When to take a HSA distribution for past medical costs

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
donocash
Posts: 464
Joined: Sat Mar 03, 2007 7:57 pm

When to take a HSA distribution for past medical costs

Post by donocash »

This is a question I have pondered for a while now, and still have no answer for. When do you decide to take a HSA distribution for past medical expenses, if ever? What factors go into the decision? If not for past expenses ever, then when?

Let me give you my real-life situation. My wife and I are both 60, in good health, and retired. I had opened a HSA some years ago. At that time, my reading suggested that rather than take distributions from the HSA for medical expenses, I should let the fund grow through prudent investment. So, the HSA fund has been 100% invested in VTSAX (Admiral Total Stock Market Index Fund) and it is now worth approximately $50,000.00. As we have been in good health, and have had good insurance, I estimate that there have been no more than $5,000.00 in qualfiied medical expenses over the past years, mostly in $100.00 or less increments.

Our current insurance is very good, and I would expect to have excellent medigap insurance five years down the road, when we are on Medicare at 65, so I don't expect any big expenses from a deductible.

So, my choices as I see it are:

1) Do nothing. Assume that in my later years my wife or I will need and use the money for end-of-life or elderly sickness expenses which are qualified but not covered by insurance.

2) Take no distribution, but change the investment: As we get older, and the expected time to use the funds grows near, VTSAX may be too aggressive. Use a bond fund instead. But when to switch?

3) Plan to phase out the fund after age 65: I could plan to take the money out after age 65, claim no qualified expenses, and pay the tax. I might be able to do that in some years without any tax at all, if there are little in the way of capital gains that year. I have moved some money from an IRA to a Roth IRA with this strategy. I believe that I could move the money out of the HSA over five years (65-70) with no more than a 10% tax. But tax laws can change, so no guarantees. And it would then be harder to move money tax-free/limited taxes from an IRA to a Roth IRA.

4) Take out the $5000.00 or less from the past medical expenses, but do nothing more. The only problem with this is that I have not been a particularly good organizer of medical bills, so it would be a lot of work. Also, it would invite a tax audit, I would think. I would not shoot myself if I was selected for an IRS tax audit, but I would be tempted. I certainly wouldn't do it if there were good studies saying I will have those qualified expenses in the future as I and my wife approach our death. (not too morbid, I hope) In any event, I really wouldn't be avoiding more than $500 in taxes, max. I'm not enthused, but I can be convinced. If not now, but sometime, then when?

5) Do nothing ever. Don't ever use the money for qualified medical expenses. Don't take the money out and pay the tax. Let the kids pay the taxes when they inherit the money.

6) Some horribly complicated combination of 1-5. A more complex and changing mix of funds? Some distributions now, some at 65, some left for health bills, some left for kids?

What should be my strategy?????????????
User avatar
tarnation
Posts: 2544
Joined: Thu Apr 26, 2007 12:36 am

Re: When to take a HSA distribution for past medical costs

Post by tarnation »

some of the same conversations on that going on here...
viewtopic.php?f=1&t=156240
Image
User avatar
tarnation
Posts: 2544
Joined: Thu Apr 26, 2007 12:36 am

Re: When to take a HSA distribution for past medical costs

Post by tarnation »

donocash wrote:This is a question I have pondered for a while now, and still have no answer for. When do you decide to take a HSA distribution for past medical expenses, if ever? What factors go into the decision? If not for past expenses ever, then when?

Let me give you my real-life situation. My wife and I are both 60, in good health, and retired. I had opened a HSA some years ago. At that time, my reading suggested that rather than take distributions from the HSA for medical expenses, I should let the fund grow through prudent investment. So, the HSA fund has been 100% invested in VTSAX (Admiral Total Stock Market Index Fund) and it is now worth approximately $50,000.00. As we have been in good health, and have had good insurance, I estimate that there have been no more than $5,000.00 in qualfiied medical expenses over the past years, mostly in $100.00 or less increments.

Our current insurance is very good, and I would expect to have excellent medigap insurance five years down the road, when we are on Medicare at 65, so I don't expect any big expenses from a deductible.

