HSA: "Pay out of pocket" vs Withdraw math problem

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
JustinR
Posts: 421
Joined: Tue Apr 27, 2010 11:43 pm

HSA: "Pay out of pocket" vs Withdraw math problem

Post by JustinR » Fri Nov 24, 2017 4:43 am

Help me reconcile this one.

HSA medical costs. You can either:
  1. Pay out of pocket and keep the money invested in your HSA to grow tax free
  2. Withdraw from your HSA and invest it in your taxable account

Most people suggest the first one, paying out of pocket. This is the tax consequence:
  1. Pay out of pocket: Money grows tax free. Pay income tax on non-medical withdrawals at the end.
  2. Withdraw: Pay tax drag and long term capital gains at the end.

If you're going to spend it all on medical costs, obviously the first one is superior.

Let's assume you will spend most of it on non-medical costs.

Is #1 still definitely better than #2? Does "tax free growth + income tax" always beat "tax drag + ltcg"?

User avatar
Tamarind
Posts: 679
Joined: Mon Nov 02, 2015 2:38 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Tamarind » Fri Nov 24, 2017 6:28 am

Many folks are actually arguing for #3: Pay out of pocket, save receipts, grow tax free. After retirement use receipts to withdraw tax-free and spend it on non-medical expenses.

But regarding 1 vs 2, your tax bracket matters. If you spend your working and retirement years in the 15%, there is not much difference between 1 & 2.

kmurp
Posts: 228
Joined: Fri Jun 01, 2007 1:53 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by kmurp » Fri Nov 24, 2017 8:22 am

I’m paying out of pocket and will use the funds for Cobra prior to Medicare or deductibles after Cobra or Medicare premiums.

User avatar
jhfenton
Posts: 2285
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by jhfenton » Fri Nov 24, 2017 10:55 am

Tamarind wrote:
Fri Nov 24, 2017 6:28 am
Many folks are actually arguing for #3: Pay out of pocket, save receipts, grow tax free. After retirement use receipts to withdraw tax-free and spend it on non-medical expenses.
kmurp wrote:
Fri Nov 24, 2017 8:22 am
I’m paying out of pocket and will use the funds for Cobra prior to Medicare or deductibles after Cobra or Medicare premiums.
Agreed. The plan is definitely not to pay taxes on the funds at their eventual withdrawal. With accumulated medical expenses before retirement, post-retirement medical expenses, and eligible insurance premiums, I have little doubt we will be able to exhaust our HSA completely tax-free, even if we hit retirement with a few hundred thousand dollars in it.

jebmke
Posts: 7016
Joined: Thu Apr 05, 2007 2:44 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by jebmke » Fri Nov 24, 2017 10:57 am

Most HSAs have an expense associated with them that is greater than say, an IRA. Using the HSA as an IRA substitute (non-medical expenses) should be a last resort.
When you discover that you are riding a dead horse, the best strategy is to dismount.

User avatar
jhfenton
Posts: 2285
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by jhfenton » Fri Nov 24, 2017 11:20 am

jebmke wrote:
Fri Nov 24, 2017 10:57 am
Most HSAs have an expense associated with them that is greater than say, an IRA. Using the HSA as an IRA substitute (non-medical expenses) should be a last resort.
1. I assume those of us advocating HSA's as an additional retirement savings vehicle are already maxing out our (Roth) IRAs and 401(k). If I couldn't afford to max out all three, I'd certainly double-dip on the tax deductions and fund IRA/401(k) contributions by reimbursing medical expenses from my HSA.

2. HSA savings options are getting better. Lively now has the cost down to a fixed $30/yr (paid from outside the HSA) for TDA brokerage. SelectAccount is $30/yr (plus the cash drag on $1,000) for Schwab brokerage. Saturna has quirks and limitations, but is cheap.

Big Dog
Posts: 579
Joined: Mon Sep 07, 2015 4:12 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Big Dog » Fri Nov 24, 2017 12:09 pm

just started an HSA this year but thinking it really doesn't work for me since I'm two years from retirement.

- Put $7500 in, but also had that much in expenses this year.

Paid expenses out general after-tax cash flow at first, but then considered what will happen in two years when I retire, and still a few years from SS (age 70). Don't have several years of cash sitting in the bank, so once I retire, I'll have to start drawing down taxable equity accounts. But, if I still had the $7500 from this year, that would be $7500 less that I'd have to take down two years hence. Just didn't seem worth the hassle for the paperwork.

User avatar
jhfenton
Posts: 2285
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by jhfenton » Fri Nov 24, 2017 12:33 pm

Big Dog wrote:
Fri Nov 24, 2017 12:09 pm
just started an HSA this year but thinking it really doesn't work for me since I'm two years from retirement.
In your situation, I'd just use the HSA for the tax deduction and pay current expenses as they arose.

If nothing else changes--like my wife having the employer-sponsored HSA deductions instead of me--when we get to HSA catch-up age in 8 years, we'll probably just spend my wife's catchup contributions on current expenses so as not to deal with investing an account that we can only put $1,000 per year in.

Spirit Rider
Posts: 6624
Joined: Fri Mar 02, 2007 2:39 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Spirit Rider » Fri Nov 24, 2017 3:13 pm

Most people suggest the first one, paying out of pocket. This is the tax consequence:
  1. Pay out of pocket: Money grows tax free. Pay income tax on non-medical withdrawals at the end.
For the vast majority of Bogleheads, there should be very little chance of the last sentence. Medical expenses for someone retiring in 2017 can run well into six figures in their lifetime.

