HSA as retirement vehicle

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emlowe
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HSA as retirement vehicle

Post by emlowe »

My family has pretty high medical costs - for example, in my HDHP plan for the family, I hit the family deductible in March, and I'll likely hit the out-of-pocket maximum this month.

So I've been using the HSA to pay the medical costs.

But I'm wondering if I wouldn't be better off paying the medical costs through my regular cash flow (which I can probably do) and using the HSA as a savings vehicle.

For those who do invest their HSA funds, do you treat it as part of your normal AA - just another account? Or do you treat it somewhat special because you may want it to be more liquid? more conservative?

Also, in California, it's not a tax-advantaged account - do people consider this?

Thanks

-Earle
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megabad
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Re: HSA as retirement vehicle

Post by megabad »

As you hypothesized, I would say that generally it is better to use regular cash flow and let the HSA grow as it is the only "retirement" account that is funded with federal income tax free money going in and the money is also federal income tax free upon withdrawal assuming it is used for qualified medical expenses. Thus, letting it grow longer will allow more tax free growth. However, this assumes two key things:

1) Your HSA provider doesn't suck (you need low fees and decent investment options).
2) You keep every medical expense receipt forever.

Personally I don't have much choice in good HSA investment options so mine is just 100% in the lowest expense equity fund. So I guess you could consider it part of my whole asset allocation.
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Artsdoctor
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Re: HSA as retirement vehicle

Post by Artsdoctor »

Emlowe,

I am in a similar situation; our co-pays and deductibles are met by February, so I can sympathize. I also live in California.

I have used our HSAs as retirement vehicles for many, many years. I think I opened mine over 15 years ago. I invested the money in Vanguard funds. I have no regrets, although there are a couple of caveats.

If you're on target for retirement savings as a whole, I'd have no reservations. If you're short-changing your 401k to put money in the HSA(s), I wouldn't be so cavalier. So make sure that the "opportunity cost" isn't significant.

If you're far away from retirement, I would invest it in tax-efficient equity funds, or perhaps balanced, if it fits your overall plan. For many years, I just counted the HSAs as part of the investment portfolio. I think that I only used Total Stock Market for many years and the state tax hit was insignificant.

If you have reasonable tax accounts and can ultimately take advantage of tax-loss harvesting, your carryover losses can be used to offset the state capital gain (income) tax since California will allow you to carryover those losses just like the federal government. For me, I have extraordinarily high carryover losses from the 2008-2009 meltdown so when it came time to rebalance out of Total Stock into Balanced, there was really no tax hit. As I get closer to retirement, I have the HSAs more conservative.

I save my receipts. You can reimburse yourself at any time, if you need to.
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grabiner
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Re: HSA as retirement vehicle

Post by grabiner »

If you are not maxing out your retirement accounts, it is better to spend money from your HSA, and use the money you aren't spending for medical costs to contribute to your IRA or 401(k). The IRA and 401(k) can be spent on anything in retirement, and are likely to have lower costs, particularly with the CA taxes.

If you are maxing out your retirement accounts, it is better to leave money in your HSA than to spend from the HSA and invest in a taxable account; this gives you more tax-deferred savings. Treat the HSA as part of your retirement portfolio; it is fine to have just one fund there as long as your HSA, IRA, 401(k), and taxable account put together are well diversified. (This is what I do; my entire HSA is invested in Vanguard Factor Value ETF VFVA, because I live in a state that recognizes HSAs and thus am not concerned about the tax cost of the dividend.)

In CA, if you are investing in your HSA for the long term, you probably want to hold your bonds in that account, because Treasury bonds are exempt from CA tax. For CA tax purposes, an HSA holding TIPS is essentially equivalent to a Roth IRA; you will owe tax on any capital gains and can deduct any losses.

