HSA... any receipt savers?

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tarnation
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Re: HSA... any receipt savers?

Post by tarnation » Tue Jan 27, 2015 11:49 pm

Beth* wrote:One of the things I like about Bogleheads is the emphasis on simplifying one's finances so it's not necessary to spend a lot of time worrying about them and managing them.

I am guessing that for most of us our HSA is a small fraction of our total worth. Is it really worth it to try to find the exactly optimal strategy for when to spend it down? Is it any more possible to find that optimal strategy, given the number of unknowns, than it is to predict whether the stock market will go up or down?
False equivalence. The tax laws are known. Stock market performance is not.
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Re: HSA... any receipt savers?

Post by knpstr » Wed Jan 28, 2015 8:23 am

tarnation wrote: To me this still sounds like you are saying don't put too much in your HSA. IMO, anyone who has the money should stuff it full. Worst case it is a tax deductible IRA with no income phase outs or RMD's. This is a good thing.
I see your point. It may be a disagreement on personal preference. "By the numbers" it is better to use your taxable than to keep money in the hsa (presuming you know that money will be used for living expenses).

I believe it is always good to max one's HSA, for the deduction. However, I also believe it is suboptimal to let it grow for say 35 years and end up with "too much" and have to use it for living expenses. To me it seems, that it is better to intentionally "stunt it's growth" by using your tax-free money now. (for those of us that may have 35 years of contributions and growth to work with, this recommendation does not apply to everyone).

Again, comparing this particular situation is one of comparing a taxable to a non-deductible ira, since the full $1,000 is being spent in both cases (in 1 case taxable investment, in the other on medical expenses). With the wiki link you posted earlier we see the taxable comes out ahead of the non-deductible account.

Basically my opinion boils down to: (and this applies to my situation and perhaps others out there, certainly not all)
There is no better way to pay/save for medical expenses than a HSA.
There are better ways to invest for future living expenses than a HSA.
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letsgobobby
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Re: HSA... any receipt savers?

Post by letsgobobby » Wed Jan 28, 2015 3:29 pm

An HSA used for non medical expenses in retirement is like a 401k that avoids payroll taxes. You say that taxable is better than an HSA used for non medical expenses in retirement. Ergo, you believe taxable is better than a 401k.

Is that right?

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Re: HSA... any receipt savers?

Post by knpstr » Wed Jan 28, 2015 3:46 pm

letsgobobby wrote:An HSA used for non medical expenses in retirement is like a 401k that avoids payroll taxes. You say that taxable is better than an HSA used for non medical expenses in retirement. Ergo, you believe taxable is better than a 401k.

Is that right?
No, not right.

Again, I'm bias to my situation in my posts. I have a HSA that isn't deducted from my paycheck, so it is subject to payroll tax (and fed/state too, but those get refunded). However, I believe the comparison to the 401k is not correct (regardless of the payroll tax situation), though it seems that way at first blush. Here's why: In both cases we still need access to an after-tax $1,000.

(1) Pay out-of-pocket = spending after-tax $1,000 on medical costs (remember you can't deduct these AND reimburse yourself later)

(2) Pay out of HSA = spending $1,000 tax-free on medical costs, thereby freeing an extra $1,000 after-tax for investing in a taxable (or even better yet left to max out a 401k or IRA if you haven't yet)

So we're comparing a taxable account to the equivalent of a non-deductible ira (we're using an after-tax $1,000 in both cases! We are also getting the full HSA deduction in both cases!). A taxable account is better than a non-deductible IRA. (HSA can't be "saved" by conversions).
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tarnation
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Re: HSA... any receipt savers?

Post by tarnation » Wed Jan 28, 2015 6:19 pm

knpstr wrote:
tarnation wrote: To me this still sounds like you are saying don't put too much in your HSA. IMO, anyone who has the money should stuff it full. Worst case it is a tax deductible IRA with no income phase outs or RMD's. This is a good thing.
I see your point. It may be a disagreement on personal preference. "By the numbers" it is better to use your taxable than to keep money in the hsa (presuming you know that money will be used for living expenses).
By the numbers it can be better to defer reimbursing oneself for qualified expenses, e.g. holding bonds. Not sure what the last part means. We know we are withdrawing an amount for qualified expenses, we just don't yet know when.

I believe it is always good to max one's HSA, for the deduction. However, I also believe it is suboptimal to let it grow for say 35 years and end up with "too much" and have to use it for living expenses. To me it seems, that it is better to intentionally "stunt it's growth" by using your tax-free money now. (for those of us that may have 35 years of contributions and growth to work with, this recommendation does not apply to everyone).
Forget size, I think size of account is a red herring here. The size is determined by contributions, RoR, and withdrawals. We have established the contributions are maxed, the ROR is not controllable (but assumed to be fixed), and we are trying to determine when to withdraw to maximize net after tax return. So size is a dependent variable.

Again, comparing this particular situation is one of comparing a taxable to a non-deductible ira, since the full $1,000 is being spent in both cases (in 1 case taxable investment, in the other on medical expenses). With the wiki link you posted earlier we see the taxable comes out ahead of the non-deductible account.
There is no $1000 in the simplified scenario. It is better to immediately reimburse under some conditions

Basically my opinion boils down to: (and this applies to my situation and perhaps others out there, certainly not all)
There is no better way to pay/save for medical expenses than a HSA.
Agreed
There are better ways to invest for future living expenses than a HSA.
Disagree. HSA worst case is better than all other tax deductible retirement accounts. HSA best case is better than Roth. (ignoring any inheritance issues).

I think two ideas are being conflated, (1)the decision to invest in an HSA (and how much) and (2) when to reimburse yourself (is there a better time) which is what this thread is about. In the latter, the decision to contribute has already been made and is irrelevant.
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Re: HSA... any receipt savers?

Post by letsgobobby » Wed Jan 28, 2015 6:33 pm

I think you are wrong. It is exactly comparable. In fact given the payroll deduction it is preferable to max an HSA before contributing to a 401k, all other things equal.

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knpstr
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Re: HSA... any receipt savers?

Post by knpstr » Wed Jan 28, 2015 6:41 pm

tarnation wrote: Disagree. HSA worst case is better than all other tax deductible retirement accounts.
You are still ignoring the "cost" of paying $1,000 in cash now for medical expenses. One MUST consider the "cost" of paying cash for the medical expenses (allowing you to defer and let the HSA grow) in the scenario and what one could do with that money in alternative scenarios. I am going to say you have not run the numbers yourself.

If you defer the medical reimbursement you're paying $1,000 in after-tax cash now, to retrieve $1,000 tax-free in the future, and the growth that the deferred $1,000 is in best case tax-free or in worst case taxed at ordinary income levels (worst of all options)

If you pay $1,000 in tax free money now, you may invest the now "freed up" $1,000 in a taxable account. That $1,000 will grow partly tax free (capital gains) and partially taxed (dividends- assuming our tax rate scenario above).

