Deferring medical expenses to allow HSA investments to compound.

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
StonksMD
Posts: 2
Joined: Wed May 13, 2020 7:45 am

Deferring medical expenses to allow HSA investments to compound.

Post by StonksMD » Wed May 13, 2020 8:11 am

Hello,

First time posting, thank you in advance for fielding my question.

Many people I know have been advocating saving medical expense receipts and paying for medical expenses with a normal savings account to allow the HSA money to compound in investments, only to redeem the medical expenses much later out of the HSA. Such as what is advised in this youtube video: https://youtu.be/yom2QOFCmIM

I recently had a $1,000 medical expense that I do not have the money for currently in my HSA (I have had very bad luck with medical problems unexpectedly at a young age). I payed for this out of my normal savings account and I am letting my HSA fill so I can afford to reimburse my normal savings account out of my HSA. The video link above (and conventional wisdom amongst my peers) advocates me saving my medical receipt to reimburse myself many years from now however I do not think this is optimal for me for the following reasons:

1) time value of money: My $1000 reimbursement will be hardly worth anything after inflation decays it away when I redeem it in lets say 30 years.

Plus, wouldn't it be better to take the guaranteed pre tax $1000 now and invest it into a Roth IRA? That way i can use it when I am 59.5 instead of 65 and I also will not have to pay income tax on anything I withdraw, not just medical expenses!

2) by saving up medical expense receipts for 30+ years, arnt we taking a big gamble that the IRS will allow us to redeem it in such a long time and the tax laws will not change? Plus the added complexity of keeping track of every medical bill for 30 years sounds like the opposite of simplicity in investing.

Because of these reasons, I believe I would be better off reimbursing myself out of my HSA now and using that money in a roth IRA rather than holding on to all of my medical expenses to redeem them in 30 years.

What do you think?

runner3081
Posts: 3205
Joined: Mon Aug 22, 2016 3:22 pm

Re: Deferring medical expenses to allow HSA investments to compound.

Post by runner3081 » Wed May 13, 2020 8:56 am

I completely disagree, they call it personal finance for a reason though :)

You are forgetting completely tax free growth on that $1k for 20 years. There will be plenty of healthcare expenses later in life to use that balance for.

Even if the government does make a change, there will likely be a notice and the decision can be made at that time to cash out with old receipts or not. We aren't likely to wake up one day and realize that the tax code has changed and those old receipts are worthless, without warning.

User avatar
grabiner
Advisory Board
Posts: 27148
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Deferring medical expenses to allow HSA investments to compound.

Post by grabiner » Wed May 13, 2020 9:02 am

Welcome to the forum!

It only makes sense to leave money to compound in your HSA if you are maxing out your other retirement accounts.

If you have a $1000 medical bill and $1000 in cash, you can take $1000 out of your HSA to pay it and put the $1000 in cash in your Roth IRA if it is not maxed out. The money will still grow tax-free, but in the Roth IRA, you can use it on anything, not just medical costs, in the future. You get a similar benefit for putting $1282 in your 401(k) (for $1000 out of pocket in a 22% tax bracket); this grows just as much as $1000 tax-free if you withdraw the money in a 22% tax bracket.)
Wiki David Grabiner

neilpilot
Posts: 3130
Joined: Fri Dec 04, 2015 1:46 pm
Location: Memphis area

Re: Deferring medical expenses to allow HSA investments to compound.

Post by neilpilot » Wed May 13, 2020 9:13 am

grabiner wrote:
Wed May 13, 2020 9:02 am
Welcome to the forum!

It only makes sense to leave money to compound in your HSA if you are maxing out your other retirement accounts.

If you have a $1000 medical bill and $1000 in cash, you can take $1000 out of your HSA to pay it and put the $1000 in cash in your Roth IRA if it is not maxed out. The money will still grow tax-free, but in the Roth IRA, you can use it on anything, not just medical costs, in the future. You get a similar benefit for putting $1282 in your 401(k) (for $1000 out of pocket in a 22% tax bracket); this grows just as much as $1000 tax-free if you withdraw the money in a 22% tax bracket.)
I don't agree. Your Roth IRA money is taxed on the way in, and then grows tax deferred. Your 401(k) money is taxed on the way out. An HSA, unlike the other 2, reduced your current taxable income and offers a tax deferred growth potential. Essentially totally tax free money, unlike the other deferred investments.