If holding bonds in the HSA doesn't work (because the HSA is bigger than your bond allocation, or because the bond options in your 401(k) are much better than the stock options), then hold a tax-efficient stock index fund such as an S&P 500 or total US market index.
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emlowe
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Re: HSA as retirement vehicle

Post by emlowe »

Thanks everyone - my HSA provider actually only offers Vanguard Index funds - so lots of good choices in general. For bond funds I have:

VANGUARD TOTAL BOND MARKET IDX INSTLPLS - VBMPX
VANGUARD SHRT-TERM INFL-PROT SEC IDX ADM - VTAPX
VANGUARD SHORT-TERM BOND INDEX ADM - VBIRX
VANGUARD INFLATION-PROTECTED SECS I - VIPIX

As well as several Vanguard Target Date funds, Vanguard Wellesley, and most of the Vanguard stock index funds as well

Forum posters with very similar question I suppose: viewtopic.php?t=247393
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Tamarind
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Re: HSA as retirement vehicle

Post by Tamarind »

I treat it as an investment account and just moved it to a custodian that would allow me to invest every dollar.

I would just have it be part of my AA, but different people approach their asset location choices differently. Some want to tax optimize by putting the likely fastest growing assets in the most tax-advantaged account (the HSA), others with large taxable accounts relative to tax-advantaged may need to tax optimize by putting bonds (or REITs) in the HSA.

I prefer to get the lowest total expense I can across all accounts for my AA, and to rebalance by directing new money to underperforming asset classes. As a result my HSA is currently all bonds, but I'd change that if my 401k had a cheaper bond fund.

OP, your concern about whether to invest conservatively because you might have large medical expenses is a common one. I think if you have an adequate emergency fund, this should not be necessary. You can wait years to be reimbursed for a particular expense. If that's not convincing to you, you probably should not invest your HSA, but rather treat it as part of your EF.
retiringwhen
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Re: HSA as retirement vehicle

Post by retiringwhen »

Because we normally have current year expenses in excess of the HSA/FSA totals and I find the paperwork saving requirement for future HSA withdrawals a headache that I just don’t want, I cash flow my HSA to get the current year (sometimes the expense spread across maybe one year).

I hate the paperwork and the idea of keeping that info around for years maybe even decades puts off any desire to use the HSA for retirement

Fully fund the HSA if you can though if you already getting all you can into your 401(k) and related accounts.

PS: my desk is covered with 6 EOB/Receipts to handle just today.
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emlowe
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Re: HSA as retirement vehicle

Post by emlowe »

The paperwork is a pain, sometimes I yearn for the HMO plan at work because there is no paperwork (Kaiser California is a book-keeping dream).

What I do is I scan in all my paperwork and just save everything digitally.

I figure with everything going paperless anyway, digital copies have to be accepted - the IRS gets digital returns, 1099s, etc, etc now anyway.

I'm already paperless with the EOBs and I use this great service called FileThis to automatically download all my electronic stuff, categorize it and send it to EverNote. Everything else I either scan in, or use my phone to take a picture.

Even if you are spending down your HSA regularly, don't you have to keep the paperwork anyway? Maybe not as long, I suppose - but still several years.

Thanks for all the feedback, I appreciate it

-Earle
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retiringwhen
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Re: HSA as retirement vehicle

Post by retiringwhen »

emlowe wrote: Sat Jun 02, 2018 10:33 am The paperwork is a pain, sometimes I yearn for the HMO plan at work because there is no paperwork (Kaiser California is a book-keeping dream).

What I do is I scan in all my paperwork and just save everything digitally.

I figure with everything going paperless anyway, digital copies have to be accepted - the IRS gets digital returns, 1099s, etc, etc now anyway.

I'm already paperless with the EOBs and I use this great service called FileThis to automatically download all my electronic stuff, categorize it and send it to EverNote. Everything else I either scan in, or use my phone to take a picture.

Even if you are spending down your HSA regularly, don't you have to keep the paperwork anyway? Maybe not as long, I suppose - but still several years.