It is best demonstrated by numbers:
https://docs.google.com/spreadsheets/d/ ... sp=sharing

Hope the link works correctly

EDIT:
Also an HSA is worse (only slightly) than Traditional IRA or 401(k) (for the purpose of living expenses) in that they can potentially rolled over or converted into a Roth at an opportune time. A HSA is "stuck" in this sense.
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Re: HSA... any receipt savers?

Post by kaneohe » Wed Jan 28, 2015 7:33 pm

"There are better ways to invest for future living expenses than a HSA

'Disagree. HSA worst case is better than all other tax deductible retirement accounts. '

worst case........ < 59.5 y.o...................HSA penalized 20%; TIRA/401K penalized 10%

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Re: HSA... any receipt savers?

Post by knpstr » Wed Jan 28, 2015 7:44 pm

kaneohe wrote:"There are better ways to invest for future living expenses than a HSA

'Disagree. HSA worst case is better than all other tax deductible retirement accounts. '

worst case........ < 59.5 y.o...................HSA penalized 20%; TIRA/401K penalized 10%
Actually you can't access your HSA, penalty free, until age 65 not 59.5
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Re: HSA... any receipt savers?

Post by kaneohe » Wed Jan 28, 2015 9:22 pm

knpstr wrote:
kaneohe wrote:"There are better ways to invest for future living expenses than a HSA

'Disagree. HSA worst case is better than all other tax deductible retirement accounts. '

worst case........ < 59.5 y.o...................HSA penalized 20%; TIRA/401K penalized 10%
Actually you can't access your HSA, penalty free, until age 65 not 59.5
Yes, I know. That's the TIRA access age. Was trying to give HSA a chance.
Even worse : withdraw between 59.5 and 65. HSA penalized 20%. TIRA/401K not penalized.

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Re: HSA... any receipt savers?

Post by Texas Radio » Wed Jan 28, 2015 9:59 pm

HSA is the greatest: 1) contributions tax deductible; 2) grows tax deferred; 3) keep receipts for anything and everything related to medical, dental, psychological, even massages, accupuncture and chiropractic..you name it; even long term care insurance and you withdraw the money anytime tax free. The receipts, as of now, never expire...

It's the only triple threat tax shelter. I have an account with Health Savings Administrators who have Vanguard Admiral funds.
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Re: HSA... any receipt savers?

Post by tarnation » Wed Jan 28, 2015 11:20 pm

knpstr wrote:
tarnation wrote: Disagree. HSA worst case is better than all other tax deductible retirement accounts.
You are still ignoring the "cost" of paying $1,000 in cash now for medical expenses. One MUST consider the "cost" of paying cash for the medical expenses (allowing you to defer and let the HSA grow) in the scenario and what one could do with that money in alternative scenarios.
no, there is no $1000. (remember the Matrix, "There is no spoon" :)) The scenario is as stated before: (1) I contributed money to my HSA (for whatever reason or motivation, for better or worse it's in there), (2) I incurred medical expenses of $M which I HAVE to pay (my doctor is funny that way). (3) my account balance is greater than $M. All these costs associated with these decisions ( whether to contribute or not, pay the medical bills or not,how much my medical bill was) those are all sunk costs. So then the prospective question is, do I reimburse myself $M now or later? That is the only decision to be made.
I am going to say you have not run the numbers yourself.
An odd statement, based on what?

If you defer the medical reimbursement you're paying $1,000 in after-tax cash now, to retrieve $1,000 tax-free in the future, and the growth that the deferred $1,000 is in best case tax-free or in worst case taxed at ordinary income levels (worst of all options)

If you pay $1,000 in tax free money now, you may invest the now "freed up" $1,000 in a taxable account. That $1,000 will grow partly tax free (capital gains) and partially taxed (dividends- assuming our tax rate scenario above).

It is best demonstrated by numbers:
https://docs.google.com/spreadsheets/d/ ... sp=sharing
CAn't make any sense out of that. That's why I was hoping to just use a known good table as a common basis. I thought you had fixed basis. It's still wrong.

Hope the link works correctly

EDIT:
Also an HSA is worse (only slightly) than Traditional IRA or 401(k) (for the purpose of living expenses) in that they can potentially rolled over or converted into a Roth at an opportune time. A HSA is "stuck" in this sense.
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Re: HSA... any receipt savers?

Post by Leeraar » Thu Jan 29, 2015 1:03 am

So, let's look at my situation (numbers are approximate, rounded for convenience):

Age 58, retired. Forced to a High Deductible Health Plan. Can contribute $7,000 p.a. to an HSA. Actual health care costs are $2,000 per year. Deductible is $7,000 per year.

Reasonable investment options are available in the HSA:

VANGUARD MID CAP INDEX FUND VIMSX
VANGUARD SMALL CAP INDEX FUND NAESX

At age 65, this retiree health care coverage will stop. I will not be able to contribute any more to an HSA, I will be forced to Medicare. The HSA balance will remain invested, and is available for future medical expenses.

What is the optimum strategy? I have seven years of potential HSA contributions available.

What I am doing is:

1. Contribute the max. to the HSA, invested 50/50 in the above two funds, except for a required cash balance of $1,000.
2. Use the HSA debit card for about half of current expenses, $1,000 per year.
3. Not saving receipts from current unreimbursed expenses. (Could fix that by getting statements from my dentist, which have been the most significant costs.)
3. Plan to use HSA balance at age 65 (about $28,000) for future medical expenses.

I don't see much wrong with this. It seems I should probably be more conscientious about saving receipts. Also, I could drive my wife crazy by telling her not to use the HSA debit card, but to use the cash-back credit card (to get 1% or whatever) and claim HSA reimbursement later.

Thoughts?

L.
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Re: HSA... any receipt savers?

Post by Leeraar » Thu Jan 29, 2015 1:06 am

Texas Radio wrote:HSA is the greatest: 1) contributions tax deductible; 2) grows tax deferred; 3) keep receipts for anything and everything related to medical, dental, psychological, even massages, accupuncture and chiropractic..you name it; even long term care insurance and you withdraw the money anytime tax free. The receipts, as of now, never expire...

It's the only triple threat tax shelter. I have an account with Health Savings Administrators who have Vanguard Admiral funds.
I am not sure this is 100% correct. I cannot use my HSA for OTC medicine like allergy relief.

L.
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Re: HSA... any receipt savers?

Post by letsgobobby » Thu Jan 29, 2015 1:24 am

knpstr wrote:
tarnation wrote: Disagree. HSA worst case is better than all other tax deductible retirement accounts.
You are still ignoring the "cost" of paying $1,000 in cash now for medical expenses. One MUST consider the "cost" of paying cash for the medical expenses (allowing you to defer and let the HSA grow) in the scenario and what one could do with that money in alternative scenarios. I am going to say you have not run the numbers yourself.

