receipt.

[jebmke]

I use the debit card for small stuff. Easier than filing for reimbursement.

[archbish99]

What difference does it make? You have to keep all the receipts anyway.

Forever?

That's what I mistakenly thought but archbish99 explained how it works.

But you have raised a niggling doubt though. How do I prove in 2039 (or whatever) that I only claimed my prescriptions (in 2013) and not my doctor's fee as well? I need to find out exactly how these withdrawals are documented at tax time.

That's a good question, and not one clearly defined to my knowledge. You can't reimburse an expense that was previously reimbursed or deducted. It's exceedingly difficult to prove a negative. If the IRS wanted to be pedantic, that would require as documentation all tax returns (with supporting receipts) between the expense and the distribution. And you'd have to prove that you didn't have secondary insurance at the time.

[porcupine]

I use the debit card for small stuff. Easier than filing for reimbursement.

My understanding is that you still need to have the receipts for taxes (though I am yet to find out how exactly the taxes are filed).

- Porcupine

[jebmke]

I use the debit card for small stuff. Easier than filing for reimbursement.

My understanding is that you still need to have the receipts for taxes (though I am yet to find out how exactly the taxes are filed).

- Porcupine

Yes, but I keep an envelope labeled Direct Debits and throw them in there. I don't try to reconcile anything. Just watch the statement.

It doesn't preclude having to save the receipts but simplifies withdrawal of the funds.

[bUU]

Thanks. I'm going to look into moving the HSA.

I wonder how much UMB will charge us for taking it away from them. Grrrr

[grabiner]

I recently learned that you can withdraw money from an HSA for non qualified medical expenses if you are over 65. So if I understand right, the HSA acts much like a 401k if you don't withdraw until age 65+. This of course assumes the tax code will be the same at that time.

You pay regular tax on these distributions; you just avoid the 20% penalty. Thus it is still better to use the HSA for medical expenses.

[tarnation]

What difference does it make? You have to keep all the receipts anyway.

Forever?

That's what I mistakenly thought but archbish99 explained how it works.

But you have raised a niggling doubt though. How do I prove in 2039 (or whatever) that I only claimed my prescriptions (in 2013) and not my doctor's fee as well? I need to find out exactly how these withdrawals are documented at tax time.

- Porcupine

I use the big yearly envelope approach, inside are all EOB's, prescription receipts, medical miles, etc. On outside it total of reimbursable amount.
If interpreted strictly, the documentation problem is intractable. see post here

[Aptenodytes]

For me, all of the work goes into matching receipts to allowed expenses and creating a mechanism for storing and retrieving them as needed. Once I do that, it makes little difference whether the receipts are tossed out after three years, 10 years, or 50.

Although the HSA bookkeeping issues do get thorny down the road, when I consider the alternatives (those detested flexible spending accounts or anything that requires getting an insurance company to authorize each reimbursement), the HSA is a vast improvement and I gladly put up with the requirements. A system which trusts individuals to play by the rules but is capable of catching and punishing cheaters is far preferable to a system that assumes everyone is trying to cheat all the time.

[Jordana]

I keep my receipts in an annual folder--prescriptions on one side, vision, dental, etc on the other. I use Quickbooks (I guess you can do this with Quicken) and have made an HSA account and put the virtual payments in as checks. Then I print it out at the end of the year and put it in the folder. I do not actually withdraw the money. I move the HSA folders to keep them with the current year tax folders so that I know to keep them and not get rid of them . I never get rid of any tax stuff anyway. And, a question would be, is the IRS really going to want to see 30 year old receipts; my bet is that the system changes at some point. However, the HSA can be used for medicare and long term care or long term care insurance, so there should be plenty of current expenses for it.

[FedGuy]

I've noticed that, when I check my receipts from two years ago, the ink has faded so badly it's barely legible. How are my receipts for medical expenses incurred this year going to prove anything when I try to deduct them from my 2039 taxes?

[BL]

I have just a small amount of HSA (under $1000) and after leaving it for a decade, I have decided to simplify my portfolio by cashing it out. I will use Medicare part B premiums of about $100/month for my claims (Supplement would also work.) I will list payments for last year to use up the fund. The other possibility would be to get future periodic payments for these two health insurance premiums until it was used up. I can see where that would work nicely for others who retire with insurance costs.