While the HSA does limit tax free withdrawal to medical costs, I submit that it's unlikely that someone will not have sufficient medical expenses. In fact, if the OP does wait 30 years it's very likely that they will not need to rely on 30 year old receipts. Most will have much more recent medical expenses to substantiate their HSA withdrawals (in the unlikely even that the IRA even asks for receipts). BTW many medicare and LTCI premiums are qualified medical expenses.

User avatar
grabiner
Advisory Board
Posts: 27148
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Deferring medical expenses to allow HSA investments to compound.

Post by grabiner » Wed May 13, 2020 9:24 am

neilpilot wrote:
Wed May 13, 2020 9:13 am
grabiner wrote:
Wed May 13, 2020 9:02 am
Welcome to the forum!

It only makes sense to leave money to compound in your HSA if you are maxing out your other retirement accounts.

If you have a $1000 medical bill and $1000 in cash, you can take $1000 out of your HSA to pay it and put the $1000 in cash in your Roth IRA if it is not maxed out. The money will still grow tax-free, but in the Roth IRA, you can use it on anything, not just medical costs, in the future. You get a similar benefit for putting $1282 in your 401(k) (for $1000 out of pocket in a 22% tax bracket); this grows just as much as $1000 tax-free if you withdraw the money in a 22% tax bracket.)
I don't agree. Your Roth IRA money is taxed on the way in, and then grows tax deferred. Your 401(k) money is taxed on the way out. An HSA, unlike the other 2, reduced your current taxable income and offers a tax deferred growth potential. Essentially totally tax free money, unlike the other deferred investments.
But you already got the benefit from the HSA when you made the contribution; this is why you should contribute to the HSA in preference to any other investment except a matched 401(k). Once the money has already been contributed, the HSA has no advantage over the Roth IRA; both grow tax-free, and withdrawals are tax-free if you follow the rules.

Withdrawing $1000 from an HSA for medical expenses, and contributing $1000 to a Roth IRA, gives you the same amount of money to spend tax-free, and the Roth IRA is more flexible. You can withdraw the $1000 from the Roth IRA tax-free at any time, since withdrawals of contributions are always tax-free, but you can also withdraw the growth tax-free after age 59-1/2 for any purpose.

For the 401(k), if you contribute and withdraw in the same tax bracket, the tax effects cancel out, so it is just as good as putting the same after-tax amount in a Roth IRA; if you retire in a lower tax bracket, it is better than a Roth IRA.
Wiki David Grabiner

wootwoot
Posts: 530
Joined: Tue Jan 27, 2009 7:37 pm

Re: Deferring medical expenses to allow HSA investments to compound.

Post by wootwoot » Wed May 13, 2020 9:34 am

grabiner wrote:
Wed May 13, 2020 9:24 am
neilpilot wrote:
Wed May 13, 2020 9:13 am
grabiner wrote:
Wed May 13, 2020 9:02 am
Welcome to the forum!

It only makes sense to leave money to compound in your HSA if you are maxing out your other retirement accounts.

If you have a $1000 medical bill and $1000 in cash, you can take $1000 out of your HSA to pay it and put the $1000 in cash in your Roth IRA if it is not maxed out. The money will still grow tax-free, but in the Roth IRA, you can use it on anything, not just medical costs, in the future. You get a similar benefit for putting $1282 in your 401(k) (for $1000 out of pocket in a 22% tax bracket); this grows just as much as $1000 tax-free if you withdraw the money in a 22% tax bracket.)
I don't agree. Your Roth IRA money is taxed on the way in, and then grows tax deferred. Your 401(k) money is taxed on the way out. An HSA, unlike the other 2, reduced your current taxable income and offers a tax deferred growth potential. Essentially totally tax free money, unlike the other deferred investments.
But you already got the benefit from the HSA when you made the contribution; this is why you should contribute to the HSA in preference to any other investment except a matched 401(k). Once the money has already been contributed, the HSA has no advantage over the Roth IRA; both grow tax-free, and withdrawals are tax-free if you follow the rules.

Withdrawing $1000 from an HSA for medical expenses, and contributing $1000 to a Roth IRA, gives you the same amount of money to spend tax-free, and the Roth IRA is more flexible. You can withdraw the $1000 from the Roth IRA tax-free at any time, since withdrawals of contributions are always tax-free, but you can also withdraw the growth tax-free after age 59-1/2 for any purpose.