If you defer the medical reimbursement you're paying $1,000 in after-tax cash now, to retrieve $1,000 tax-free in the future, and the growth that the deferred $1,000 is in best case tax-free or in worst case taxed at ordinary income levels (worst of all options)

If you pay $1,000 in tax free money now, you may invest the now "freed up" $1,000 in a taxable account. That $1,000 will grow partly tax free (capital gains) and partially taxed (dividends- assuming our tax rate scenario above).

It is best demonstrated by numbers:
https://docs.google.com/spreadsheets/d/ ... sp=sharing

Hope the link works correctly

EDIT:
Also an HSA is worse (only slightly) than Traditional IRA or 401(k) (for the purpose of living expenses) in that they can potentially rolled over or converted into a Roth at an opportune time. A HSA is "stuck" in this sense.
I'm sorry, you just aren't right. I don't know how to show you any other way. There is no separate $1000. There is only $1000 to be spent from Pot A (untaxed forever) or Pot B (subject to taxes). It is better to spend from Pot B, allowing the $1000 to continue to grow in Pot A until there is no other choice. That is why people use 401ks. That is why people use IRAs. That is why people say, "A tax deferred is a tax not paid." And that is why it is better to use an HSA for future savings growth of $1000 if you have the opportunity to leave the $1000 in it, rather than taking it out prematurely.

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Re: HSA... any receipt savers?

Post by Leeraar » Thu Jan 29, 2015 1:43 am

letsgobobby wrote:
knpstr wrote:
tarnation wrote: Disagree. HSA worst case is better than all other tax deductible retirement accounts.
You are still ignoring the "cost" of paying $1,000 in cash now for medical expenses. One MUST consider the "cost" of paying cash for the medical expenses (allowing you to defer and let the HSA grow) in the scenario and what one could do with that money in alternative scenarios. I am going to say you have not run the numbers yourself.

If you defer the medical reimbursement you're paying $1,000 in after-tax cash now, to retrieve $1,000 tax-free in the future, and the growth that the deferred $1,000 is in best case tax-free or in worst case taxed at ordinary income levels (worst of all options)

If you pay $1,000 in tax free money now, you may invest the now "freed up" $1,000 in a taxable account. That $1,000 will grow partly tax free (capital gains) and partially taxed (dividends- assuming our tax rate scenario above).

It is best demonstrated by numbers:
https://docs.google.com/spreadsheets/d/ ... sp=sharing

Hope the link works correctly

EDIT:
Also an HSA is worse (only slightly) than Traditional IRA or 401(k) (for the purpose of living expenses) in that they can potentially rolled over or converted into a Roth at an opportune time. A HSA is "stuck" in this sense.
I'm sorry, you just aren't right. I don't know how to show you any other way. There is no separate $1000. There is only $1000 to be spent from Pot A (untaxed forever) or Pot B (subject to taxes). It is better to spend from Pot B, allowing the $1000 to continue to grow in Pot A until there is no other choice. That is why people use 401ks. That is why people use IRAs. That is why people say, "A tax deferred is a tax not paid." And that is why it is better to use an HSA for future savings growth of $1000 if you have the opportunity to leave the $1000 in it, rather than taking it out prematurely.
I think the issue here is that an HSA is always tax deductible going in. It is never after-tax going in, like some IRA or 401k contributions may be.

I can quite see the argument that after-tax IRA contributions succeed in converting all investment gains into ordinary income, and may therefore not have an advantage. I think the inherent pre-tax nature of HSA contributions outweighs that, no matter the ultimate use of the HSA.

(Yes, there is a presumption on tax rates here. Let's say the rates are constant.)

L.
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Re: HSA... any receipt savers?

Post by Texas Radio » Thu Jan 29, 2015 7:25 am

http://healthsavings.com/hsa/what-is-covered-by-an-hsa/

The link above shows just how much is covered by an HSA. OTC meds like aspirin are not but pretty much everything else is. Eyeglasses, contact lenses, teeth cleanings..so many. Point being it is easy to save receipts and then withdraw some or all of your investments tax-free after they have compounded nicely. This can be done before age 65 if you like.

Receipts do not need to be produced to your administrator to withdraw funds. Our only watchdog is the IRS and years and years of receipts will be available to satisfy them. 8-)
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Re: HSA... any receipt savers?

Post by knpstr » Thu Jan 29, 2015 8:07 am

letsgobobby wrote: I'm sorry, you just aren't right. I don't know how to show you any other way. There is no separate $1000. There is only $1000 to be spent from Pot A (untaxed forever) or Pot B (subject to taxes). It is better to spend from Pot B, allowing the $1000 to continue to grow in Pot A until there is no other choice. That is why people use 401ks. That is why people use IRAs. That is why people say, "A tax deferred is a tax not paid." And that is why it is better to use an HSA for future savings growth of $1000 if you have the opportunity to leave the $1000 in it, rather than taking it out prematurely.
Okay, let me put it this way for you guys -

The Assumptions:
-----------------------------------------------------------------------------------------------------
I have $1,000 in my HSA that I have contributed yesterday (so no growth yet)
I incur a $1,000 medical cost, today.
I currently have after tax cash in my checking account of $1,000
I just opened a Taxable Account but have not put money in it. $0

The Scenarios:
-----------------------------------------------------------------------------------------------------
(1) Pay out of pocket
My HSA still has $1,000 in it - ready to grow
I spend cash from my checking account of $1,000 for the medical expense today
I now have after tax cash in my checking account of $0
Since I have no money left in my checking account, I still have $0 in my taxable account

(2) Pay out of HSA
My HSA has $1,000 removed and now has $0 in it.
I spend the money already contributed to the HSA yesterday for the medical expense today
I still have after tax cash in my checking account of $1,000
I choose to invest this full $1,000 from my checking account into a taxable account.
I now have after tax cash in my checking account of $0

This is how we get to my spreadsheet I shared. Maybe you can understand where the numbers came from now. It covers 30 years of growth from the decisions made in scenarios (1) and (2) and we use both on living expenses. (Thanks for pointing out the basis error, I corrected it)

https://docs.google.com/spreadsheets/d/ ... sp=sharing
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Re: HSA... any receipt savers?

Post by Userdc » Thu Jan 29, 2015 9:26 am

I think it's good for everyone to run the numbers, and there are certainly scenarios where a taxable account beats a non-deduticble IRA (which I think is the appropriate comparison when we talk about whether we should spend 1,000 already in an HSA vs 1,000 in taxable).

In many cases, this same analysis will lead to a very different answer:

1) lower income tax rate in retirement. Many people currently in 15% dividend bracket will have lower than 25% marginal tax rate in retirement.
2) higher dividend tax rate. Federal dividend tax can be as high as ~25% (20% + Medicare surtax + pease). Even if that drops to 15% in retirement, the running tax drag erases any taxable advantage to lower capital gains at the end.
3) non enough tax-deferred space for bonds. This is primarily a problem for higher income, but if you run same analysis for bonds, taxable will get crushed.
4) future medical needs expected. If you run your numbers and assume there is a $2000 medical bill in year 30, these two will be back to parity.

