Spending HSA money versus other

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rambleonrosenson
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Spending HSA money versus other

Post by rambleonrosenson » Tue Jan 17, 2017 12:21 pm

Hi All,

So I was thinking about my HSA (with SelectAccount) and medical spending and had a question. If I put pre-tax money into my HSA and it can be invested and grow tax-free and then be withdrawn tax-free and without penalty once the age requirement is met, why should I be spending that money when it comes to my medical expenses rather than spending money from my bank account on medical expenses and taking full advantage of the triple tax-free element of the HSA as an investment? Is there a clear reason to be using the HSA for medical expenses rather than investing?

I recognize that the cons of treating my HSA as strictly an investment vehicle would be that there would be a restriction on investment options and on my withdrawal ability without incurring a penalty, but would those necessarily outweigh the tax benefits that I would receive?

I also recognize that it would depend on the investment options/expense ratios provided by my HSA relative to my brokerage account (with Vanguard), so I have provided a link to SelectAccount's HSA investment options below. (Note: I think with the expense ratios available for the HSA being a good bit higher than my Vanguard admiral expense ratios for the Total Stock Market Index and the Intermediate Term Bond Market Index that this may tip the scales in favor of spending HSA money on medical expenses, but I'm still curious what the thoughts are on my question if one were to assume that these expense ratios were more in line with one another.)

To give a little background, I have an employer sponsored HSA plan (no match) and have elected the HDHP option with a single individual deductible of $2,500. Please let me know if you need any more info and I'm interested to read your insightful responses!


Here is the link to SelectAccount's HSA investment options: https://www.selectaccount.com/wp-conten ... -Funds.pdf

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queso
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Re: Spending HSA money versus other

Post by queso » Tue Jan 17, 2017 12:52 pm

My HSA plan is identical to yours. Pay for medical expenses out of pocket and use the HSA as a tIRA once I get old enough to use it for non-medical expenses.

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Kenkat
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Re: Spending HSA money versus other

Post by Kenkat » Tue Jan 17, 2017 12:55 pm

Are you maxing out other tax deferral accounts that have better expense ratios such as IRA or 401(k)? Your strategy does make sense if you are using all of the other options already; if not, you'd probably be better served putting your cash into an IRA at Vanguard than using that cash for medical expenses.

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Cyclesafe
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Re: Spending HSA money versus other

Post by Cyclesafe » Tue Jan 17, 2017 1:20 pm

Wait a sec. Withdrawals from an HSA after 59 1/2 for non-medical expense paying purposes are fully taxable - just as a traditional IRA. Sorry.

I pay out-of-pocket for medical expenses when I expect them to be greater than 10% of my AGI and thus deductible. This happens when I pre-pay a year's worth of private medical insurance (retired, under 65). Otherwise, I pay for medical expenses with my pre-tax funded HSA account.

vesalius
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Re: Spending HSA money versus other

Post by vesalius » Tue Jan 17, 2017 1:54 pm

Cyclesafe wrote:Wait a sec. Withdrawals from an HSA after 59 1/2 for non-medical expense paying purposes are fully taxable - just as a traditional IRA. Sorry.

I pay out-of-pocket for medical expenses when I expect them to be greater than 10% of my AGI and thus deductible. This happens when I pre-pay a year's worth of private medical insurance (retired, under 65). Otherwise, I pay for medical expenses with my pre-tax funded HSA account.
True, but if you keep the receipts for those medical bills you paid out of pocket you can later withdraw that amount from your HSA, even years/decades later and the money will have grown tax-free in HSA during that time-frame. The tax-free withdrawal years later can then be used for anything you want.

Also even if you stop contributing to an HSA or switch to a non HDHP medical insurance plan, future medical expenses paid out of pocket can still be used for tax-free withdrawals from old or now dormant HSA's.

Boglehead Wiki - HSA:Paying current expenses out of pocket

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Cyclesafe
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Re: Spending HSA money versus other

Post by Cyclesafe » Tue Jan 17, 2017 2:56 pm

vesalius wrote:
Cyclesafe wrote:Wait a sec. Withdrawals from an HSA after 59 1/2 for non-medical expense paying purposes are fully taxable - just as a traditional IRA. Sorry.

I pay out-of-pocket for medical expenses when I expect them to be greater than 10% of my AGI and thus deductible. This happens when I pre-pay a year's worth of private medical insurance (retired, under 65). Otherwise, I pay for medical expenses with my pre-tax funded HSA account.
True, but if you keep the receipts for those medical bills you paid out of pocket you can later withdraw that amount from your HSA, even years/decades later and the money will have grown tax-free in HSA during that time-frame. The tax-free withdrawal years later can then be used for anything you want.

Also even if you stop contributing to an HSA or switch to a non HDHP medical insurance plan, future medical expenses paid out of pocket can still be used for tax-free withdrawals from old or now dormant HSA's.

