Is there a point under a curve (HSA balance by age) where one should cease to pay out of pocket for medical expenses and save receipts, and instead pay out of their HSA while investing the cash which would have paid for those medical expenses in a taxable account in order to maximize return? Where should this curve be?
Previous discussions have asked about when to stop contributions:
I'm of the opinion that as long as I have income and am HSA elligible, it makes sense to contribute to get the tax deduction. But when to start drawdown has a sizable impact on the mix of balances in various account types later in life (Roth, tax-deferred, taxable, HSA). The typical 'given' is that drawdown should happen at least by medicare. With a 140k balance and almost 30 years to go before medicare, I'm starting to question whether I should start drawdown prior to that.
- Have enough in HSA to fund medical expenses through retirement on earnings.
- Retain enough balance in HSA to self-fund a few years of long-term care.
It looks like I'd need to achieve 6.25% return above medical
inflation at this point to reach my goals if I were to start drawdown now, so for me it seems too soon as that seems fairly optimistic. However, if I could achieve those returns and waited until medicare to drawdown, then our balance at age 80 would be 2.5M in today's dollars ($1M at medicare age), of which only ~$375k is tax-free from previous expenses.
Upsides to having an HSA balance larger than required to self-fund long-term care:
- Can use to supplement tax-deferred withdrawals, both to smooth out taxes from RMDs and to keep from withdrawing from tax-deferred prior to RMDs if desired.
- Self-insurance against running out due to lower returns or higher medical cost inflation.
Downsides to having an HSA balance larger than required to self-fund long-term care:
I'm most interested in the analysis of and reactions to the final bullet point.
- Large balance is taxable to non-spouse beneficiaries in a lump sum, which likely limits this money in estate planning to charitable contributions (which I personally have no problem with).
- After-tax proceeds from HSA withdrawals might be less than after-tax proceeds from withdrawing earlier tax-free for medical expenses and putting into a taxable account.
My thinking is that if I were to start drawdown while in accumulation phase, I would put the money I otherwise would have used for paying medical costs into taxable investment. I think it's fair to look at this as funding a taxable investment with pre-tax money, while using post-tax money to pay for medical care. As such, it seems that money withdrawn tax-free, growing with a taxable account tax drag and then selling with capital gains tax might net more than leaving it in to compound without a tax drag and then later withdrawal and pay income tax on. I think what I'm seeing is that the value of my 'receipts' by not taking money out tax free until much later is essentially dwindling in real dollars and at some point, that 'loss' in taxes becomes greater than the loss of a taxable vs a tax-deferred account.
But there is much here that I'm not fully understanding and I'm pretty sure my cobbled together spreadsheet is not fully sufficient.
I also remember seeing someone suggesting perhaps investing an HSA in a healthcare fund, in order to hedge against high medical inflation. Assume for this thought experiment that there is enough income to max other available tax-advantaged space, so it is a pure question of ideal allocation between HSA and taxable investment vehicles.