So, my choices as I see it are:

1) Do nothing. Assume that in my later years my wife or I will need and use the money for end-of-life or elderly sickness expenses which are qualified but not covered by insurance.

2) Take no distribution, but change the investment: As we get older, and the expected time to use the funds grows near, VTSAX may be too aggressive. Use a bond fund instead. But when to switch?

3) Plan to phase out the fund after age 65: I could plan to take the money out after age 65, claim no qualified expenses, and pay the tax. I might be able to do that in some years without any tax at all, if there are little in the way of capital gains that year. I have moved some money from an IRA to a Roth IRA with this strategy. I believe that I could move the money out of the HSA over five years (65-70) with no more than a 10% tax. But tax laws can change, so no guarantees. And it would then be harder to move money tax-free/limited taxes from an IRA to a Roth IRA.

4) Take out the $5000.00 or less from the past medical expenses, but do nothing more. The only problem with this is that I have not been a particularly good organizer of medical bills, so it would be a lot of work. Also, it would invite a tax audit, I would think. I would not shoot myself if I was selected for an IRS tax audit, but I would be tempted. I certainly wouldn't do it if there were good studies saying I will have those qualified expenses in the future as I and my wife approach our death. (not too morbid, I hope) In any event, I really wouldn't be avoiding more than $500 in taxes, max. I'm not enthused, but I can be convinced. If not now, but sometime, then when?

5) Do nothing ever. Don't ever use the money for qualified medical expenses. Don't take the money out and pay the tax. Let the kids pay the taxes when they inherit the money.

6) Some horribly complicated combination of 1-5. A more complex and changing mix of funds? Some distributions now, some at 65, some left for health bills, some left for kids?

What should be my strategy?????????????
This boils down to what to do today ( or this tax year at least). In that sense, the withdrawal options (5),(3),and (1) are all the same vs. the withdrawal option (4). (2) is not really a withdrawal option but a investment option.
Image
User avatar
HueyLD
Posts: 9789
Joined: Mon Jan 14, 2008 9:30 am

Re: When to take a HSA distribution for past medical costs

Post by HueyLD »

.............
Last edited by HueyLD on Sat Feb 07, 2015 12:12 pm, edited 1 time in total.
User avatar
tarnation
Posts: 2544
Joined: Thu Apr 26, 2007 12:36 am

Re: When to take a HSA distribution for past medical costs

Post by tarnation »

donocash wrote:

4) Take out the $5000.00 or less from the past medical expenses, but do nothing more. The only problem with this is that I have not been a particularly good organizer of medical bills, so it would be a lot of work. Also, it would invite a tax audit, I would think. I would not shoot myself if I was selected for an IRS tax audit, but I would be tempted. I certainly wouldn't do it if there were good studies saying I will have those qualified expenses in the future as I and my wife approach our death. (not too morbid, I hope) In any event, I really wouldn't be avoiding more than $500 in taxes, max. I'm not enthused, but I can be convinced. If not now, but sometime, then when?

What should be my strategy?????????????
If you are in the 10% marginal bracket, you are probably better off taking the money out as you go every year and putting it in taxable, esp if you are using to hold VTSAX.
Image
davebarnes
Posts: 542
Joined: Wed Jan 02, 2008 6:06 pm
Location: Berkeley, Denver, Colorado USA

best move

Post by davebarnes »

HueyLD wrote:Once you are 65 and on Medicare, you can withdraw an amount equal to Medicare premiums paid for you and your spouse (except for Medigap premiums). There will be no tax or penalty.
This, in my opinion, is the best action.
A nerd living in Denver
curmudgeon
Posts: 2630
Joined: Thu Jun 20, 2013 11:00 pm

Re: When to take a HSA distribution for past medical costs

Post by curmudgeon »

I've been thinking on this topic myself, without coming to a clear conclusion. A few thoughts:

1) it's pretty common to have some significant dental bills as you age, so it might be worth planning ahead for that potential.

2) I would probably withdraw all that you can easily and conveniently document now for old bills. Don't make a big production of it, but go ahead and take the low hanging fruit.

3) As noted, you can pay your base part b medicare premiums out of this account.