Boglehead Wiki - HSA:Paying current expenses out of pocket
So does this mean that I can take tax-free withdrawals for substantiated medical expenses from years before the existence of my HSA , years when I didn't itemize and took the standard deduction? Please tell me this is true!!!

oldhobo
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Re: Spending HSA money versus other

Post by oldhobo » Tue Jan 17, 2017 3:37 pm

Cyclesafe wrote:So does this mean that I can take tax-free withdrawals for substantiated medical expenses from years before the existence of my HSA , years when I didn't itemize and took the standard deduction? Please tell me this is true!!!
Only expenses incurred after the opening of your HSA can be reimbursed.

As it stands now, an HSA is an excellent tool in your retirement toolkit. The money can be withdrawn at 65 and taxed as a traditional IRA if used for non medical expenses (and never taxes if used for qualified medical expenses)

dsmil
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Re: Spending HSA money versus other

Post by dsmil » Tue Jan 17, 2017 3:48 pm

My plan is to pay everything out of pocket, then withdraw the HSA funds, then move the money over to my Roth. Therefore, I'm getting the tax deduction and never paying taxes on the money, no matter what I use the funds for in retirement.

lateralex
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Re: Spending HSA money versus other

Post by lateralex » Tue Jan 17, 2017 6:24 pm

How do you plan to move the money into your Roth? You mean by way of normal contributions?

I'd rather keep the money in the HSA and claim prior medical expenses in retirement.

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grabiner
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Re: Spending HSA money versus other

Post by grabiner » Tue Jan 17, 2017 9:28 pm

lateralex wrote:How do you plan to move the money into your Roth? You mean by way of normal contributions?

I'd rather keep the money in the HSA and claim prior medical expenses in retirement.
Welcome to the forum!

The idea is to contribute more to your Roth because you don't need the money for medical expenses. If you have $1000 in your checking account and a $1000 medical bill, you can pay $1000 out of your HSA, and then contribute $1000 from your checking account to your Roth IRA.

The advantage is that Roth investments also grow tax-free (and 401(k) investments are as good as tax-free given the deduction), and can be spent on anything. If you had left the $1000 in your HSA, you could spend $1000 on anything later, but any growth would be taxed if not used for medical costs.

If you can max out your 401(k) and Roth IRA without touching the HSA, then it does make sense to keep the money in the HSA, because that gives you more tax-free growth.
Wiki David Grabiner

inbox788
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Re: Spending HSA money versus other

Post by inbox788 » Wed Jan 18, 2017 4:44 am

queso wrote:My HSA plan is identical to yours. Pay for medical expenses out of pocket and use the HSA as a tIRA once I get old enough to use it for non-medical expenses.
I just started doing HSA, so it will be a while before I start spending it, but I can imagine after 10, 20 or 30 years having TOO MUCH money in HSA. How are folks deciding when to start spending HSA money for health expenses vs. letting it grow tax-free longer?

keystone
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Re: Spending HSA money versus other

Post by keystone » Wed Jan 18, 2017 8:59 am

inbox788 wrote: I just started doing HSA, so it will be a while before I start spending it, but I can imagine after 10, 20 or 30 years having TOO MUCH money in HSA. How are folks deciding when to start spending HSA money for health expenses vs. letting it grow tax-free longer?
Take a look at this recent thread, particularly the posts by White Coat Investor where he talks about the possibility of having "too much money" in the HSA:

viewtopic.php?f=1&t=204979

I think we all have to look at our individual circumstances and determine what makes the most sense. Like you, I just started contributing to an HSA this year. My plan is to keep the money invested for a while and perhaps start to make tax free medical withdrawals when it's time to pay for my son's college education around age 57-58 and continue to prioritize HSA withdrawals in retirement once I've exhausted taxable savings. If you're concerned about your descendants' inheritance, the benefits of inheriting an HSA are nowhere near as good as they are for IRAs so it may make sense to spend it down first.

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Cyclesafe
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Re: Spending HSA money versus other

Post by Cyclesafe » Wed Jan 18, 2017 9:49 am

I itemize medical expenses only in alternate years as I pay one year of a private HDHP and then prepay a second year for the total to breach the 10% AGI hurdle for deductibility. In those years, I spend out-of-pocket for other medical expenses until I reach my insurance deductible. The latter, which take me further beyond the hurdle, are then also entered on Schedule A. In this manner I get maximum deductions and preserve my HSA balance for when I can't deduct.

In years I don't itemize medical expenses, I use my HSA to pay for qualified medical expenses.

If one regards tax-free (or deferred) gains from HSA investments as immaterial and has ample tax deferred space elsewhere, then there is no reason not to draw down the HSA now rather than latter (using receipts from years past qualified medical expenses).