Thanks for all the feedback, I appreciate it

-Earle
My approach is mostly digital too, but i have to track EOB, actual payments and HSA reimbursements. Once the year is done. I put the whle mess in a file box (and folder on my PC) and forget about it. I just imagine keeping ten years of EOBs and their reimbursement status w/ HSA would be a nightmare. Keeping 10099-R and 5498 forms for IRAs and 401(K) and related conversions/rollovers, etc. is bad enough.
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Re: HSA as retirement vehicle

Post by aj76er »

When using your HSA to pay for current medical expenses, one trick you can do is to first charge everything on a points credit card, and then reimburse yourself out of the HSA to pay off the credit card.
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retiringwhen
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Re: HSA as retirement vehicle

Post by retiringwhen »

aj76er wrote: Sat Jun 02, 2018 10:46 am When using your HSA to pay for current medical expenses, one trick you can do is to first charge everything on a points credit card, and then reimburse yourself out of the HSA to pay off the credit card.
+1, one of the reasons I don't use too many paper checks anymore 8-)
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Re: HSA as retirement vehicle

Post by texasdiver »

emlowe wrote: Sat Jun 02, 2018 10:33 am The paperwork is a pain, sometimes I yearn for the HMO plan at work because there is no paperwork (Kaiser California is a book-keeping dream).

What I do is I scan in all my paperwork and just save everything digitally.

I figure with everything going paperless anyway, digital copies have to be accepted - the IRS gets digital returns, 1099s, etc, etc now anyway.

I'm already paperless with the EOBs and I use this great service called FileThis to automatically download all my electronic stuff, categorize it and send it to EverNote. Everything else I either scan in, or use my phone to take a picture.

Even if you are spending down your HSA regularly, don't you have to keep the paperwork anyway? Maybe not as long, I suppose - but still several years.

Thanks for all the feedback, I appreciate it


-Earle

We use our HSA for medical expenses but they have been so trivial (just smaller co-pays for the most part and the occasional prescription) that it doesn't put a dent into the HSA accumulation. Honestly I don't keep any records because we have a Kaiser HSA, a Kaiser HSA VISA card and all the charges are Kaiser co-pays or Kaiser prescription fills. So anyone looking at the Visa statement will see nothing by Kaiser charges. I know every year there is a box on the tax form that I check stating that all the expenses are for eligible medical expenses. But beyond that I don't keep records. I suppose if we are ever audited I can pull up all the Kaiser HSA expenses online and print them. I'm not worried about it. I don't even know how long the records are retained by Kaiser but one assumes they are retained as long as I would need.
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Re: HSA as retirement vehicle

Post by retiringwhen »

texasdiver wrote: Sat Jun 02, 2018 11:00 am We use our HSA for medical expenses but they have been so trivial (just smaller co-pays for the most part and the occasional prescription) that it doesn't put a dent into the HSA accumulation. Honestly I don't keep any records because we have a Kaiser HSA, a Kaiser HSA VISA card and all the charges are Kaiser co-pays or Kaiser prescription fills. So anyone looking at the Visa statement will see nothing by Kaiser charges. I know every year there is a box on the tax form that I check stating that all the expenses are for eligible medical expenses. But beyond that I don't keep records. I suppose if we are ever audited I can pull up all the Kaiser HSA expenses online and print them. I'm not worried about it. I don't even know how long the records are retained by Kaiser but one assumes they are retained as long as I would need.
Be thankful you have good health or a very good health plan.

If you are building up an HSA balance without current expenditures to offset, you will just need the EOBs later in life and no documentation for current expenses. Your checkbox approach is more than sufficient.

If you are just trying to defer reimbursement of already incurred costs (what I think is in part being discussed in the this thread), then you need to carefully document all un-reimbursed expenses in the current period for use in a later time to substantiate a withdrawal from the HSA at that time.