First, most people underestimate what their HSA qualified medical expenses will be in retirement. First, there are Medicare Part B and Part D premiums and many BHs will be subject to IRMAA. Also, any insurance premiums except for Medicare Supplement Plans are qualified. You can switch a significant amount of that Medigap cost from non-qualified premiums to qualified medical expenses by enrolling in the high-deductible plan F (G enroll >= 2020). All out-of-pocket medical, dental, vision, and hearing expenses are qualified medical expenses. As are Long Term Care
(LTC) insurance and/or out-of-pocket LTC costs.

The optimizations in the accumulation and withdrawal phases are:
  1. Accumulation:
    1. Not maximizing tax-advantaged accounts: Reimburse all qualified medical expenses from HSA. Use reimbursements towards maximizing tax-advantaged accounts. Gross up for pre-tax contributions.
    2. Maximizing tax-advantaged accounts: Pay qualified medical receipts out-of-pocket save receipts and reimbursment for retirement.
  2. Withdrawal:
    1. Tax-free: If you wish to take tax-free distributions at any time, reimburse the HSA encumbered tax-free assets first.
    2. Pre-tax: Always take distributions from other pre-tax assets first. Pre-tax distributions from an HSA should be a last resort.
Note: Caveat to HSA owners who have only non-spouse beneficiaries. Do not die suddenly. Probably should reimburse from HSA sooner rather than later in retirement. Spouses should tell spouse beneficiaries to do the same after they pass, or maybe the HSA account owner should clean up their own mess before they go.

JustinR
Posts: 421
Joined: Tue Apr 27, 2010 11:43 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by JustinR » Fri Nov 24, 2017 4:28 pm

Tamarind wrote:
Fri Nov 24, 2017 6:28 am
Many folks are actually arguing for #3: Pay out of pocket, save receipts, grow tax free. After retirement use receipts to withdraw tax-free and spend it on non-medical expenses.
That's the same as #1.

Nobody's really answered my question.

Phrased a different way, if you could convert your 401k money to a taxable account (for free, paying no tax during conversion), would you?

jalbert
Posts: 2293
Joined: Fri Apr 10, 2015 12:29 am

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by jalbert » Fri Nov 24, 2017 4:40 pm

HSA medical costs. You can either:
1. Pay out of pocket and keep the money invested in your HSA to grow tax free

2. Withdraw from your HSA and invest it in your taxable account
There is a 3rd option. You don't have to reimburse expenses in the year incurred, but can save medical
receipts and reimburse from HSA funds in a later year.
Risk is not a guarantor of return.

User avatar
knpstr
Posts: 1827
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by knpstr » Fri Nov 24, 2017 4:51 pm

JustinR wrote:
Fri Nov 24, 2017 4:43 am
Does "tax free growth + income tax" always beat "tax drag + ltcg"?
No, I don't think so.

I'd encourage you to make a spreadsheet and play with the numbers a little.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

Spirit Rider
Posts: 6624
Joined: Fri Mar 02, 2007 2:39 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Spirit Rider » Fri Nov 24, 2017 5:36 pm

JustinR wrote:
Fri Nov 24, 2017 4:28 pm
Nobody's really answered my question.
That is because your question is based on a fundamental fallacy.

As I pointed out, there is very little chance that someone will need to make non-qualified withdrawals from their HSA accounts. Almost everyone (and their spouse beneficiary) will run out of HSA funds long before they run out of qualified medical expenses.

Even if they do run out it is not a simple calculation of ordinary income rates vs. capital gains rates and the tax drag on distributions. It is not an all or nothing situation. You now have to model exactly how much is is left in the HSA and determine how much of that is due to contributions and how much is due to not reimbursing qualified medical expenses in a timely manner.

LimeJello
Posts: 3
Joined: Sat Dec 10, 2016 11:31 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by LimeJello » Fri Nov 24, 2017 6:01 pm

I’m pretty sure at age 65 you can withdraw tax free for any reason.

User avatar
jhfenton
Posts: 2285
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by jhfenton » Fri Nov 24, 2017 6:33 pm

LimeJello wrote:
Fri Nov 24, 2017 6:01 pm
I’m pretty sure at age 65 you can withdraw tax free for any reason.
You can withdraw penalty-free for any reason at age 65. Normal income taxes still apply if the withdrawal is not a reimbursement of medical expenses.

User avatar
Veiled
Posts: 109
Joined: Sun Oct 15, 2017 7:12 am

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Veiled » Fri Nov 24, 2017 10:53 pm

Nobody's answered your question because the answer is "it depends on your tax rates during accumulation and on withdrawal from either account." The differences are likely small. But most people don't see the value in picking #1 or #2 because there really is a distinct #3.
JustinR wrote:
Fri Nov 24, 2017 4:28 pm
Tamarind wrote:
Fri Nov 24, 2017 6:28 am
#3: Pay out of pocket, save receipts, grow tax free. After retirement use receipts to withdraw tax-free and spend it on non-medical expenses.
That's the same as #1.
I agree with others who say this is totally different. OP, your question pits two options against each other: #1 income tax on HSA withdrawals vs #2 tax drag + LTCG. But medical receipts allow you to spend HSA money on whatever you want and the government waives income tax, so #3 is no income tax, no tax drag, no LTCG.

Medical receipts are like "get out of tax free" cards for your HSA. And as a healthcare professional I completely agree with Spirit Rider on the fact that medical expenses will give you enough receipts to deplete your HSA, no matter how early you started. My only question is: how likely is it that congress lets us keep such an awesome retirement vehicle until I'm 65? :wink:
Pardon me as I read these one hundred and fifty-seven SP vs LLC vs Scorp threads...