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Re: HSA... any receipt savers?

Post by knpstr » Thu Jan 29, 2015 9:57 am

Userdc wrote:I think it's good for everyone to run the numbers, and there are certainly scenarios where a taxable account beats a non-deduticble IRA (which I think is the appropriate comparison when we talk about whether we should spend 1,000 already in an HSA vs 1,000 in taxable).

In many cases, this same analysis will lead to a very different answer:

1) lower income tax rate in retirement. Many people currently in 15% dividend bracket will have lower than 25% marginal tax rate in retirement.
2) higher dividend tax rate. Federal dividend tax can be as high as ~25% (20% + Medicare surtax + pease). Even if that drops to 15% in retirement, the running tax drag erases any taxable advantage to lower capital gains at the end.
3) non enough tax-deferred space for bonds. This is primarily a problem for higher income, but if you run same analysis for bonds, taxable will get crushed.
4) future medical needs expected. If you run your numbers and assume there is a $2000 medical bill in year 30, these two will be back to parity.
Absolutely agree, people should actually do the calculations based upon what applies to them! what one can contribute, years left to contribute, reasonable estimate for medical expenses, preferred portfolio allocation, etc...

1) Fair point - Remember too that if your marginal rate is any lower than 25% your Capital Gains rate drops to 0% (so remember to adjust both scenarios for the new assumptions - this usually works out better for the taxable group since the difference in final tax is greater 15% vs 25% against say 0% vs 15%)
2) I ran that scenario on our $1,000 example. (dividends taxed at 25% for 30 years. At the end taxable gets taxed at 15%, HSA gets taxed at 25%) Taxable still comes out slightly ahead.
3) I'd suggest that if you're in a higher income level and have this problem, you should be in tax-exempt bonds, nevertheless I see your point.
4) This current example has been whittled down to as simple as possible, to try to show what I'm talking about. In the first examples we assumed maxing the HSA every year then assuming $1,000 expenses on average each year for 30 years ending up with HSAs in the hundreds of thousands of dollars, in both cases... and it seemed too complex to get my point across, so it has been reduced to this basic demonstration.
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letsgobobby
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Re: HSA... any receipt savers?

Post by letsgobobby » Thu Jan 29, 2015 10:21 am

We're going around in circles and don't seem to be able to understand each other, so I'm going to move on. I will continue to pay for all my living expenses, including medical expenses, from cash flow and checking accounts, while continuing to save the maximum possible in all my tax advantaged accounts, including Roth IRAs, 403b, HSA, etc, for as long as the government will allow me.

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Re: HSA... any receipt savers?

Post by packet » Thu Jan 29, 2015 10:46 am

(OP here)

Thanks everyone for such a great thread... learned way more than I anticipated!
:sharebeer

Anyway, for me and my personal situation, I'll be maxing out my HSA and saving receipts for later use (I have ~15 years to go, my employer pitches in $2,600/year, and i can contribute via paycheck (no fed/state/fica taxes). If I understand the bottom line(s) from this thread, I'm doing the right thing (or, at the very least, not doing the wrong thing).

:beerCheers!
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Re: HSA... any receipt savers?

Post by knpstr » Thu Jan 29, 2015 11:01 am

letsgobobby wrote:We're going around in circles and don't seem to be able to understand each other, so I'm going to move on. I will continue to pay for all my living expenses, including medical expenses, from cash flow and checking accounts, while continuing to save the maximum possible in all my tax advantaged accounts, including Roth IRAs, 403b, HSA, etc, for as long as the government will allow me.
Sorry, I couldn't be more clear in my examples for you. I thought my last post in doing a "walk-through" with the actual flow of cash did a good job, but I guess not. I'm sure it is my inability to get my point across clearly.

A HSA is a unique scenario, different than those others (Trad IRAs, 401(k), etc), in that we have the opportunity to use it along the way, without penalty. If one chooses to not utilize it, and pays out-of-pocket, one must take into consideration what they could have done with that money had they chosen otherwise. Paying with the HSA as you go you still get the full benefit of tax free in and tax free out of all of your medical costs, the ONLY difference is you just lose out on that potential tax-deferred growth. My spreadsheet and examples were to show that if that "tax-deferred growth" in your HSA is ultimately used for living expenses, you'd have more money if you paid out of your HSA and invested the out-of-pocket cash you otherwise spent, given our assumptions. You can say anytime you pay out-of-pocket instead of using an HSA you're just making the equivalent of a non-deductible IRA contribution. Again, the equivalent comparison given all of this, is a taxable account to a NON-deductible IRA (that can't be converted later), not a comparison of a taxable account to a 401k or Deductible IRA or Roth IRA, etc.

However, you can take comfort in knowing that even in my examples it won't make a bank breaking difference in the end either way one decides to go as long as they are maxing out their HSA along the way.

There are other advantages to investing in a taxable account such as liquidity, gains/loss harvesting, etc... but unfortunately we never got to that part!
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Re: HSA... any receipt savers?

Post by scottyja » Thu Jan 29, 2015 11:29 am

knpstr wrote:My spreadsheet and examples were to show that if that "tax-deferred growth" in your HSA is ultimately used for living expenses, you'd have more money if you paid out of your HSA and invested the out-of-pocket cash you otherwise spent, given our assumptions.
knpstr, I appreciate the time you put into calculating all this out. The quote above is the biggest difference for me - I intend to eventually use my entire HSA for medical expenses, but probably later in life. Having a young family, I expect my medical expenditures to fluctuate wildly year-to-year for the next 20 years (you never know with kids). Some years we'll likely hit our insurance out-of-pocket maximum, and I'll probably pay out of the HSA for those years. However, I'm still anticipating my medical expenses in retirement to outweigh any accumulated savings in my HSA. As people age, medical expenses go up. It will be comforting to have that large cushion to fall back on.

The other aspect is probably more a weakness than a conscious decision, but I doubt I will be 100% disciplined in putting those funds I would have used for medical expenses into a taxable account. If I pay a $1,000 bill with my HSA, I think I'm more likely to NOT add an additional $1,000 to my Vanguard account than to do it. Primarily because mentally it seems I don't have that money to invest, where if I'm paying a bill, I really don't feel I have a choice. I'm not sure if that makes sense, but it's more of a mental game for me. So in the meantime, I'm saving my receipts - whether I ever cash them in remains to be seen.

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Re: HSA... any receipt savers?

Post by Userdc » Thu Jan 29, 2015 12:29 pm

This discussion has been very helpful for me as well. To me, the two key assumptions for knpstr's analysis are:

1) you expect your lifetime HSA contributions/earnings to comfortably exceed your lifetime medical expenses. Essentially, you are putting extra money in the HSA with the intent of using some of it as a traditional IRA.
2) you have enough other tax-deferred space for your bond allocation

If those two assumptions hold, most people would be better off pulling from the HSA as they go, rather than saving receipts.