When I enroll in Medicare, it's not likely that I'll breach my 10% AGI hurdle to allow a deduction for medical expenses until I incur large qualifying medical expenses that are not covered by Medicare - such as the more intensive, end-of-life elements of assisted living. In the interim, the HSA can be used to pay for Medicare supplemental insurance premiums.

I hope I'm doing this right.......

pshonore
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Re: Spending HSA money versus other

Post by pshonore » Wed Jan 18, 2017 10:00 am

Cyclesafe wrote:I itemize medical expenses only in alternate years as I pay one year of a private HDHP and then prepay a second year for the total to breach the 10% AGI hurdle for deductibility. In those years, I spend out-of-pocket for other medical expenses until I reach my insurance deductible. The latter, which take me further beyond the hurdle, are then also entered on Schedule A. In this manner I get maximum deductions and preserve my HSA balance for when I can't deduct.

In years I don't itemize medical expenses, I use my HSA to pay for qualified medical expenses.

If one regards tax-free (or deferred) gains from HSA investments as immaterial and has ample tax deferred space elsewhere, then there is no reason not to draw down the HSA now rather than latter (using receipts from years past qualified medical expenses).

When I enroll in Medicare, it's not likely that I'll breach my 10% AGI hurdle to allow a deduction for medical expenses until I incur large qualifying medical expenses that are not covered by Medicare - such as the more intensive, end-of-life elements of assisted living. In the interim, the HSA can be used to pay for Medicare supplemental insurance premiums.

I hope I'm doing this right.......
I believe you can use HSA funds to pay for Medicare B, C and D parts (and probably even Part A if you don't get it for free), but supplemental Medigap "Letter" Plans (F, G, etc) are not valid expenses for HSAs.

Day9
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Re: Spending HSA money versus other

Post by Day9 » Wed Jan 18, 2017 11:13 am

I don't want to hold onto receipts for 30 years so I paid a few $500 bills out of my HSA now instead of doing this. I should start a post in the personal finance tips forum titled "How to securely hold onto receipts for 30 years" :mrgreen:
I'm just a fan of the person I got my user name from

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Aptenodytes
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Re: Spending HSA money versus other

Post by Aptenodytes » Wed Jan 18, 2017 11:21 am

kenschmidt wrote:Are you maxing out other tax deferral accounts that have better expense ratios such as IRA or 401(k)? Your strategy does make sense if you are using all of the other options already; if not, you'd probably be better served putting your cash into an IRA at Vanguard than using that cash for medical expenses.
If the OP is willing to track all qualified medical expenses forever, then it is probably better to go the other way -- max out the HSA and then put what you can into the IRA. The ERs don't seem to be a trump -- the Vanguard Small-Cap Index is an option at ER=.23%.

In general HSA investment options get better over time, sometimes very quickly.

inbox788
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Re: Spending HSA money versus other

Post by inbox788 » Wed Jan 18, 2017 2:59 pm

keystone wrote:Take a look at this recent thread, particularly the posts by White Coat Investor where he talks about the possibility of having "too much money" in the HSA:

viewtopic.php?f=1&t=204979
Thanks. I had searched, but didn't come across this thread. It's not short so I haven't had a chance to go through it.
pshonore wrote:I believe you can use HSA funds to pay for Medicare B, C and D parts (and probably even Part A if you don't get it for free), but supplemental Medigap "Letter" Plans (F, G, etc) are not valid expenses for HSAs.
No medigap?!? I was assuming it would have been included. So save the funds to pay for the gaps, not the insurance. Hmm...

Recently came across a situation where Medicare had a gap requiring a substantial hospitalization co-pay after 20 days, and despite a secondary policy FedBlue, it didn't cover the entire gap. Some medigap insurance policies cover 100 days, while the FedBlue only covered 30, which in effect only added 10 additional days to Medicare. Not very effective gap insurance in this situation. Lots of big and little gaps and likely increasing as the plans try to cut costs and stealthily adjust the fine print.
Cyclesafe wrote:If one regards tax-free (or deferred) gains from HSA investments as immaterial and has ample tax deferred space elsewhere, then there is no reason not to draw down the HSA now rather than latter (using receipts from years past qualified medical expenses).
I don't think the HSA investments will be immaterial. I can imagine a doubling or several over the course of decades. I see how it should be spent ahead of Roth, but still not clear on HSA/Roth vs tIRA timing and even less clear with cash/taxable vs over accumulating HSA funds.

Sailor36
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Re: Spending HSA money versus other

Post by Sailor36 » Wed Jan 18, 2017 4:16 pm

inbox788 wrote:
Lots of big and little gaps and likely increasing as the plans try to cut costs and stealthily adjust the fine print.
A really big gap now is that Medicare does not pay for long term care. For those without LTC insurance, this can be very expensive. One strategy might be to use the HSA as a form of self-insurance for long term care, but the problem is you never know how much LTC (if any) you are going to need. When you are paying for LTC, your medical expenses will be so high that the deduction will likely exceed your taxable income, so the tax benefit of using the HSA for those expenses will be wasted.