JustinR
Posts: 421
Joined: Tue Apr 27, 2010 11:43 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by JustinR » Fri Nov 24, 2017 11:22 pm

Veiled wrote:
Fri Nov 24, 2017 10:53 pm
Nobody's answered your question because the answer is "it depends on your tax rates during accumulation and on withdrawal from either account." The differences are likely small. But most people don't see the value in picking #1 or #2 because there really is a distinct #3.
JustinR wrote:
Fri Nov 24, 2017 4:28 pm
Tamarind wrote:
Fri Nov 24, 2017 6:28 am
#3: Pay out of pocket, save receipts, grow tax free. After retirement use receipts to withdraw tax-free and spend it on non-medical expenses.
That's the same as #1.
I agree with others who say this is totally different. OP, your question pits two options against each other: #1 income tax on HSA withdrawals vs #2 tax drag + LTCG. But medical receipts allow you to spend HSA money on whatever you want and the government waives income tax, so #3 is no income tax, no tax drag, no LTCG.
What? You're paying yourself for medical costs you paid out of pocket in the past. You're not actually using tax free money to buy a motorcycle. What you guys are calling #3 (saving receipts and then using that credit later to buy a motorcycle), isn't actually a thing.

Veiled wrote:
Fri Nov 24, 2017 10:53 pm
Medical receipts are like "get out of tax free" cards for your HSA. And as a healthcare professional I completely agree with Spirit Rider on the fact that medical expenses will give you enough receipts to deplete your HSA, no matter how early you started. My only question is: how likely is it that congress lets us keep such an awesome retirement vehicle until I'm 65? :wink:
Spirit Rider wrote:
Fri Nov 24, 2017 5:36 pm
JustinR wrote:
Fri Nov 24, 2017 4:28 pm
Nobody's really answered my question.
That is because your question is based on a fundamental fallacy.

As I pointed out, there is very little chance that someone will need to make non-qualified withdrawals from their HSA accounts. Almost everyone (and their spouse beneficiary) will run out of HSA funds long before they run out of qualified medical expenses.

Even if they do run out it is not a simple calculation of ordinary income rates vs. capital gains rates and the tax drag on distributions. It is not an all or nothing situation. You now have to model exactly how much is is left in the HSA and determine how much of that is due to contributions and how much is due to not reimbursing qualified medical expenses in a timely manner.
It's not a fundamental fallacy. I understand that lifetime medical costs will likely be more than your lifetime HSA.

The point of this thread is a theoretical exercise. I thought I made that pretty clear in my first post, with the bolded part.

For example, people often say that a benefit of 401k is "tax-free growth." But is that ACTUALLY a real benefit? According to your answers, looks like it's not (at least, not always), and yet everyone parrots that bullet point mindlessly without thinking about it.

User avatar
tarnation
Posts: 2341
Joined: Thu Apr 26, 2007 12:36 am

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by tarnation » Sat Nov 25, 2017 12:52 am

If I understand your question, I remember a long (and somewhat painful) thread on this when to reimburse problem.
viewtopic.php?f=1&t=156240

Iirc, worst case (if you have no more qualified expenses) then it comes down to is in your tax situation, is a non deductible trad ira better than a taxable acccount?
Image

kaneohe
Posts: 4445
Joined: Mon Sep 22, 2008 12:38 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by kaneohe » Sat Nov 25, 2017 12:53 am

Spirit Rider wrote:
Fri Nov 24, 2017 5:36 pm
...................................................
As I pointed out, there is very little chance that someone will need to make non-qualified withdrawals from their HSA accounts. Almost everyone (and their spouse beneficiary) will run out of HSA funds long before they run out of qualified medical expenses.

........................................................
If you were in good health before Medicare, not sure how true this would be. If you got a Medicare Supplement Plan F , there would be no medical expenses except Medicare and Plan F supplement. Medicare premiums are qualified but supplement is not so maybe $3K/ yr of qualified expenses.
If you had $50K in HSA, it would take 17 yrs to deplete w/o any growth in HSA. If growth in HSA, then it would take even longer.

libralibra
Posts: 12
Joined: Sat Jul 30, 2011 2:01 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by libralibra » Sat Nov 25, 2017 3:05 am

Things reverse if you die with a large balance and no spouse, causing a taxable account to be better than an HSA in that case. An HSA becomes instantly fully taxable upon death, whereas a taxable account gets stepped-up with no income tax.

Spirit Rider
Posts: 6624
Joined: Fri Mar 02, 2007 2:39 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Spirit Rider » Sat Nov 25, 2017 5:01 am

kaneohe wrote:
Sat Nov 25, 2017 12:53 am
Spirit Rider wrote:
Fri Nov 24, 2017 5:36 pm
...................................................
As I pointed out, there is very little chance that someone will need to make non-qualified withdrawals from their HSA accounts. Almost everyone (and their spouse beneficiary) will run out of HSA funds long before they run out of qualified medical expenses.

........................................................
If you were in good health before Medicare, not sure how true this would be. If you got a Medicare Supplement Plan F , there would be no medical expenses except Medicare and Plan F supplement. Medicare premiums are qualified but supplement is not so maybe $3K/ yr of qualified expenses.
If you had $50K in HSA, it would take 17 yrs to deplete w/o any growth in HSA. If growth in HSA, then it would take even longer.
As I pointed out in a previous post, most people seriously underestimate healthcare expenses in retirement. Even people who start retirement healthy do not stay that way.

You have not included any out-of-pocket expenses for dental, vision or hearing care and supplies. Not to mention prescription drug costs. Using Medicare's Part D planning tools, my Part D premiums + OOP prescription drug costs will be > $4K/year. All of those expenses rise goemetrically as you age. Total out-of-pocket expenses are 3 - 4 times higher by age 85.

Fidelity's estimate for a 65 year old couple retiring in 2017 is $275K in "today's" dollars and does not include long-term care. Other estimates are even higher, when adding LTC costs are > $400K in "today's" dollars.