Now, in my case, our household are no strangers to the medical profession so we have co-pays, prescription co-pays, and uncovered expenses ranging from across at least 5 different offices plus eye care and dental. That means I am recording co-pays (the ones paid using the HSA Visa card are trivial), paying bills and then requesting reimbursement for those. A lot of my mess is just tracking who owes whom in part to make sure the billers are not taking us to the cleaners!

I have an additional incentive to carefully track this as well due to a quirk in NJ income tax law. OOP Medical expenses are claimable in excess of 2% of gross income and HSA/FSA reimbursements must be included in that calculation since contributions to those accounts are not deducted at time of payroll (in other words HSA/FSA contributions are post-tax for NJ).

Bottom line, it is a nightmare and one I want to close out each year as tidily as possible to keep the mess from getting too huge!
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DR
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Re: HSA as retirement vehicle

Post by DR »

I put in the max, including +50 catch up, but am not yet using a HSA brokerage to get better than my default 1.24% they give me. I pay what little medical we have out of our own post-tax pocket. I have not been saving medical receipts. I figure with Medicare B costs at $3,500 per year and rising I'd be able to take withdraws against those amounts and surely I'll have other medical costs. If not, I guess that's a good problem to have. I suppose I should use the investment account. It has several Vanguard funds, including this one: Vanguard LifeStrategy Cnsrv Gr Inv VSCGX
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emlowe
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Re: HSA as retirement vehicle

Post by emlowe »

Just thinking out loud here and from reading the good wiki section on HSA (https://www.bogleheads.org/wiki/Health_savings_account)

Suppose you invest in your HSA and don't use it year-to-year for expenses. It grows tax-deferred in whatever investments you have. Let's say you have 20 years of savings in the HSA and 20 years of HDHP expenses you were paying out of regular cash flow at 10k per year. For this thought experiment let's say you have 200k in the HSA, matching the 200k in expenses you have been paying or the last 20 years.

When you retire, you want to start drawing down on your retirement funds - of which the HSA is one of your accounts.

The HSA money you can do two things:
1) Just withdraw money and use for anything just like any other account - you pay regular income tax but no penalty, so it acts like a tIRA - so worse case it's just like a tIRA (except it doesn't have RMDs and poor inheritance rules)

2) Withdraw the money and pay for any medical expense over the past 20 years (AFAIK there is no limit?) you had a HDHP+HSA. This is completely tax-free, but you need to keep good records. This actually seems like a pretty good deal to me - in retirement I can now pay myself 10k/yr in completely tax-free income for 20 years. Moreover, you can pay yourself the 200k tax-free on whatever time-scale you want - 50k for 4 years, 200k in the first year, etc.

So for me, I'm thinking I'm going to start using the HSA primarily as a savings vehicle - it's especially useful as I've maxed out everything else - it's almost a tIRA back-door :-)

-Earle
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Nova1967
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Re: HSA as retirement vehicle

Post by Nova1967 »

Unlike IRAs and 401K retirement plans you can contribute to the HSA in retirement before Age 65, HSA contributions are tax-deductible before you turn 65 and become eligible for Medicare. ... You can contribute up to the maximum regardless of your income, and your entire contribution is tax-deductible.
retiringwhen
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Re: HSA as retirement vehicle

Post by retiringwhen »

emlowe wrote: Sat Jun 02, 2018 12:17 pm Just thinking out loud here and from reading the good wiki section on HSA (https://www.bogleheads.org/wiki/Health_savings_account)

Suppose you invest in your HSA and don't use it year-to-year for expenses. It grows tax-deferred in whatever investments you have. Let's say you have 20 years of savings in the HSA and 20 years of HDHP expenses you were paying out of regular cash flow at 10k per year. For this thought experiment let's say you have 200k in the HSA, matching the 200k in expenses you have been paying or the last 20 years.

When you retire, you want to start drawing down on your retirement funds - of which the HSA is one of your accounts.