4) I really doubt you are likely to trigger anything in IRS by pulling out ~$5000 in one year. That's pretty easy to hit in a single year with just a bad medical episode and some dental bills. Might be different if you have a atypical tax return anyway, though (lots of deductions, self employed etc).

I'm still adding to our HSA these days, and have been treating it similarly to you, but I'm starting to lean towards just taking the distributions for small stuff yearly. I have a hard time justifying the time spent in recordkeeping vs the rather marginal tax savings. Haven't decided what we'll do when/if we get some bigger bills, as we haven't had any, but I'm starting to lean towards doing them contemporaneously as well.
User avatar
tarnation
Posts: 2544
Joined: Thu Apr 26, 2007 12:36 am

Re: When to take a HSA distribution for past medical costs

Post by tarnation »

curmudgeon wrote:I've been thinking on this topic myself, without coming to a clear conclusion. A few thoughts:

I'm still adding to our HSA these days, and have been treating it similarly to you, but I'm starting to lean towards just taking the distributions for small stuff yearly. I have a hard time justifying the time spent in recordkeeping vs the rather marginal tax savings. Haven't decided what we'll do when/if we get some bigger bills, as we haven't had any, but I'm starting to lean towards doing them contemporaneously as well.
I am currently pondering this also, but it ocurs to me that the record-keeping requirements are the same whether you reimburse yourself this tax year or later. You have to have the same EOB's receipts etc. The only difference is they go in the tax folder for this year or they go in a folder for future years.
Image
Beth*
Posts: 734
Joined: Wed Apr 30, 2014 9:57 am

Re: When to take a HSA distribution for past medical costs

Post by Beth* »

The record keeping may be the same whether you reimburse yourself now or in a later year, but if anything were to happen to you it will be a lot more difficult for your survivors if they have to start documenting your medical expenses over the past 10 years. And, my understanding is that whatever is in the HSA becomes taxable to your beneficiary (other than your spouse) in the year in which it is inherited:

http://www.bogleheads.org/wiki/Health_s ... erited_HSA

Given this, if you are in your 60s I think it makes sense to start depleting the HSA. At a minimum, I think it should be the first retirement savings that anyone uses up. I'm 57 and I am withdrawing from my HSA as I have medical and dental expenses. I'm putting in the maximum each year and my expenses aren't that high so it is growing, but I'm doing my best to spend it down.
User avatar
Artsdoctor
Posts: 6063
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: When to take a HSA distribution for past medical costs

Post by Artsdoctor »

A paycheck is a very powerful thing. I'm not touching my HSA until the paychecks stop or unless I'm diagnosed with an illness which will chew up an awful of medical expense. We will be "penalized" tremendously with Medicare premium "surcharges" once we become eligible for Medicare so my plan is to at least start paying my premiums with my HSA. During my working years, no plans to touch it because I can easily recoup any expenses paid with income.
Last edited by Artsdoctor on Sun Jan 25, 2015 8:08 pm, edited 1 time in total.
User avatar
tarnation
Posts: 2544
Joined: Thu Apr 26, 2007 12:36 am

Re: When to take a HSA distribution for past medical costs

Post by tarnation »

Beth* wrote:The record keeping may be the same whether you reimburse yourself now or in a later year, but if anything were to happen to you it will be a lot more difficult for your survivors if they have to start documenting your medical expenses over the past 10 years. And, my understanding is that whatever is in the HSA becomes taxable to your beneficiary (other than your spouse) in the year in which it is inherited:

http://www.bogleheads.org/wiki/Health_s ... erited_HSA

Given this, if you are in your 60s I think it makes sense to start depleting the HSA. At a minimum, I think it should be the first retirement savings that anyone uses up. I'm 57 and I am withdrawing from my HSA as I have medical and dental expenses. I'm putting in the maximum each year and my expenses aren't that high so it is growing, but I'm doing my best to spend it down.
Yes to minimize the trouble I keep all the documents in a folder. At years end I tally them up, insert the schedule of expenses in the front, seal them in an big envelope, and write HSA reimbursable and the amount on the outside. So that when I or anybody else gets ready to reimburse they just need to take that envelope drop it in that years tax folder and withdraw that amount.
Image
Beth*
Posts: 734
Joined: Wed Apr 30, 2014 9:57 am