Yes, there will be growth in the HSA, but you are neglecting the fact that healthcare costs have been rising > twice the rate of inflation. The last few years have seen about 5% - 6%.

kaneohe
Posts: 4445
Joined: Mon Sep 22, 2008 12:38 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by kaneohe » Sat Nov 25, 2017 9:03 am

Spirit Ride..........thanks for your reply. I suppose it's a very individual thing. I wasn't thinking of a lot of things there because they weren't on my list so I kind of forgot about them. I am guessing my non-covered expenses are dental (check ups), Pt D premiums and deductible which totaled perhaps $600 in recent yrs. Have had some serious medical expenses which were all covered under Medicare/supplement. Plus the 3K in Medicare premiums + DW's part for vision/dental...........hmm, guess that would be approaching 4K total.

TravelforFun
Posts: 899
Joined: Tue Dec 04, 2012 11:05 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by TravelforFun » Sat Nov 25, 2017 9:49 am

jhfenton wrote:
Fri Nov 24, 2017 6:33 pm
LimeJello wrote:
Fri Nov 24, 2017 6:01 pm
I’m pretty sure at age 65 you can withdraw tax free for any reason.
You can withdraw penalty-free for any reason at age 65. Normal income taxes still apply if the withdrawal is not a reimbursement of medical expenses.
Not true. You would have to pay income tax plus 20% penalty if you used your HSA money for non-qualified expenses.

TravelforFun

Jags4186
Posts: 1469
Joined: Wed Jun 18, 2014 7:12 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Jags4186 » Sat Nov 25, 2017 9:58 am

I simply view the HSA as an IRA. I’m 31 years old...the prospects of my wife and I hoarding receipts for 34 years just doesn’t seem realistic. What constitutes keeping a receipt? Would a check image to a doctor count with a matching EOB? That’s easier to produce as I can go and download everything from the insurers webiste once a year and file away.

Jags4186
Posts: 1469
Joined: Wed Jun 18, 2014 7:12 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Jags4186 » Sat Nov 25, 2017 9:58 am

TravelforFun wrote:
Sat Nov 25, 2017 9:49 am
jhfenton wrote:
Fri Nov 24, 2017 6:33 pm
LimeJello wrote:
Fri Nov 24, 2017 6:01 pm
I’m pretty sure at age 65 you can withdraw tax free for any reason.
You can withdraw penalty-free for any reason at age 65. Normal income taxes still apply if the withdrawal is not a reimbursement of medical expenses.
Not true. You would have to pay income tax plus 20% penalty if you used your HSA money for non-qualified expenses.

TravelforFun
That isn’t correct. At age 65 you can withdraw for any reason penalty, not tax, free.

https://www.smu.edu/-/media/Site/Busine ... ashx?la=en
Last edited by Jags4186 on Sat Nov 25, 2017 9:59 am, edited 1 time in total.

CyLaw
Posts: 7
Joined: Sun Sep 08, 2013 8:24 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by CyLaw » Sat Nov 25, 2017 9:59 am

TravelforFun wrote:
Sat Nov 25, 2017 9:49 am
jhfenton wrote:
Fri Nov 24, 2017 6:33 pm
LimeJello wrote:
Fri Nov 24, 2017 6:01 pm
I’m pretty sure at age 65 you can withdraw tax free for any reason.
You can withdraw penalty-free for any reason at age 65. Normal income taxes still apply if the withdrawal is not a reimbursement of medical expenses.
Not true. You would have to pay income tax plus 20% penalty if you used your HSA money for non-qualified expenses.

TravelforFun
Per IRS publications, the 20% penalty does not apply past age 65.

Pub 969, p 9 (https://www.irs.gov/pub/irs-pdf/p969.pdf)
Additional tax. There is an additional 20% tax on the
part of your distributions not used for qualified medical ex
penses. Figure the tax on Form 8889 and file it with your
Form 1040 or Form 1040NR.

Exceptions. There is no additional tax on distributions
made after the date you are disabled, reach age 65, or
die.

Soon2BXProgrammer
Posts: 316
Joined: Mon Nov 24, 2014 11:30 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Soon2BXProgrammer » Sat Nov 25, 2017 9:59 am

TravelforFun wrote:
Sat Nov 25, 2017 9:49 am
jhfenton wrote:
Fri Nov 24, 2017 6:33 pm
LimeJello wrote:
Fri Nov 24, 2017 6:01 pm
I’m pretty sure at age 65 you can withdraw tax free for any reason.
You can withdraw penalty-free for any reason at age 65. Normal income taxes still apply if the withdrawal is not a reimbursement of medical expenses.
Not true. You would have to pay income tax plus 20% penalty if you used your HSA money for non-qualified expenses.

TravelforFun
From:
https://www.irs.gov/pub/irs-pdf/p969.pdf

Additional tax.
There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR
Exceptions.
There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.

Soon2BXProgrammer
Posts: 316
Joined: Mon Nov 24, 2014 11:30 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Soon2BXProgrammer » Sat Nov 25, 2017 10:01 am

Jags4186 wrote:
Sat Nov 25, 2017 9:58 am
I simply view the HSA as an IRA. I’m 31 years old...the prospects of my wife and I hoarding receipts for 34 years just doesn’t seem realistic. What constitutes keeping a receipt? Would a check image to a doctor count with a matching EOB? That’s easier to produce as I can go and download everything from the insurers webiste once a year and file away.

i create a file for each year. Each expense has:
1. print out from HSA website
2. expaination of benefits
3. doctor invoice
4. payment receipt.

I built a whole year in paper, then run it through my scanner as a package, and create 1 PDF per year, with a cover page adding them all up. I plan to distribute in whole year amounts (eventually).