The HSA money you can do two things:
1) Just withdraw money and use for anything just like any other account - you pay regular income tax but no penalty, so it acts like a tIRA - so worse case it's just like a tIRA (except it doesn't have RMDs and poor inheritance rules)

2) Withdraw the money and pay for any medical expense over the past 20 years (AFAIK there is no limit?) you had a HDHP+HSA. This is completely tax-free, but you need to keep good records. This actually seems like a pretty good deal to me - in retirement I can now pay myself 10k/yr in completely tax-free income for 20 years. Moreover, you can pay yourself the 200k tax-free on whatever time-scale you want - 50k for 4 years, 200k in the first year, etc.

So for me, I'm thinking I'm going to start using the HSA primarily as a savings vehicle - it's especially useful as I've maxed out everything else - it's almost a tIRA back-door :-)

-Earle
If you are willing to put the effort into the record keeping AND you aren't shifting other savings from pre-tax vehicles with less strings attached, it is actually the best deal out there assuming you can put all the pieces together.
megabad
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Re: HSA as retirement vehicle

Post by megabad »

I wish I had said this earlier, but if you find yourself reaching the deductible and OOP max quickly in the year, it is possible that an HDHP is not the best fit for your family. I would examine this carefully since CA is already an unfriendly tax state for HSAs. It is possible the savings from switching to an HMO/PPO/EPO could be greater than the fed tax savings on HSA growth.
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Re: HSA as retirement vehicle

Post by retiringwhen »

megabad wrote: Sat Jun 02, 2018 6:41 pm I wish I had said this earlier, but if you find yourself reaching the deductible and OOP max quickly in the year, it is possible that an HDHP is not the best fit for your family. I would examine this carefully since CA is already an unfriendly tax state for HSAs. It is possible the savings from switching to an HMO/PPO/EPO could be greater than the fed tax savings on HSA growth.
Some folks don't have an option based on their MegaCorp health plans... I have been looking at post-retirement plans (before Medicare) and it looks to me like one of the "cadillac" plans with low deductibles but very high premiums will actually pay off and hopefully simplify paperwork!
TX_Drew
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Re: HSA as retirement vehicle

Post by TX_Drew »

I’ve Been saving my HSA and investing in VTI. It’s a bit over 40k now. My thoughts are really it’s IRA account earmarked for medical costs when I’m older. That means deductible and copays when I’m on Medicare. I believe Medicare copays are 20%, so I can imagine really needing this account when I’m older.

I’m not saving receipts for decades. Not worth it to me. In fact our neighborhood had a shred day two weeks back and I purged 2 years of all those statement.

If you can stay organized for decades with all those papers, you are an impressive individual.
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emlowe
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Re: HSA as retirement vehicle

Post by emlowe »

Well, I mentioned it earlier - but this is what I already do:

- save all EOBs, recipients, bills, etc in a box for the current year.
- January, I scan in and digitize everything into a giant multi-page PDF for the prior year
- I then shred everything
- rinse and repeat

So for any given year, I have one single PDF file that contains every medical EOB, receipt and bill. It is typically hundreds of pages long.

I keep the PDF in Evernote, where it becomes fully searchable using Evernote's OCR.

So in effect, I keep zero paper and I can find any bill I want over the last 4-5 years I've done this within 10 mins typically.

But I'm pretty tech savvy - I realize most people today still aren't.

-Earle
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Bacchus01
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Re: HSA as retirement vehicle

Post by Bacchus01 »

If you can cash flow it, you probably should cash flow it.

My order of investment:
- 401k pre-tax to the match
- HSA max
- 401k remainder to max
- Backdoor ROTH
- 529s
- NQ Deferred to get under tax threshold
- After-tax TSM/S&P
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DR
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Re: HSA as retirement vehicle

Post by DR »

I am sort of wondering why so many people refer to keeping the receipts on every medical expense when they describe how this HSA as retirement fund can work. I understand that you need these past receipts if you want the tax-free withdraw on some portion of that account, but is there really any danger that you'd save more, including accrued interest, than what you would spend on post-retirement medical? Medicare B alone is ~$3,200 per year for a married couple with premiums probably outpacing inflation.