The equivalent concept: let's say the government gives you a voucher to pull $10K tax-free out of your traditional deductible IRA. Would you use that voucher today or at some point in the future?

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Re: HSA... any receipt savers?

Post by letsgobobby » Thu Jan 29, 2015 1:13 pm

Userdc wrote:This discussion has been very helpful for me as well. To me, the two key assumptions for knpstr's analysis are:

1) you expect your lifetime HSA contributions/earnings to comfortably exceed your lifetime medical expenses. Essentially, you are putting extra money in the HSA with the intent of using some of it as a traditional IRA.
2) you have enough other tax-deferred space for your bond allocation

If those two assumptions hold, most people would be better off pulling from the HSA as they go, rather than saving receipts.

The equivalent concept: let's say the government gives you a voucher to pull $10K tax-free out of your traditional deductible IRA. Would you use that voucher today or at some point in the future?
Just like with a "get out of jail free" card in Monopoly, I suspect most of us would save it until we actually needed it.

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Re: HSA... any receipt savers?

Post by Userdc » Thu Jan 29, 2015 1:22 pm

letsgobobby wrote: Just like with a "get out of jail free" card in Monopoly, I suspect most of us would save it until we actually needed it.
I suspect you are right, but most people would pay less taxes and end up with more money if they used the voucher ASAP.

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Re: HSA... any receipt savers?

Post by knpstr » Thu Jan 29, 2015 1:25 pm

letsgobobby wrote: Just like with a "get out of jail free" card in Monopoly, I suspect most of us would save it until we actually needed it.
Just remember the "get out of jail free" card is depreciating! $1,000 today is worth more than $1,000 20 years from now.

The "Tax-Free" amount you defer does not grow in value itself, you're just tying it up so that the growth from it may be tax free or it may be taxed as ordinary income. If you instead opt to allow it to grow under capital gains tax you can guarantee it won't be taxed as ordinary income (under current laws) and may even be mostly tax free if your retirement tax bracket is low.
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Re: HSA... any receipt savers?

Post by Leeraar » Thu Jan 29, 2015 2:06 pm

If you had a "Get out of jail free" card, would you sell it now, rather than keep it for future use?

I think the introduction of the $1,000 after tax amount is a bit of a red herring.

L.
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Re: HSA... any receipt savers?

Post by knpstr » Thu Jan 29, 2015 2:57 pm

Leeraar wrote: I think the introduction of the $1,000 after tax amount is a bit of a red herring.

L.
Could you explain why you think it is a bit of a red herring?
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Re: HSA... any receipt savers?

Post by Leeraar » Thu Jan 29, 2015 3:37 pm

knpstr wrote:
Leeraar wrote: I think the introduction of the $1,000 after tax amount is a bit of a red herring.

L.
Could you explain why you think it is a bit of a red herring?
Because, to pay out of pocket now with after-tax funds and then to not redeem that chit in the future is a very non-optimal thing to do.

L.
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Re: HSA... any receipt savers?

Post by knpstr » Thu Jan 29, 2015 3:59 pm

Leeraar wrote:
knpstr wrote:
Leeraar wrote: I think the introduction of the $1,000 after tax amount is a bit of a red herring.

L.
Could you explain why you think it is a bit of a red herring?
Because, to pay out of pocket now with after-tax funds and then to not redeem that chit in the future is a very non-optimal thing to do.

L.
I don't follow.

The people paying out of pocket now with after-tax funds are redeeming in the future, no?
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Re: HSA... any receipt savers?

Post by Leeraar » Thu Jan 29, 2015 4:39 pm

knpstr wrote:
Leeraar wrote:
knpstr wrote:
Leeraar wrote: I think the introduction of the $1,000 after tax amount is a bit of a red herring.

L.
Could you explain why you think it is a bit of a red herring?
Because, to pay out of pocket now with after-tax funds and then to not redeem that chit in the future is a very non-optimal thing to do.

L.
I don't follow.

The people paying out of pocket now with after-tax funds are redeeming in the future, no?
I'll look at your numbers again.
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Re: HSA... any receipt savers?

Post by Texas Radio » Thu Jan 29, 2015 4:44 pm

letsgobobby wrote:We're going around in circles and don't seem to be able to understand each other, so I'm going to move on. I will continue to pay for all my living expenses, including medical expenses, from cash flow and checking accounts, while continuing to save the maximum possible in all my tax advantaged accounts, including Roth IRAs, 403b, HSA, etc, for as long as the government will allow me.
+1
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Re: HSA... any receipt savers?

Post by tarnation » Thu Jan 29, 2015 6:33 pm

knpstr wrote: Okay, let me put it this way for you guys -

The Assumptions:
-----------------------------------------------------------------------------------------------------
I have $1,000 in my HSA that I have contributed yesterday (so no growth yet)
I incur a $1,000 medical cost, today.
I currently have after tax cash in my checking account of $1,000
I just opened a Taxable Account but have not put money in it. $0

The Scenarios:
-----------------------------------------------------------------------------------------------------
(1) Pay out of pocket
My HSA still has $1,000 in it - ready to grow
I spend cash from my checking account of $1,000 for the medical expense today
I now have after tax cash in my checking account of $0
Since I have no money left in my checking account, I still have $0 in my taxable account

(2) Pay out of HSA
My HSA has $1,000 removed and now has $0 in it.
I spend the money already contributed to the HSA yesterday for the medical expense today
I still have after tax cash in my checking account of $1,000
I choose to invest this full $1,000 from my checking account into a taxable account.
I now have after tax cash in my checking account of $0

This is how we get to my spreadsheet I shared. Maybe you can understand where the numbers came from now. It covers 30 years of growth from the decisions made in scenarios (1) and (2) and we use both on living expenses. (Thanks for pointing out the basis error, I corrected it)

https://docs.google.com/spreadsheets/d/ ... sp=sharing
Ok, now for the good news. With the basis corrected, one can: set D10 and G10 and H10 equal to B10; set H11=H10 and fill down; hide columns C, F, H ( since they don't matter). Once this is done, one can match the columns from the wiki for taxable and ND trad columns. This is equivalent my scenario. I tried uploading my excel to google docs. But couldn't figure out the sharing. :annoyed Anyway So now we have a common basis.
So my takeways:
If you are investing in bonds. (ie. set appreciation to 0, set divs to yield just leave at 2%, and tax rate for divs = marginal ), then you are always better deferring ( except for 0% bracket where it is a wash).
If investing in tax efficient equities, then in the 15% marginal (0% qualified) bracket then is a wash. I would say leave it in unless you aren't maxing everything else. it is better to reimburse immediately.
If in a higher bracket 25%/15% then you only need ~22% of your HSA growth to be used for medical to be a wash.
In 35%/15% then you need 44% of your HSA growth to be used for medical to be a wash.
Last edited by tarnation on Fri Jan 30, 2015 2:18 am, edited 1 time in total.
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Re: HSA... any receipt savers?