Jags4186
Posts: 1469
Joined: Wed Jun 18, 2014 7:12 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Jags4186 » Sat Nov 25, 2017 10:05 am

Soon2BXProgrammer wrote:
Sat Nov 25, 2017 10:01 am
Jags4186 wrote:
Sat Nov 25, 2017 9:58 am
I simply view the HSA as an IRA. I’m 31 years old...the prospects of my wife and I hoarding receipts for 34 years just doesn’t seem realistic. What constitutes keeping a receipt? Would a check image to a doctor count with a matching EOB? That’s easier to produce as I can go and download everything from the insurers webiste once a year and file away.

i create a file for each year. Each expense has:
1. print out from HSA website
2. expaination of benefits
3. doctor invoice
4. payment receipt.

I built a whole year in paper, then run it through my scanner as a package, and create 1 PDF per year, with a cover page adding them all up. I plan to distribute in whole year amounts (eventually).
What about doctors that don’t give invoices? My wife sees a psychologist. This is the 3rd one she’s been to. None have ever given invoices, they demand payment at time of service, and basically we get stuck keeping track what we’ve paid them and trying to match up to the EOBs. I find the whole thing shady but seeing as all 3 over the last 8 years have acted in a similar fashion I have to assume this is the way they handle business. Real doctors send bills in the mail after they process through insurance so there is no question about what one is owed. As you can imagine this is the vast majority of our medical spending...about $4000/yr. Should I call them and demand invoices?

User avatar
willthrill81
Posts: 2364
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by willthrill81 » Sat Nov 25, 2017 10:10 am

libralibra wrote:
Sat Nov 25, 2017 3:05 am
Things reverse if you die with a large balance and no spouse, causing a taxable account to be better than an HSA in that case. An HSA becomes instantly fully taxable upon death, whereas a taxable account gets stepped-up with no income tax.
That's true, but it will be difficult for most to build up an HSA big enough to truly be a real problem. About the most I can see being plausible is about
roughly $500k ($562.50 monthly for 30 years at 6% return = $533k), and most of us will have substantially less than that at death. Paying taxes on an inherited HSA is far from the worse thing that could happen to heirs.

For those who want to bequeath some of their assets to charity, their HSA should absolutely be the first account donated, and it's very simple to do.
Just name your desired charity as the beneficiary of your HSA, and you avoid all tax implications for your heirs.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
willthrill81
Posts: 2364
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by willthrill81 » Sat Nov 25, 2017 10:11 am

Jags4186 wrote:
Sat Nov 25, 2017 10:05 am
Soon2BXProgrammer wrote:
Sat Nov 25, 2017 10:01 am
Jags4186 wrote:
Sat Nov 25, 2017 9:58 am
I simply view the HSA as an IRA. I’m 31 years old...the prospects of my wife and I hoarding receipts for 34 years just doesn’t seem realistic. What constitutes keeping a receipt? Would a check image to a doctor count with a matching EOB? That’s easier to produce as I can go and download everything from the insurers webiste once a year and file away.

i create a file for each year. Each expense has:
1. print out from HSA website
2. expaination of benefits
3. doctor invoice
4. payment receipt.

I built a whole year in paper, then run it through my scanner as a package, and create 1 PDF per year, with a cover page adding them all up. I plan to distribute in whole year amounts (eventually).
What about doctors that don’t give invoices? My wife sees a psychologist. This is the 3rd one she’s been to. None have ever given invoices, they demand payment at time of service, and basically we get stuck keeping track what we’ve paid them and trying to match up to the EOBs. I find the whole thing shady but seeing as all 3 over the last 8 years have acted in a similar fashion I have to assume this is the way they handle business. Real doctors send bills in the mail after they process through insurance so there is no question about what one is owed. As you can imagine this is the vast majority of our medical spending...about $4000/yr. Should I call them and demand invoices?
I would think that a detailed receipt upon payment would be sufficient for the IRS.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Soon2BXProgrammer
Posts: 316
Joined: Mon Nov 24, 2014 11:30 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Soon2BXProgrammer » Sat Nov 25, 2017 10:11 am

Jags4186 wrote:
Sat Nov 25, 2017 10:05 am
Soon2BXProgrammer wrote:
Sat Nov 25, 2017 10:01 am
Jags4186 wrote:
Sat Nov 25, 2017 9:58 am
I simply view the HSA as an IRA. I’m 31 years old...the prospects of my wife and I hoarding receipts for 34 years just doesn’t seem realistic. What constitutes keeping a receipt? Would a check image to a doctor count with a matching EOB? That’s easier to produce as I can go and download everything from the insurers webiste once a year and file away.

i create a file for each year. Each expense has:
1. print out from HSA website
2. expaination of benefits
3. doctor invoice
4. payment receipt.

I built a whole year in paper, then run it through my scanner as a package, and create 1 PDF per year, with a cover page adding them all up. I plan to distribute in whole year amounts (eventually).
What about doctors that don’t give invoices? My wife sees a psychologist. This is the 3rd one she’s been to. None have ever given invoices, they demand payment at time of service, and basically we get stuck keeping track what we’ve paid them and trying to match up to the EOBs. I find the whole thing shady but seeing as all 3 over the last 8 years have acted in a similar fashion I have to assume this is the way they handle business. Real doctors send bills in the mail after they process through insurance so there is no question about what one is owed. As you can imagine this is the vast majority of our medical spending...about $4000/yr. Should I call them and demand invoices?

i would explain to them you have no problem paying at the time of service, however you would like a detailed invoice/bill at that point in time, to make sure you have documentation for the IRS of eligible expenses. and see what they say? "just a credit card receipt" might not be enough but if they print out a receipt on their letter head stating what its for..