So I guess the thinking here is that you could end up without enough medical costs over your lifetime to liquidate that HSA account? I'm in good health, but that still seems unlikely to me. But I will probably only have, at best, $50K in HSA funds going into retirement. I just don't think that over the subsequent 30 years or so of my planning model that I'll have any trouble finding future medical costs in that amount, especially given the cost of Medicare B if I wanted to use it for that. I suppose if a person accumulated several hundred thousand, this might be more of an issue.
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Re: HSA as retirement vehicle

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Frank Grimes
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Re: HSA as retirement vehicle

Post by Frank Grimes »

DR wrote: Mon Jun 04, 2018 8:59 am I am sort of wondering why so many people refer to keeping the receipts on every medical expense when they describe how this HSA as retirement fund can work. I understand that you need these past receipts if you want the tax-free withdraw on some portion of that account, but is there really any danger that you'd save more, including accrued interest, than what you would spend on post-retirement medical? Medicare B alone is ~$3,200 per year for a married couple with premiums probably outpacing inflation.

So I guess the thinking here is that you could end up without enough medical costs over your lifetime to liquidate that HSA account? I'm in good health, but that still seems unlikely to me. But I will probably only have, at best, $50K in HSA funds going into retirement. I just don't think that over the subsequent 30 years or so of my planning model that I'll have any trouble finding future medical costs in that amount, especially given the cost of Medicare B if I wanted to use it for that. I suppose if a person accumulated several hundred thousand, this might be more of an issue.
Can't you use HSA funds for nursing home care? So once I get really old, if I have anything left in the HSA I can use the funds for that.
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Re: HSA as retirement vehicle

Post by Spirit Rider »

I do not like terms like "retirement vehicle" and especially "stealth IRA" when discussing HSA accounts. You are either reimbursing qualified medical expenses as they occur primarily as a "current" HSA or you are cash-flowing qualified medical expenses to build a larger "retirement" HSA.

Yes, there is a provision in Section 223 that allows penalty-free, but taxable non-qualified distributions from HSA accounts >= age 65. However, as I like to say, just because you can do something does not mean you should do something.

You should almost never take taxable HSA distributions if you have other pre-tax retirement accounts. You would likely be giving up tax-free growth for taxable growth, never a good trade off. The one exception I can think of is someone with a very large HSA balance with a non-spouse beneficiary. An option if they plan charitable bequests, the HSA is a better choice, because unlike retirement accounts, a non-spouse beneficiary is required to take the full taxable distribution in the year of death.

Restating some of what Grabiner suggested, I suggest:
  • If you are not maximizing your retirement plan contributions, you should always seek immediate reimbursement of qualified medical expenses to tax advantage of the income and FICA tax savings to be able to contribute more.
  • If you are maximizing your other retirement plan contributions and you have the financial means to do so. You should cash flow all qualified medical expenses. You should not think of this as general retirement assets, but rather retirement health assets.
  • You should always take tax-free distributions from HSA accounts for previous qualified medical expenses before you take tax-free distributions from Roth accounts. Tax-free distributions are fungible and it always makes sense to take distributions first that are encumbered with EOBs, receipts, etc...
  • If you do have a non-spouse beneficiary for your HSA. Keep an eye on your longevity and consider proactively taking tax-free distributions at some point. Finally, keep yourself healthy and don't die suddenly :beer
angler-39
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Re: HSA as retirement vehicle

Post by angler-39 »

Two more points to add:
- HSA assets can be used to pay COBRA medical premiums ;
- HSA contributions are not allowed if you are enrolled in Medicare (including Part A) age 65 or after. This can trip those up who have delayed receiving SS benefits since there can be up to a six-month lookback period in which you cannot make HSA contributions.
Good luck!
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Re: HSA as retirement vehicle