Re: When to take a HSA distribution for past medical costs

Post by Beth* »

According to the Wiki " it appears that reimbursable medical expenses of the decedent that had not been reimbursed no longer can be reimbursed." Saving the receipts in an envelope might not do anyone any good unless you reimburse yourself for the receipts before you die. It doesn't matter how well organized they are.
User avatar
Artsdoctor
Posts: 6063
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: When to take a HSA distribution for past medical costs

Post by Artsdoctor »

So, if you were to die without emptying out your HSA, the HSA will pass to your spouse as long as your spouse is named as the beneficiary (you really want to check to make sure this has been done). Your spouse will then be able to use it as his/her HSA. If there is no spouse or if your spouse dies, the HSA ceases to exist as an HSA and will be dumped into your estate. You cannot pass on your HSA to other family members or friends to be used as an HSA.
TomTX
Posts: 165
Joined: Tue Sep 30, 2014 6:43 am

Re: When to take a HSA distribution for past medical costs

Post by TomTX »

Shoot, I would just start depleting as time allows you to go through reciepts. Then further deplete with the Medicare payments, etc.
User avatar
Artsdoctor
Posts: 6063
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: When to take a HSA distribution for past medical costs

Post by Artsdoctor »

^ Sure, that's possible. But many of use are using an HSA as an investment account, not a savings account. If invested properly, you benefit from tax-free gains from pre-tax assets and ultimately from tax-free withdrawals. If you can afford it, don't touch it for many, many years and let it grow.
User avatar
tarnation
Posts: 2544
Joined: Thu Apr 26, 2007 12:36 am

Re: When to take a HSA distribution for past medical costs

Post by tarnation »

Beth* wrote:According to the Wiki " it appears that reimbursable medical expenses of the decedent that had not been reimbursed no longer can be reimbursed." Saving the receipts in an envelope might not do anyone any good unless you reimburse yourself for the receipts before you die. It doesn't matter how well organized they are.
It is not quite that clear cut. Wiki also says

Code: Select all

Even for a spouse HSA beneficiary, it is unclear whether the surviving spouse (who becomes the HSA holder) may distribute the undistributed expenses of the decedent.
From reading the quoted sources, it seems like there have not been many inherited HSA, so there needs to be some rulings on this topic. But this is only a problem if the account holding spouse dies first.
Image
Bill M
Posts: 440
Joined: Sun Dec 30, 2012 9:10 pm

Re: When to take a HSA distribution for past medical costs

Post by Bill M »

Once you turn 65 and are covered by Medicare, you can't contribute any more to the HSA. So the account is "frozen" at that point. But the premiums for Medicare B and D are allowable reimbursements. Also long-term-care premiums.

The HSA is a tax-free account, just like a Roth IRA. My withdrawal sequence is to exhaust all the taxable accounts first, then the tax-deferred accounts (like traditional IRAs) before touching the tax-free accounts. Due to the messiness of inheriting a HSA, it will be the first of the tax-free accounts to be tapped.
User avatar
Hub
Posts: 480
Joined: Fri Jul 13, 2012 8:56 am

Re: When to take a HSA distribution for past medical costs

Post by Hub »

tarnation wrote: Yes to minimize the trouble I keep all the documents in a folder. At years end I tally them up, insert the schedule of expenses in the front, seal them in an big envelope, and write HSA reimbursable and the amount on the outside. So that when I or anybody else gets ready to reimburse they just need to take that envelope drop it in that years tax folder and withdraw that amount.
I like your system. What all do you include in the folder to "prove up" the expenses?
User avatar
tarnation
Posts: 2544
Joined: Thu Apr 26, 2007 12:36 am

Re: When to take a HSA distribution for past medical costs

Post by tarnation »

Hub wrote:
tarnation wrote: Yes to minimize the trouble I keep all the documents in a folder. At years end I tally them up, insert the schedule of expenses in the front, seal them in an big envelope, and write HSA reimbursable and the amount on the outside. So that when I or anybody else gets ready to reimburse they just need to take that envelope drop it in that years tax folder and withdraw that amount.
I like your system. What all do you include in the folder to "prove up" the expenses?
I think most important is EOB. Especially since it is sufficient in itself to satisfy reimbursement from a FSA. I also keep the receipt from payment. For meds I get a summary from my pharmacy (or insurance co). For the schedule I copy and paste the online claims from my insurer into xcel.
Image
Topic Author
donocash
Posts: 464
Joined: Sat Mar 03, 2007 7:57 pm

Re: When to take a HSA distribution for past medical costs

Post by donocash »

Thanks to all who have responded so far.