Horsefly
Posts: 114
Joined: Sat Oct 24, 2015 8:13 am
Location: Colorado, mostly

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Horsefly » Sat Nov 25, 2017 10:16 am

JustinR wrote:
Fri Nov 24, 2017 11:22 pm
What? You're paying yourself for medical costs you paid out of pocket in the past. You're not actually using tax free money to buy a motorcycle. What you guys are calling #3 (saving receipts and then using that credit later to buy a motorcycle), isn't actually a thing.
I think you are still not getting it. The expenses have already been paid. You don't have to pay them again. If you paid out of pocket in the past, when you take the money out you *CAN* use if for anything you want. Yes, you can buy a motorcycle. #3 is definitely different from #1.

kaneohe
Posts: 4445
Joined: Mon Sep 22, 2008 12:38 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by kaneohe » Sat Nov 25, 2017 11:31 am

JustinR wrote:
Fri Nov 24, 2017 4:28 pm
........................................................................................
Phrased a different way, if you could convert your 401k money to a taxable account (for free, paying no tax during conversion), would you?
answering this in isolation w/ no HSA connection..................I think I would. Trading the tax drag of taxable acct for lower LTCG rates.
Assuming you invest in efficient index funds w/ dividends about 2% and growth but no distributed CG in fund, there isn't much tax drag and you can go a long time before the tax drag overcomes the difference in tax rates. The big advantage of the 401K is the tax deduction. Once you have gotten that, not much advantage staying there if you have ordinary rates facing you when you withdraw.

User avatar
tarnation
Posts: 2341
Joined: Thu Apr 26, 2007 12:36 am

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by tarnation » Sat Nov 25, 2017 1:03 pm

Jags4186 wrote:
Sat Nov 25, 2017 9:58 am
I simply view the HSA as an IRA. I’m 31 years old...the prospects of my wife and I hoarding receipts for 34 years just doesn’t seem realistic. What constitutes keeping a receipt? Would a check image to a doctor count with a matching EOB? That’s easier to produce as I can go and download everything from the insurers webiste once a year and file away.
This also came up the the aforementioned thread of pain. Specifically this post viewtopic.php?f=1&t=156240&start=100#p2350292
Image

User avatar
Lieutenant.Columbo
Posts: 1034
Joined: Sat Sep 05, 2015 9:20 pm
Location: Los Angeles CA

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Lieutenant.Columbo » Sat Nov 25, 2017 1:04 pm

Soon2BXProgrammer wrote:
Sat Nov 25, 2017 10:01 am
i create a file for each year. Each expense has:
1. print out from HSA website
2. expaination of benefits
3. doctor invoice
4. payment receipt.

I built a whole year in paper, then run it through my scanner as a package, and create 1 PDF per year, with a cover page adding them all up. I plan to distribute in whole year amounts (eventually).
Hi Soon2BXProgrammer,
1. what specifo do you print out of the HSA website? and why do this for every expense?
2. why do you save the EOB since the invoice+receipt show how much and what you paid for?
Thank you.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

User avatar
tarnation
Posts: 2341
Joined: Thu Apr 26, 2007 12:36 am

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by tarnation » Sat Nov 25, 2017 1:09 pm

Jags4186 wrote:
Sat Nov 25, 2017 10:05 am
What about doctors that don’t give invoices? My wife sees a psychologist. This is the 3rd one she’s been to. None have ever given invoices, they demand payment at time of service, and basically we get stuck keeping track what we’ve paid them and trying to match up to the EOBs. I find the whole thing shady but seeing as all 3 over the last 8 years have acted in a similar fashion I have to assume this is the way they handle business. Real doctors send bills in the mail after they process through insurance so there is no question about what one is owed. As you can imagine this is the vast majority of our medical spending...about $4000/yr. Should I call them and demand invoices?
I think peeps in the Psych world often don't file. I believe it has to do with Disclosures, privacy, discussions with Insurance company about diagnoses, treatment, etc. It's easier and less risk to just give you a receipt and let you file it. They should be able to furnish you with a receipt showing date of service,diagnosis codes, and provider, so that you can file with insurance company and get reimbursed.
Image

truenorth418
Posts: 315
Joined: Wed Dec 19, 2012 7:38 am

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by truenorth418 » Sat Nov 25, 2017 1:44 pm

Money is fungible. I assume I will always have health related expenses in my budget - and that I will have more of those when I am older, so why not wait and allow the funds in my HSA to grow tax free for a while?

Later I will withdraw the money tax free to pay for those health related expenses. I will probably use my HSA to pay for medicare premiums and if not that then maybe nursing home related expenses.

JustinR
Posts: 421
Joined: Tue Apr 27, 2010 11:43 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by JustinR » Sat Nov 25, 2017 1:51 pm

Horsefly wrote:
Sat Nov 25, 2017 10:16 am
JustinR wrote:
Fri Nov 24, 2017 11:22 pm
What? You're paying yourself for medical costs you paid out of pocket in the past. You're not actually using tax free money to buy a motorcycle. What you guys are calling #3 (saving receipts and then using that credit later to buy a motorcycle), isn't actually a thing.
I think you are still not getting it. The expenses have already been paid. You don't have to pay them again. If you paid out of pocket in the past, when you take the money out you *CAN* use if for anything you want. Yes, you can buy a motorcycle. #3 is definitely different from #1.
How is paying yourself later different than paying yourself back immediately. What you're asserting makes no sense at all.