Also as others have noted, left-over HSA money is taxed as income to your heirs, so it is good to spend it on current or past medical expenses while you are alive and can take advantage of it being tax-free.

Dirghatamas
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Re: Spending HSA money versus other

Post by Dirghatamas » Wed Jan 18, 2017 5:23 pm

My thinking on HSA is simple: its the best investment vehicle offered in the US under our current laws. So maximize contributions and never take money out for health expenses till you are very old.

The way I see it, for most of us, Healthcare costs will be high in old age vs. when we are younger. At age 46, looking back, my healthcare costs have been ~0 so far. The whole reason to build a cushion in assets is to take care of unexpected long term health care issues. HSA is the best vehicle for that.

If it turns out that I am 80 and never needed much healthcare, I will be pleasantly surprised and take money out equivalent to 401K. Win-win either way. I never keep receipts for this small stuff on healthcare. It sounds crazy complicated to keep receipts for 40 years.

It seems like an asymmetric bet. If it turns out that we DO need extensive healthcare in old age, the tax free compounding of HSA over decades would have been beneficial. If it turns out we DIDN'T need much healthcare in old age, we are winners anyway and we over saved by many X over what we really needed. Why sweat this pleasant surprise?

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Cyclesafe
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Re: Spending HSA money versus other

Post by Cyclesafe » Wed Jan 18, 2017 6:14 pm

If medical insurance is no longer provided tax free to an employee or if an employee ceases to be employed, the calculus concluding that health care costs will be minimal will be revisited in a hurry. DW and I, several years shy of qualifying for Medicare, incur unsubsidized Bronze level coverage costs of $18k per year with $10K deductibles. The former is covered by taxable savings and the later by taxable savings or our HSA depending on whether we are itemizing medical expenses.

My in-laws were incurring long term care costs of $12k per month for the last 3 years of their lives. And they were healthy.

Sorry to be Debbie Downer here, but even if you are healthy and rarely see doctors and dentists outside of routine exams, just being alive incurs unavoidable exponentially rising health care expenses. Of course, this assumes that you keep current with health insurance prior to Medicare and do not live with your care-giving children in your dotage.

inbox788
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Re: Spending HSA money versus other

Post by inbox788 » Thu Jan 19, 2017 4:51 am

Sailor36 wrote:A really big gap now is that Medicare does not pay for long term care. For those without LTC insurance, this can be very expensive. One strategy might be to use the HSA as a form of self-insurance for long term care, but the problem is you never know how much LTC (if any) you are going to need. When you are paying for LTC, your medical expenses will be so high that the deduction will likely exceed your taxable income, so the tax benefit of using the HSA for those expenses will be wasted.
Good idea to consider LTC. The LTC insurance has been discussed, and it's the conventional wisdom that it's for medium high NW individual who needs to protect this nestegg. If the NW is low, there's Medicaid and if the NW is very high, one can afford to pay. Plus most LTC plans today are very limited capped by amount and time, so it's not really that long term protection.
Your Real Risk Is ...
Here's the answer to the question, "what's my real risk of needing long-term care?". It's either 0% (you'll never need it) or it's 100% (you'll need it). I call it the "lottery you don't want to win ... though the odds are significantly greater than winning the lottery!

Average Length of Stays (Nursing Homes)
5 years or more 12.0%
3 to 5 years 12.0%
1 to 3 years 30.3%
6 to 12 months 14.2%
3 to 6 months 10.0%
less than 3 months 20.0%

Average Length Of Stay in Years
Female 2.6 years
Male 2.3 years
Married 1.6 years
Single / Never Married 3.8 years
Widowed 2.3 years
Divorced / Separated 2.7 years
http://www.aaltci.org/long-term-care-in ... m-care.php

Getting married might keep you out of a nursing home for an extra year or two!
One-third of today’s 65 year-olds may never need long-term care support, but 20 percent will need it for longer than 5 years
http://longtermcare.gov/the-basics/how- ... -you-need/

Note that some data is very mixed up including home care.

keystone
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Re: Spending HSA money versus other

Post by keystone » Thu Jan 19, 2017 8:52 am

Day9 wrote:I don't want to hold onto receipts for 30 years so I paid a few $500 bills out of my HSA now instead of doing this. I should start a post in the personal finance tips forum titled "How to securely hold onto receipts for 30 years" :mrgreen:
My plan is to scan every receipt greater than $100 and store in a folder on Google Drive. Although I don't own a crystal ball, I feel confident enough that Google will still be around in 30 years or at the very least there will be sufficient warning signs that it won't, at which point I would move the documents somewhere else.

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