Post by knpstr » Thu Jan 29, 2015 7:11 pm

tarnation wrote: So my takeways:
If you are investing in bonds. (ie. set appreciation to 0, set divs to yield just leave at 2%, and tax rate for divs = marginal ), then you are always better deferring ( except for 0% bracket where it is a wash). Agreed
If investing in tax efficient equities, then in the 15% marginal (0% qualified) bracket then is a wash. I would say leave it in unless you aren't maxing everything else. Lost me here. My taxable comes to $10,062.66 vs HSA $8,703.26 - I put the appreciation back to 6% put all growth tax-free (0% qualified)

If in a higher bracket 25%/15% then you only need ~22% of your HSA growth to be used for medical to be a wash.
In 35%/15% then you need 44% of your HSA growth to be used for medical to be a wash.
This is where I have to seemingly backtrack. This worksheet is assuming we're using it ALL for living expenses. I was trying to show how a HSA is not the best place to invest for living expenses. See below
tarnation wrote:
knpstr wrote: There are better ways to invest for future living expenses than a HSA.
Disagree. HSA worst case is better than all other tax deductible retirement accounts.

... so we assume it is all for living expenses in every tax bracket to prove this point.

Also, In my earlier example of Maxing $6550 and $1,000 medical costs... the pay out of HSA still ends up with a HSA balance of $685,000 in 30 years. This was assumed to be enough. It is fair to question this assumption.
Last edited by knpstr on Thu Jan 29, 2015 9:31 pm, edited 2 times in total.
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Re: HSA... any receipt savers?

Post by letsgobobby » Thu Jan 29, 2015 7:43 pm

tarnation wrote: Ok, now for the good news. With the basis corrected, one can: set D10 and G10 and H10 equal to B10; set H11=H10 and fill down; hide columns C, F, H ( since they don't matter). Once this is done, one can match the columns from the wiki for taxable and ND trad columns. This is equivalent my scenario. I tried uploading my excel to google docs. But couldn't figure out the sharing. :annoyed Anyway So now we have a common basis.
So my takeways:
If you are investing in bonds. (ie. set appreciation to 0, set divs to yield just leave at 2%, and tax rate for divs = marginal ), then you are always better deferring ( except for 0% bracket where it is a wash).
If investing in tax efficient equities, then in the 15% marginal (0% qualified) bracket then is a wash. I would say leave it in unless you aren't maxing everything else.
If in a higher bracket 25%/15% then you only need ~22% of your HSA growth to be used for medical to be a wash.
In 35%/15% then you need 44% of your HSA growth to be used for medical to be a wash.
Except in the 35% bracket the dividend taxation rate will be 18.8% or 23.8%, not 15%.

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Re: HSA... any receipt savers?

Post by tarnation » Fri Jan 30, 2015 2:27 am

knpstr wrote:
tarnation wrote: So my takeways:
If you are investing in bonds. (ie. set appreciation to 0, set divs to yield just leave at 2%, and tax rate for divs = marginal ), then you are always better deferring ( except for 0% bracket where it is a wash). Agreed
If investing in tax efficient equities, then in the 15% marginal (0% qualified) bracket then is a wash. I would say leave it in unless you aren't maxing everything else. Lost me here. My taxable comes to $10,062.66 vs HSA $8,703.26 - I put the appreciation back to 6% put all growth tax-free (0% qualified)

If in a higher bracket 25%/15% then you only need ~22% of your HSA growth to be used for medical to be a wash.
In 35%/15% then you need 44% of your HSA growth to be used for medical to be a wash.
This is where I have to seemingly backtrack. This worksheet is assuming we're using it ALL for living expenses. I was trying to show how a HSA is not the best place to invest for living expenses. See below
tarnation wrote:
knpstr wrote: There are better ways to invest for future living expenses than a HSA.
Disagree. HSA worst case is better than all other tax deductible retirement accounts.

... so we assume it is all for living expenses in every tax bracket to prove this point.

Also, In my earlier example of Maxing $6550 and $1,000 medical costs... the pay out of HSA still ends up with a HSA balance of $685,000 in 30 years. This was assumed to be enough. It is fair to question this assumption.
I edited my post. Was rushing to get out the door. :oops:
Well you can assume you won't have any more future medical, or insurance costs and that doesn't change the takeaways above. The best place to to invest for living expenses is a different question (and would need a different thread).
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Re: HSA... any receipt savers?

Post by knpstr » Fri Jan 30, 2015 7:46 am

tarnation wrote: I edited my post. Was rushing to get out the door. :oops:
Well you can assume you won't have any more future medical, or insurance costs and that doesn't change the takeaways above. The best place to to invest for living expenses is a different question (and would need a different thread).
I have done that multiple times in this thread! (having to go back and edit)

Yeah, the assumption isn't that you won't have medical expenses at all in the future, but medical expenses won't be greater than the $685,000 that is still built up in the HSA even while using it as you go, in retirement (for my example). That's why I posted the Society of Actuaries report saying that the average retiring couple now can expect to have average medical costs over 20 years (so they die at age 85) of: $292,000. Based on the past 30 years of CPI data and projecting that forward that would roughly translate to $667,144 needed in 30 years from now. Worst case is you have medical expenses greater and have to spend from your taxable or other retirement accounts, you just have that $685,000 head start before it comes to that.

Of course it is highly unlikely you spend all $685,000 at age 65, so that number can still grow to a larger number as it stays invested until you use it.
For example starting with $685,000 earning a modest 3% return and withdrawing $30,000 at the start of every year for medical expenses:
You still have $59,217 on Dec 31st when you're 100 years old and you've spent $1,050,000 in medical costs over those 35 years!!

Those that deferred (under our earlier assumptions) Start with a Balance of $807,000 at age 65.
Under the same retirement assumptions above when they are 100 they take $420,785 to the grave. Spending the same $1,050,000 in medical costs as the other group.

If we spend less than $30,000 a year for 35 years on medical costs and/or we earn higher than 3% return, both cases had 'way too much' in their HSA. In my opinion, it is smart to take advantage of the receipts today as those lose value over time. You're $1,000 receipt is worth about $439 dollars if you defer claiming it for 30 years. (again projecting past inflation forward)

EDIT:
So with all of that being the case... It is always better to reimburse immediately (again, with these assumptions) in regards to equities and tax brackets, however if you're going to invest in all bonds in your HSA that would be an exception to the always better rule (since bonds gets us back to being taxed as ordinary income, which we're trying to avoid after all)
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Re: HSA... any receipt savers?