User avatar
Lieutenant.Columbo
Posts: 1034
Joined: Sat Sep 05, 2015 9:20 pm
Location: Los Angeles CA

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Lieutenant.Columbo » Sat Nov 25, 2017 2:04 pm

JustinR wrote:
Sat Nov 25, 2017 1:51 pm
Horsefly wrote:
Sat Nov 25, 2017 10:16 am
JustinR wrote:
Fri Nov 24, 2017 11:22 pm
What? You're paying yourself for medical costs you paid out of pocket in the past. You're not actually using tax free money to buy a motorcycle. What you guys are calling #3 (saving receipts and then using that credit later to buy a motorcycle), isn't actually a thing.
I think you are still not getting it. The expenses have already been paid. You don't have to pay them again. If you paid out of pocket in the past, when you take the money out you *CAN* use if for anything you want. Yes, you can buy a motorcycle. #3 is definitely different from #1.
How is paying yourself later different than paying yourself back immediately. What you're asserting makes no sense at all.
isn't the difference that if you pay yourself back now (option #1) and put the amount in a taxable account for, say, 10 years, it will incur tax drag+capital gains tax, while if you pay yourself 10 years later (option #3), the same amount wouldn't incur any taxes upon withdrawal if for qualified expenses?
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

LSLover
Posts: 43
Joined: Thu May 19, 2016 1:39 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by LSLover » Sat Nov 25, 2017 2:08 pm

Lieutenant.Columbo wrote:
Sat Nov 25, 2017 2:04 pm
JustinR wrote:
Sat Nov 25, 2017 1:51 pm
Horsefly wrote:
Sat Nov 25, 2017 10:16 am
JustinR wrote:
Fri Nov 24, 2017 11:22 pm
What? You're paying yourself for medical costs you paid out of pocket in the past. You're not actually using tax free money to buy a motorcycle. What you guys are calling #3 (saving receipts and then using that credit later to buy a motorcycle), isn't actually a thing.
I think you are still not getting it. The expenses have already been paid. You don't have to pay them again. If you paid out of pocket in the past, when you take the money out you *CAN* use if for anything you want. Yes, you can buy a motorcycle. #3 is definitely different from #1.
How is paying yourself later different than paying yourself back immediately. What you're asserting makes no sense at all.
isn't the difference that if you pay yourself back now (option #1) and put the amount in a taxable account for, say, 10 years, it will incur tax drag+capital gains tax, while if you pay yourself 10 years later (option #3), the same amount wouldn't incur any taxes upon withdrawal if for qualified expenses?
That logic would work fine if not for the extra expenses associated with the HSA investment vehicles. I am not aware of any HSA that allows investments into Boglehead-like accounts without a surcharge...

Jags4186
Posts: 1469
Joined: Wed Jun 18, 2014 7:12 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Jags4186 » Sat Nov 25, 2017 2:19 pm

LSLover wrote:
Sat Nov 25, 2017 2:08 pm
Lieutenant.Columbo wrote:
Sat Nov 25, 2017 2:04 pm
JustinR wrote:
Sat Nov 25, 2017 1:51 pm
Horsefly wrote:
Sat Nov 25, 2017 10:16 am
JustinR wrote:
Fri Nov 24, 2017 11:22 pm
What? You're paying yourself for medical costs you paid out of pocket in the past. You're not actually using tax free money to buy a motorcycle. What you guys are calling #3 (saving receipts and then using that credit later to buy a motorcycle), isn't actually a thing.
I think you are still not getting it. The expenses have already been paid. You don't have to pay them again. If you paid out of pocket in the past, when you take the money out you *CAN* use if for anything you want. Yes, you can buy a motorcycle. #3 is definitely different from #1.
How is paying yourself later different than paying yourself back immediately. What you're asserting makes no sense at all.
isn't the difference that if you pay yourself back now (option #1) and put the amount in a taxable account for, say, 10 years, it will incur tax drag+capital gains tax, while if you pay yourself 10 years later (option #3), the same amount wouldn't incur any taxes upon withdrawal if for qualified expenses?
That logic would work fine if not for the extra expenses associated with the HSA investment vehicles. I am not aware of any HSA that allows investments into Boglehead-like accounts without a surcharge...
It’s highly employer dependent. I have my HSA through HSA bank linked to TD Ameritrade. My employer covers all of HSA Banks fees. I keep a $0 cash balance and invest at TD in commission free ETFs.

User avatar
Lieutenant.Columbo
Posts: 1034
Joined: Sat Sep 05, 2015 9:20 pm
Location: Los Angeles CA

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Lieutenant.Columbo » Sat Nov 25, 2017 2:24 pm

LSLover wrote:
Sat Nov 25, 2017 2:08 pm
Lieutenant.Columbo wrote:
Sat Nov 25, 2017 2:04 pm
JustinR wrote:
Sat Nov 25, 2017 1:51 pm
Horsefly wrote:
Sat Nov 25, 2017 10:16 am
JustinR wrote:
Fri Nov 24, 2017 11:22 pm
What? You're paying yourself for medical costs you paid out of pocket in the past. You're not actually using tax free money to buy a motorcycle. What you guys are calling #3 (saving receipts and then using that credit later to buy a motorcycle), isn't actually a thing.
I think you are still not getting it. The expenses have already been paid. You don't have to pay them again. If you paid out of pocket in the past, when you take the money out you *CAN* use if for anything you want. Yes, you can buy a motorcycle. #3 is definitely different from #1.
How is paying yourself later different than paying yourself back immediately. What you're asserting makes no sense at all.
isn't the difference that if you pay yourself back now (option #1) and put the amount in a taxable account for, say, 10 years, it will incur tax drag+capital gains tax, while if you pay yourself 10 years later (option #3), the same amount wouldn't incur any taxes upon withdrawal if for qualified expenses?
That logic would work fine if not for the extra expenses associated with the HSA investment vehicles. I am not aware of any HSA that allows investments into Boglehead-like accounts without a surcharge...
unless Saturna/Pershing's rules change for 2018, in 2017 all it cost me to both maintain my Saturna HSA account and to invest my HSA contribution for the year into VSIAX in one trade was $25.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

User avatar
willthrill81
Posts: 2364
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by willthrill81 » Sat Nov 25, 2017 2:40 pm

Lieutenant.Columbo wrote:
Sat Nov 25, 2017 2:24 pm
LSLover wrote:
Sat Nov 25, 2017 2:08 pm
Lieutenant.Columbo wrote:
Sat Nov 25, 2017 2:04 pm
JustinR wrote:
Sat Nov 25, 2017 1:51 pm
Horsefly wrote:
Sat Nov 25, 2017 10:16 am