For the 401(k), if you contribute and withdraw in the same tax bracket, the tax effects cancel out, so it is just as good as putting the same after-tax amount in a Roth IRA; if you retire in a lower tax bracket, it is better than a Roth IRA.
This.

While the reimbursed HSA expenses -> Roth contribution strategy isn't covered very often here it is perfectly valid and even preferential under your circumstances.

scophreak
Posts: 100
Joined: Tue Jan 12, 2016 1:17 pm

Re: Deferring medical expenses to allow HSA investments to compound.

Post by scophreak » Wed May 13, 2020 9:40 am

As was somewhat mentioned earlier, holding $ long-term in an HSA (or any account for that matter) only makes sense if it is in an investment that has a positive expected real gain over that time. As the OP suggests, $ within an HSA held in cash will absolutely lose buying power to inflation over time, especially over a 20-30 year holding period. These $ need to be invested within the HSA into appropriate funds (just like a Roth IRA or other account) in order to reap the true benefits.

User avatar
grabiner
Advisory Board
Posts: 27148
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Deferring medical expenses to allow HSA investments to compound.

Post by grabiner » Wed May 13, 2020 9:54 am

scophreak wrote:
Wed May 13, 2020 9:40 am
As was somewhat mentioned earlier, holding $ long-term in an HSA (or any account for that matter) only makes sense if it is in an investment that has a positive expected real gain over that time. As the OP suggests, $ within an HSA held in cash will absolutely lose buying power to inflation over time, especially over a 20-30 year holding period. These $ need to be invested within the HSA into appropriate funds (just like a Roth IRA or other account) in order to reap the true benefits.
If you are investing the HSA for medical expenses in retirement, then it should be viewed as part of your IRA, which will also be used for expenses in retirement. Viewing the two as a unit means that you might hold just one fund in the HSA (which is likely a small part of your portfolio) and get the overall allocation right.

If you live in CA or NJ, you may want to invest the HSA in Treasury bonds or TIPS; these two states do not recognize HSAs and will tax dividends on any other investment in an HSA. Thus, if Treasury bonds meet your investment needs, you should hold them in your HSA and hold other investments in your IRA and 401(k).
Wiki David Grabiner

Topic Author
StonksMD
Posts: 2
Joined: Wed May 13, 2020 7:45 am

Re: Deferring medical expenses to allow HSA investments to compound.

Post by StonksMD » Wed May 13, 2020 11:11 am

Thank you all for the wonderful advice! I cannot believe I was able to get such a detailed answer so soon! I really appreciate the help!

This is the result I expected. I dont think it is widely advertised that this “deferred medical expense redemption” strategy in HSAs is only effective if the investor has already maxed out his/her retirement savings. I am glad to get an answer to this complex issue!

terran
Posts: 1345
Joined: Sat Jan 10, 2015 10:50 pm

Re: Deferring medical expenses to allow HSA investments to compound.

Post by terran » Wed May 13, 2020 11:47 am

grabiner wrote:
Wed May 13, 2020 9:02 am
Welcome to the forum!

It only makes sense to leave money to compound in your HSA if you are maxing out your other retirement accounts.

If you have a $1000 medical bill and $1000 in cash, you can take $1000 out of your HSA to pay it and put the $1000 in cash in your Roth IRA if it is not maxed out. The money will still grow tax-free, but in the Roth IRA, you can use it on anything, not just medical costs, in the future. You get a similar benefit for putting $1282 in your 401(k) (for $1000 out of pocket in a 22% tax bracket); this grows just as much as $1000 tax-free if you withdraw the money in a 22% tax bracket.)
+1

People get all up in arms as soon as someone suggests taking money out of an HSA, but leaving money in an HSA only makes sense when that's your last remaining tax advantaged contribution option. Once you've contributed to an HSA you've already gotten the tax deduction (maybe also a FICA deduction) no matter what you do next so that's a done deal. Not taking a distribution from an HSA only gets you one more tax advantage: tax free growth and you can get that with more flexibility in a Roth IRA. Taking the HSA distribution also gives you the option of making a Roth vs Traditional calculation and possibly getting yet another tax deduction.

Post Reply