Post by tarnation » Fri Jan 30, 2015 7:46 pm

knpstr wrote:
tarnation wrote: I edited my post. Was rushing to get out the door. :oops:
Well you can assume you won't have any more future medical, or insurance costs and that doesn't change the takeaways above. The best place to to invest for living expenses is a different question (and would need a different thread).
I have done that multiple times in this thread! (having to go back and edit)

Yeah, the assumption isn't that you won't have medical expenses at all in the future, but medical expenses won't be greater than the $685,000 that is still built up in the HSA even while using it as you go, in retirement (for my example). That's why I posted the Society of Actuaries report saying that the average retiring couple now can expect to have average medical costs over 20 years (so they die at age 85) of: $292,000. Based on the past 30 years of CPI data and projecting that forward that would roughly translate to $667,144 needed in 30 years from now. Worst case is you have medical expenses greater and have to spend from your taxable or other retirement accounts, you just have that $685,000 head start before it comes to that.

Of course it is highly unlikely you spend all $685,000 at age 65, so that number can still grow to a larger number as it stays invested until you use it.
For example starting with $685,000 earning a modest 3% return and withdrawing $30,000 at the start of every year for medical expenses:
You still have $59,217 on Dec 31st when you're 100 years old and you've spent $1,050,000 in medical costs over those 35 years!!

Those that deferred (under our earlier assumptions) Start with a Balance of $807,000 at age 65.
Under the same retirement assumptions above when they are 100 they take $420,785 to the grave. Spending the same $1,050,000 in medical costs as the other group.

If we spend less than $30,000 a year for 35 years on medical costs and/or we earn higher than 3% return, both cases had 'way too much' in their HSA. In my opinion, it is smart to take advantage of the receipts today as those lose value over time. You're $1,000 receipt is worth about $439 dollars if you defer claiming it for 30 years. (again projecting past inflation forward)

EDIT:
So with all of that being the case... It is always better to reimburse immediately (again, with these assumptions) in regards to equities and tax brackets, however if you're going to invest in all bonds in your HSA that would be an exception to the always better rule (since bonds gets us back to being taxed as ordinary income, which we're trying to avoid after all)
Account balance is a dependent variable in the simple scenario. We are just trying to figure out when to reimburse for max after tax net. see post up thread. ^
I'm confused again, I only said assume no more medical because you were stressing "living expenses". I thought it reasonable to assume some fraction of the HSA growth would be used by medical that is why I included the break-even percentages.
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Re: HSA... any receipt savers?

Post by knpstr » Fri Jan 30, 2015 8:27 pm

tarnation wrote:We are just trying to figure out when to reimburse for max after tax net. see post up thread. ^
That wasn't the only discussion in the thread.

Earlier there was also the implication that one can never have enough in their HSA for medical expenses, or if you pay out of the HSA, you surely won't have enough, therefore it is always better to defer. Since we settled our current discussion, I revisited that question, showing how $685,000 in a HSA (given my assumptions) could sustain paying out $1 million over 35 years (given my assumptions).

Meaning, in my opinion that should be enough. Certainly my assumptions are inaccurate in that very few will sustain $1,000 every year along the way. But it is a way to make some sense out of our future needs. Taking issue with my assumptions are fair game and that is where I suggest everyone input their own numbers! :happy

My assumptions (rates of return, medical expenses, years of contribution, etc..) are not meant to indicate what is correct for everyone, it is just for demonstration.
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Re: HSA... any receipt savers?

Post by letsgobobby » Fri Jan 30, 2015 8:35 pm

knpstr wrote:It is always better to reimburse immediately (again, with these assumptions) in regards to equities and tax brackets,
It's only true with your assumptions if you can predict the future with great certainty and it turns out to be exactly like you thought it would. That's nothing like saying "it's always better."

Here I am today. One year ago I had had $5000 in out of pocket medical expenses in my entire lifetime. Last year, I had $10k in out of pocket medical expenses last year. I have $15,000 in my HSA. Should I withdraw the $10k from my HSA or leave it there and let it grow and pay the $10k out of taxable? I invest 100% of my HSA in stocks.

Future medical expenses are not independent variables but rather dependent on current medical expenses. I have an illness now; I'm more likely than a healthy person to have an illness later. The average couple has $300k in medical expenses in retirement; mine are likely to be higher. What about all the expenses I may accrue from age 40 to 65? Non-inflation adjusted that is easily (unfortunately) another $200,000. That's if my wife, or children, don't have medical problems. All of a sudden it looks a lot harder to overfund an HSA.

There is some merit to the argument not to grossly overfund an HSA. But for a currently high tax bracket couple, avoiding 18.8-35%+ federal tax rates (plus state) on current investments for 25+ years is a gift - especially with the prospects of completely tax-free withdrawals later, or at the least withdrawals in a substantially lower tax bracket, and the intrinsic uncertainty about the possibility of high out of pocket expenses for modern medicine over a very long period of time.

I think you may be young, and very healthy. Perhaps it's hard for you to imagine the reality of 5 figures of out of pocket health care expenses, year after year. But it does happen, to quite a few people. An HSA is a health care annuity that is highly tax advantaged for a high-income earner. Not something to be thrown away lightly.

(and remember that the decision to withdraw is irrevocable, whereas the decision not to withdraw is like an option with time value - you can always withdraw the funds later if it appears you are approaching overfunding.)

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Re: HSA... any receipt savers?

Post by knpstr » Fri Jan 30, 2015 8:43 pm

letsgobobby wrote:
knpstr wrote:It is always better to reimburse immediately (again, with these assumptions) in regards to equities and tax brackets,
It's only true with your assumptions if you can predict the future with great certainty and it turns out to be exactly like you thought it would. That's nothing like saying "it's always better."
I don't mean to sound offensive to you, but the quote you included by me in your post literally includes me saying "(again, with these assumptions)"

I have never claimed these assumptions apply to everyone, always try to say to run your own numbers... please stop bringing it up over and over again when the disclosure has already been made, multiple times.
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Re: HSA... any receipt savers?

Post by letsgobobby » Fri Jan 30, 2015 8:46 pm

If you've spent 3 pages of posting excel spreadsheets only to end with, "everyone should run their own numbers," then you've wasted a lot of breath. Surely you have a larger, more generalizable point to make?

Like you, I don't mean to be offensive. But it's very much a platitude to tell people to 'run their own numbers' if you don't believe there is something more to the story than that.

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Re: HSA... any receipt savers?

Post by knpstr » Fri Jan 30, 2015 8:53 pm

letsgobobby wrote:If you've spent 3 pages of posting excel spreadsheets only to end with, "everyone should run their own numbers," then you've wasted a lot of breath. Surely you have a larger, more generalizable point to make?

Like you, I don't mean to be offensive. But it's very much a platitude to tell people to 'run their own numbers' if you don't believe there is something more to the story than that.
Yes, my generalized point was that nearly everyone was saying "it is always better to defer" and when I posted my first example people said
"Interesting analysis. Doubt that many of the receipt savers have done the quantitative analysis. More likely, just the qualitative idea
My generalized point was don't just assume conventional wisdom or a commonly held view is correct without investigating it for yourself. Once you set a spreadsheet up changing your assumptions takes seconds. You may even change your assumptions as your life changes. You aren't committed to the same plan you initially started with.