Post by MrBeaver »

DR wrote: Mon Jun 04, 2018 8:59 am So I guess the thinking here is that you could end up without enough medical costs over your lifetime to liquidate that HSA account? I'm in good health, but that still seems unlikely to me.
It's all in the timing. I was lucky to start maxing my HSA starting the first year HSAs were offered (2004), and I was young at the time. I now have ~140k balance with 28 years before Medicare eligibility. If contributions continue, I will hit $1M 2018 dollars at Medicare eligibility with only a 5.5% real return over those ~3 decades, which seems entirely plausible. $30k per year (2018 dollars) 3% withdrawal rate seems like it would go pretty far to pay Medicare premiums and out of pocket costs, with a large principle left if long term care is needed. And I didn't violate the reasonable suggestion here that 401k funds occur before HSA contributions, I just wasn't eligible for a 401k until recently so prioritized HSA contributions when I was young with lower income.
Spirit Rider wrote: Mon Jun 04, 2018 11:53 am You should almost never take taxable HSA distributions if you have other pre-tax retirement accounts. You would likely be giving up tax-free growth for taxable growth, never a good trade off. The one exception I can think of is someone with a very large HSA balance with a non-spouse beneficiary. An option if they plan charitable bequests, the HSA is a better choice, because unlike retirement accounts, a non-spouse beneficiary is required to take the full taxable distribution in the year of death.
Great points and superb list. I agree that charitable bequests is a great option. I'm also leaving open the idea that I might take tax-free qualified distributions in retirement before SS, which would allow me to increase low-rate Roth conversions if that makes sense at the time for tax planning. But that's not really 'giving up tax-free growth for taxable growth', and instead is shifting tax-free growth money from a restricted HSA to a less-restricted Roth.

From time to time I do 'fret' over the inflation erosion of the value of my receipts (withdrawing 20k tax-free in 20 years is worth a lot less than 20k tax-free now). It seems that if the LTCG tax rate stays below the income tax rate at distribution, then depending on the time horizon pulling money out of an HSA tax-free from qualified expenses and putting it in taxable may come out a little bit ahead. But for now I'm thinking the flexibility of more untaxed resources to draw from prior to SS outweighs the potential benefit from withdrawing earlier even if it is money that I won't accrue enough qualified expenses to deplete tax-free in retirement. But I'll keep monitoring as I'm sure things will change in the future.
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Artsdoctor
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Re: HSA as retirement vehicle

Post by Artsdoctor »

TX_Drew wrote: Sat Jun 02, 2018 8:37 pm I’ve Been saving my HSA and investing in VTI. It’s a bit over 40k now. My thoughts are really it’s IRA account earmarked for medical costs when I’m older. That means deductible and copays when I’m on Medicare. I believe Medicare copays are 20%, so I can imagine really needing this account when I’m older.

I’m not saving receipts for decades. Not worth it to me. In fact our neighborhood had a shred day two weeks back and I purged 2 years of all those statement.

If you can stay organized for decades with all those papers, you are an impressive individual.
You are assuming that you will be alive at Medicare age. While that may be statistically likely, you are giving up some of the flexibility built into HSAs by destroying your past receipts. Many would not be bothered with the pain of saving small sums over many years, but perhaps keeping receipts for large sums might give you back some of the flexibility with very little bookkeeping.

Most people are going to have a supplemental Medicare plan and will not have to pay the 20% balance which you've quoted. While your HSA can be used to pay for your Medicare premiums, it cannot be used to pay for your supplement, just FYI.