One suggestion that has come so far that I had not thought of was using the HSA for medicare B costs.

It seems, however, that those costs are relatively small, at least compared to what I have in reserve in my HSA. It sounds like others have even much more in their HSA than I do.

My understanding is that the Medicare B premium is about $1200.00/yr. currently.

Are there other costs to be saved for? I have really no idea what to expect when I will fall into illness, as we all must barring a sudden demise. I assume, perhaps naively, that when I or my wife require medical care that it will be covered by Medicare or Medigap coverage for the most part.

I feel that I am still missing something. What is it?
Last edited by donocash on Mon Jan 26, 2015 8:06 pm, edited 1 time in total.
User avatar
HueyLD
Posts: 9789
Joined: Mon Jan 14, 2008 9:30 am

Re: When to take a HSA distribution for past medical costs

Post by HueyLD »

................
Last edited by HueyLD on Sat Feb 07, 2015 12:12 pm, edited 1 time in total.
User avatar
Artsdoctor
Posts: 6063
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: When to take a HSA distribution for past medical costs

Post by Artsdoctor »

The Medicare premium is based on your MAGI. Although the base rate might be $1200 it can easily cost three times that amount if you're working. And that premium is based on your previous 1040, for what that's worth (so if you and your spouse are high-income earners at ages 63 and 64, you'll be paying dearly for your Medicare). If you have no medications, you'll be fine. If you need prescriptions which are costly, you could well have significant co-pays.

If worse comes to worse and you just can't find anything to spend your money on, you can reimburse yourself for years gone by or even withdraw the balance and pay income tax just like your IRA. I just don't see how anyone can have an HSA balance which is "too high."
User avatar
Texas Radio
Posts: 135
Joined: Sun Dec 28, 2014 10:59 am

Re: When to take a HSA distribution for past medical costs

Post by Texas Radio »

Artsdoctor wrote:^ Sure, that's possible. But many of use are using an HSA as an investment account, not a savings account. If invested properly, you benefit from tax-free gains from pre-tax assets and ultimately from tax-free withdrawals. If you can afford it, don't touch it for many, many years and let it grow.
+1

If used properly it's the only triple tax benefit vehicle. Contributions are tax deductible. They grow tax deferred. You can withdraw anytime tax free for medical expenses (which are defined very liberally). Save your receipts as they never expire. We have a shoebox full for later use. Also, long term care insurance is a medical expense. Love HSA
A portfolio is like a bar of soap. The more you handle it the smaller it gets.
User avatar
tarnation
Posts: 2544
Joined: Thu Apr 26, 2007 12:36 am

Re: When to take a HSA distribution for past medical costs

Post by tarnation »

Texas Radio wrote:If used properly it's the only triple tax benefit vehicle. Contributions are tax deductible. They grow tax deferred. You can withdraw anytime tax free for medical expenses (which are defined very liberally). Save your receipts as they never expire. We have a shoebox full for later use. Also, long term care insurance is a medical expense. Love HSA
Well, not "never". ^
Image
User avatar
Texas Radio
Posts: 135
Joined: Sun Dec 28, 2014 10:59 am

Re: When to take a HSA distribution for past medical costs

Post by Texas Radio »

Well, not "never". ^[/quote]

It's my understanding that as of now there is no expiration date on receipts
A portfolio is like a bar of soap. The more you handle it the smaller it gets.
User avatar
tarnation
Posts: 2544
Joined: Thu Apr 26, 2007 12:36 am

Re: When to take a HSA distribution for past medical costs

Post by tarnation »

Texas Radio wrote:Well, not "never". ^
It's my understanding that as of now there is no expiration date on receipts[/quote]
Per conversation up thread ^, for nonspouse beneficiaries, they expire when the account owner does.
Image
Post Reply