I think you are still not getting it. The expenses have already been paid. You don't have to pay them again. If you paid out of pocket in the past, when you take the money out you *CAN* use if for anything you want. Yes, you can buy a motorcycle. #3 is definitely different from #1.
How is paying yourself later different than paying yourself back immediately. What you're asserting makes no sense at all.
isn't the difference that if you pay yourself back now (option #1) and put the amount in a taxable account for, say, 10 years, it will incur tax drag+capital gains tax, while if you pay yourself 10 years later (option #3), the same amount wouldn't incur any taxes upon withdrawal if for qualified expenses?
That logic would work fine if not for the extra expenses associated with the HSA investment vehicles. I am not aware of any HSA that allows investments into Boglehead-like accounts without a surcharge...
unless Saturna/Pershing's rules change for 2018, in 2017 all it cost me to both maintain my Saturna HSA account and to invest my HSA contribution for the year into VSIAX in one trade was $25.
My employer covers the administration costs. I pay 40 basis points for access to Vanguard institutional funds, which often have the lowest ERs of any Vanguard funds. That's far lower than the drag on a taxable account.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
jhfenton
Posts: 2285
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by jhfenton » Sat Nov 25, 2017 2:50 pm

LSLover wrote:
Sat Nov 25, 2017 2:08 pm
That logic would work fine if not for the extra expenses associated with the HSA investment vehicles. I am not aware of any HSA that allows investments into Boglehead-like accounts without a surcharge...
I pay $30/year (paid from outside the HSA) to invest my HSA through Lively+TD Ameritrade. It's not as cheap as an IRA would be, but it's about 6 bp at this point (on a $46K balance) and declining. Inside the HSA, I buy SPEM (SPDR Portfolio Emerging Markets) commission-free at 11 bp. (Since it's such a small account, I just invest in one asset class and round out our portfolio in our other accounts.)

User avatar
tarnation
Posts: 2341
Joined: Thu Apr 26, 2007 12:36 am

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by tarnation » Sat Nov 25, 2017 3:20 pm

I think account fees are a red-herring when resolving the question of when to withdraw funds. There are plenty of HSA options that are free, interest bearing accounts, CD's etc and plenty of taxable accounts that have fees also, trades, maintenance etc. If really needed, all can be accounted for in the ROR used in the calculations.
Image

Soon2BXProgrammer
Posts: 316
Joined: Mon Nov 24, 2014 11:30 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by Soon2BXProgrammer » Sat Nov 25, 2017 7:02 pm

Lieutenant.Columbo wrote:
Sat Nov 25, 2017 1:04 pm
Soon2BXProgrammer wrote:
Sat Nov 25, 2017 10:01 am
i create a file for each year. Each expense has:
1. print out from HSA website
2. expaination of benefits
3. doctor invoice
4. payment receipt.

I built a whole year in paper, then run it through my scanner as a package, and create 1 PDF per year, with a cover page adding them all up. I plan to distribute in whole year amounts (eventually).
Hi Soon2BXProgrammer,
1. what specifo do you print out of the HSA website? and why do this for every expense?
2. why do you save the EOB since the invoice+receipt show how much and what you paid for?
Thank you.
1. my HSA somehow gets eligible expenses shared with it from my insurance. I print out the expense page, and it shows that i haven't taken a distribution for it. this is probably way overkill. Also i keep my tax returns to prove i didn't itemize medical, and a copy of something for the year, that shows i didn't make any distributions.
2. its probably overkill

overall, it costs me nothing more then a minute or so to print all the stuff out... and i do it anyways to double check billing.

i figure i will be audited, when i take a distribution.. just easiest to send them enough paperwork that they realize "oh this guy has his (#$*# together" and then move on.

nolesrule
Posts: 330
Joined: Thu Feb 26, 2015 10:59 am

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by nolesrule » Sun Nov 26, 2017 10:30 am

We live in New Jersey so our situation is a bit different from most. To keep things simple the only fund we use for investments is a Treasury fund at 0.4% ER so we don't have to deal with state taxes. We reimburse as we go and that money allows us to put more in VTSAX or VTIAX where we have better control over the buys and sells and a higher long-term expected return even with a bit of tax drag, and don't have to worry about tax consequences of the HSA provider switching investment custodians.

Beyond that, yeah we could hold onto receipts, but $3000 withdrawn today is very likely to be worth more than $3000 withdrawn in 25 years.

Even with the reimbursements, our account balance is still growing year over year.

libralibra
Posts: 12
Joined: Sat Jul 30, 2011 2:01 pm

Re: HSA: "Pay out of pocket" vs Withdraw math problem

Post by libralibra » Tue Nov 28, 2017 3:58 am

JustinR wrote:
Fri Nov 24, 2017 4:43 am
Let's assume you will spend most of it on non-medical costs.

Is #1 still definitely better than #2? Does "tax free growth + income tax" always beat "tax drag + ltcg"?
As for the "math problem", if you assume both case 1 and 2 could be invested the same way, then the only difference are the tax rates. Say the gain is X, the tax rates are R1 and R2 and M is any accumulated medical costs. Then the break even is when

(X-M) * R1 = X * R2, or

M/X = 1 - R2/R1

E.g. if R1 is 25% marginal and R2 is 15% LTCG, then

M/X = 1 - 15/25 = 40%

meaning if you expect medical costs to equal at least 40% of your gains, then Case 1 is better, otherwise Case 2 will have lower taxes.

Or if you plug in 15% marginal and 0% LTCG, you'd get M/X=1, meaning you'd need 100% medical costs to make Case 1 work out.

Note, all this assumes you have some big medical cost today that allows you to withdraw from your HSA now to set up Case 2, and that in Case 2 you just buy and hold and don't incur any interim gains which are taxed.

Post Reply