This has been discussed many times, but just remember that your HSA is really not like an IRA. If you have a non-spousal beneficiary, they will be obligated to pay income tax on the balance when you die, so HSAs are rarely good estate planning tools (there's no inherited RMD schedule which are characteristic of IRAs). However, you can leave the HSA to a charity and it will be passed without taxation.
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emlowe
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Re: HSA as retirement vehicle

Post by emlowe »

Artsdoctor wrote: Mon Jun 04, 2018 4:43 pm
This has been discussed many times, but just remember that your HSA is really not like an IRA. If you have a non-spousal beneficiary, they will be obligated to pay income tax on the balance when you die, so HSAs are rarely good estate planning tools (there's no inherited RMD schedule which are characteristic of IRAs). However, you can leave the HSA to a charity and it will be passed without taxation.
Other than inheritance, how is the HSA not exactly like an IRA for non-medical withdrawals?

It looks to me to be pretty much like an IRA.

(And when I'm dead I'm not sure I'll care much about the difference)

-Earle
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Artsdoctor
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Re: HSA as retirement vehicle

Post by Artsdoctor »

^ The beneficiary issue is a big one. It may not be important to you, but others may feel differently so it would be incorrect to paint the HSA as an IRA-equivalent.
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Re: HSA as retirement vehicle

Post by Small Law Survivor »

emlowe wrote: Fri Jun 01, 2018 7:12 pm But I'm wondering if I wouldn't be better off paying the medical costs through my regular cash flow (which I can probably do) and using the HSA as a savings vehicle.
Yup, this is what I've done for the last 8 years. We too hit our deductible ($3,000) in the first two months of the year. Deduction + tax free growth. Seems like a good plan.
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Re: HSA as retirement vehicle

Post by dalmatiandan »

Would it be considered tax-smart to bequest your HSA to charity instead of to a non-spouse beneficiary? This is a powerful tax-free vehicle, and it seems that “non-spouse beneficiary” is not a desirable line of succession! I have read about the taxation of the HSA when it enters the estate...

Let’s say the primary HSA owner designates the spouse as first beneficiary, and then the spouse eventually may have the ability to treat it as their own HSA upon death of primary. The widow/er would then by default have the next successor be a “non-spouse.” Maybe the spouse that inherits the HSA should decide to leave it to charity, rather than leaving it to the estate?

This is all assuming that neither the primary nor the spouse is able to deplete the HSA, which is still perhaps a stretch.

Academic question for me as I learn more about HSA’s.

Dan

EDIT: found this enlightening thread
viewtopic.php?t=141799
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Artsdoctor
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Re: HSA as retirement vehicle

Post by Artsdoctor »

dalmatiandan wrote: Mon Jun 04, 2018 7:57 pm Would it be considered tax-smart to bequest your HSA to charity instead of to a non-spouse beneficiary? This is a powerful tax-free vehicle, and it seems that “non-spouse beneficiary” is not a desirable line of succession! I have read about the taxation of the HSA when it enters the estate...

Let’s say the primary HSA owner designates the spouse as first beneficiary, and then the spouse eventually may have the ability to treat it as their own HSA upon death of primary. The widow/er would then by default have the next successor be a “non-spouse.” Maybe the spouse that inherits the HSA should decide to leave it to charity, rather than leaving it to the estate?

This is all assuming that neither the primary nor the spouse is able to deplete the HSA, which is still perhaps a stretch.

Academic question for me as I learn more about HSA’s.

Dan

EDIT: found this enlightening thread
viewtopic.php?t=141799
I don't think this is an academic question at all. There's no way of knowing how long you're going to live, how long your spouse is going to live (if there is a spouse), or what the balance of your HSA is going to be. If you're charitably inclined and you're going to want to leave something to a charitable organization anyway, you may as well name them as the non-spouse beneficiary of the HSA(s) which then frees up money elsewhere to leave to your "heirs" in a more tax-efficient manner.

Co-pays and deductibles have ballooned over the past decades and more people are taking advantage of HSAs. The vast majority will not use them for investment purposes but for those that do, the balances in retirement may be sizable. Why risk having half the balance eaten up in taxes when you don't really have to?
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