I also believe everyone should always check the facts themselves. I am highly against taking people's word for it. Always question.

EDIT:
(disclosure data from my home state and my insurer)
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1361028/

"Per capita lifetime expenditure is $316,600, a third higher for females ($361,200) than males ($268,700). Two-fifths of this difference owes to women's longer life expectancy. Nearly one-third of lifetime expenditures is incurred during middle age, and nearly half during the senior years. For survivors to age 85, more than one-third of their lifetime expenditures will accrue in their remaining years."

Addressing examples of people in the highest tax bracket is by definition addressing only 1% of people (or near it). On average people are average, however I understand everyone's situation is highly individualized.
Last edited by knpstr on Fri Jan 30, 2015 9:24 pm, edited 1 time in total.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

letsgobobby
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Re: HSA... any receipt savers?

Post by letsgobobby » Fri Jan 30, 2015 9:10 pm

I have previously posted my list of criteria for who should use a 529. Here's a link:

viewtopic.php?f=2&t=143946#p2139695

In other words, "everyone should run their numbers." That said, for most middle-class Americans, a 529 is low on the priority list as to relative tax benefit, compared to 401ks, IRAs, etc.

Regarding HSAs, while some people should run numbers, for most people paying out of pocket is better. But we could be more precise, and propose a list of factors that would generally favor paying out of pocket, rather than with the HSA:

- they are high income now;
- they expect to be low income in retirement;
- they pay high state taxes now (benefit variable);
- they will pay low or no state taxes later;
- they have high medical expenses;
- they have chronic health conditions;
- they are married;
- they will not have a private health care plan in retirement;
- they can afford to pay for medical expenses out of pocket;
- they like the idea of having choices;
- they realize the future is uncertain;
- they believe medical technology will continue to advance, creating attractive life-extending, expensive medical treatment options.

The fewer of these criteria you meet, the more likely you should consider paying out of pocket.

What do you think of that?

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knpstr
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Re: HSA... any receipt savers?

Post by knpstr » Fri Jan 30, 2015 9:46 pm

Far too general to be meaningful and I take issue with many of those points supporting paying out of pocket.
... while some people should run numbers, for most people paying out of pocket is better.
Oh, could you see me cringe?!? EVERYONE should run the numbers. It makes reckless lists like that irrelevant.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

Leeraar
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Re: HSA... any receipt savers?

Post by Leeraar » Sat Jan 31, 2015 2:00 am

I don't think everyone should run the numbers, since they involve assumptions about unknowable future conditions. There are some general guidelines:

HSAs are unique, in that they offer tax-deductible contributions, and tax-free withdrawals, if they are used for qualifying medical expenses (QME). In addition, HSAs can be used as long-term savings vehicles, particularly since many HSA account providers offer low-cost index funds as investment choices.

HSA account holders may choose to pay current medical expenses out of pocket, with after-tax dollars. Provided they retain the appropriate documentation, they can recover those expenses by a tax-free reimbursement from the HSA at any future time. Delaying reimbursement is a bet that the return on the invested funds will exceed inflation, without any tax considerations.

HSA contributions may only be made if one has a high deductible health plan, and then only until age 65. The remaining balance in an HSA may be carried over for life of the holder, and withdrawals remain tax free if used for qualifying medical expenses.

If HSA withdrawals are not used for QME, then those withdrawals are taxable, and may incur a penalty. In that respect, the HSA is treated like a deductible conventional IRA, though different rules (for example on age, or RMDs) apply.

In an extreme scenario, an investor may:

1. Fund an HSA.
2. Pay medical expenses out of pocket.
3. Not invest HSA holdings, but keep them in cash.
4. Never claim reimbursement of out-of-pocket expenses.
5. Withdraw from the HSA before age 65 for unqualified expenses.

Needless to say, this scenario is ill-advised.

A recommended scenario for most investors is:

1. Fund your HSA to the maximum allowed.
2. Invest the HSA, to the extent allowed, in low-cost index funds.
3. Get reimbursement from the HSA for current QME.
4. Retain the unused part of the HSA for future medical expenses.

L.
(Edited for typo.)
Last edited by Leeraar on Sat Jan 31, 2015 2:33 am, edited 1 time in total.
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JLJL
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Re: HSA... any receipt savers?

Post by JLJL » Sat Jan 31, 2015 2:23 am

Leeraar wrote:I don't think everyone should run the numbers, since they involve assumptions about unknowable future conditions. There are some general guidelines:

HSAs are unique, in that they offer tax-deductible contributions, and tax-free withdrawals, if they are used for qualifying medical expenses (QME). In addition, HSAs can be used as long-term savings vehicles, particularly since many HSA account providers offer low-cost index funds as investment choices.

HSA account holders may choose to pay current medical expenses out of pocket, with after-tax dollars. Provided they retain the appropriate documentation, they can recover those expenses by a tax-free reimbursement from the HSA at any future time. Delaying reimbursement is a bet that the return on the invested funds will exceed inflation, without any tax considerations.

HSA contributions may only be made if one has a high deductible health plan, and then only until age 65. The remaining balance in an HSA may be carried over for life of the holder, and withdrawals remain tax free if used for qualifying medical expenses.

If HSA withdrawals are not used for QME, then those withdrawals are taxable, and may incur a penalty. In that respect, the HSA is treated like a deductible conventional IRA, though different rules (for example on age, or RMDs) apply.

In an extreme scenario, an investor may:

1. Fund an HSA.
2. Pay medical expenses out of pocket.
3. Not invest HSA holdings, but keep them in cash.
4. Never claim reimbursement of out-of-pocket expenses.
5. Withdraw from the HSA before age 65 for unqualified expenses.

Needles to say, this scenario is ill-advised.

A recommended scenario for most investors is:

1. Fund your HSA to the maximum allowed.
2. Invest the HSA, to the extent allowed, in low-cost index funds.
3. Get reimbursement from the HSA for current QME.
4. Retain the unused part of the HSA for future medical expenses.

L.
Thanks Leeraar!

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knpstr
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Re: HSA... any receipt savers?

Post by knpstr » Sat Jan 31, 2015 9:16 am

L.
I generally agree with most of those statements as they are just outlining the rules of the HSA.

I genuinely disagree with not trying to plan for oneself. Financial planning or planning for your life is generally regarded as wise though the future (in all instances) is always unknowable. That does not mean one should not plan and it also does not mean that once one has a plan, that they shouldn't be constantly revising it as it unfolds.

In my opinion:
Delaying reimbursement is a bet that the return on the invested funds will exceed inflation, without any tax considerations.
should say:
"Delaying reimbursement is a bet that the return on the deferred funds will be used for QME."

Also:
If one defers reimbursement it is the equivalent of making a non-deductible HSA contribution at the time the decision is made.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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