The problem with 'saving receipts' for future qualified HSA withdrawals

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MrBeaver
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The problem with 'saving receipts' for future qualified HSA withdrawals

Post by MrBeaver » Sun Aug 19, 2018 10:07 am

In HSA accounts, we get an income tax deduction at the time of contribution. We get tax-free withdrawals when we withdrawal for a qualified medical expense in that year or a year prior. Because of this, a strategy is often suggested where we cash-flow medical expenses and leave HSA assets in the HSA to grow, saving receipts to withdrawal at a future year. The HSA wiki page states:
Paying current expenses out of pocket
If you are maxing out your retirement accounts, you should treat the HSA as an opportunity for further savings, like an IRA, and not withdraw from it until you retire. If you have $1,000 in medical bills, paying them from your taxable account leaves the $1,000 in the HSA to grow tax-free (and keeps the right to withdraw $1,000 tax-free in a future year), while paying them from the HSA leaves $1,000 in your taxable account, which will grow subject to taxes since you do not have any room for tax-sheltered contributions.

Once you are retired, you can withdraw from the HSA an amount equal to your past medical expenses plus any current expenses tax-free, and withdraw from your other accounts for non-medical expenses. HSAs can be used to pay medicare premiums and other medical expenses in retirement.
In taxable accounts, we understand that there is tax drag associated with paying long term capital gains (LTCG) rates on qualified dividends. But what often seems ignored is that the deflationary effect of inflation on previous year's qualified medical expenses which authorize future qualified withdrawals from an HSA also represents a tax drag. Essentially, inflation of x% deflates the value of a receipt by (1/(1-x))-1 which then causes an effective tax drag in the HSA of ((1/(1-x))-1) * (income tax rate)% at the time of withdrawal. Income tax rates have been higher than LTCG rates for some time, and historically (since 1974, at least), inflation has been higher than dividend yields. Thus, the tax drag per year of qualified dividends in a taxable account is less than the effective tax drag per year of deflated prior qualified medical expenses in an HSA because both coefficients which determine effective HSA tax drag (inflation and income tax rate) are higher than the coefficients which determine taxable account tax drag (dividend yield and LTCG rate). Historical yield vs inflation (data from http://www.multpl.com/s-p-500-dividend-yield/):
Image

To be fair, this deflationary tax drag does not compound like a taxable account tax drag because the money is tax-deferred (the value keeps earning returns until the withdrawal is taken). This means that the longer the money stays in the account, the more likely keeping it in the HSA will yield more after-tax dollars after paying income tax on the deflated portion of the previous medical expense which is now not a qualified expense due to the deflation of the receipt value. Assuming at least as much value from the HSA will be taxed as we have lost from deflation of prior year's medical expense receipts, the after-tax dollars we have to spend from HSA investments starts off with an advantage toward withdrawing the money from the HSA and investing in a taxable account. As time continues, the advantage shifts toward keeping it in the HSA and paying income tax on it, but that cutoff line appears fairly late. With a 7% higher income tax rate than LTCG tax rate in retirement (22% income, 15% LTCG) and inflation 0.5% higher than dividend yield, I compute that it takes roughly 25-30 years for leaving the money in the HSA due to compounding to exceed the after-tax money we would have if we withdrew it earlier (tax-free) and invested in a taxable account at LTCG rates. This time lengthens dramatically as the delta between income tax rates and LTCG rates increases. For example, at a delta of 13% (28% income tax, 15% LTCG) it takes 45 years. 7% is the current minimum delta between LTCG rates and federal income tax rates, with the exception of an individual whose income is below the standard deduction (0% income tax rate). The time to break even on HSA invested funds vs taxable also increases as inflation grows relative to dividend yield, and shrinks slightly as real investment returns increase (due to additional compounding power).

Am I missing something here?

If this analysis is accurate, then it seems a prudent HSA balance to 'stop' HSA growth at by taking distributions for medical expenses and investing that money in a taxable account would be a balance which provides a SWR for total maximum out of pocket medical expenses, along with enough growth to ensure that SWR will increase slightly at retirement to cover Medicare premiums also. It is likely the principal which provides a SWR of medicare premiums + expenses would also provide a decent cushion for long-term care if needed.

The risks with this strategy are:
  • LTCG rates cease to be lower than income tax rates
  • Long-term dividend yields rise above inflation in the future like they were prior to 1974
  • Medical expenses rise faster than expected (expected medical inflation would be used to compute SWR)
Given the poor tax treatment of HSA funds at death, I'm personally inclined to use this strategy, and leave whatever unused balance there is if I don't need extended long-term care to charity. Since I started investing in an HSA at their inception (2004), I'm roughly 75% of the way to a balance which would satisfy the above criteria. I imagine other bogleheads are near to this level as well, which is why I'd like to bring this up and get feedback on it.

What are your thoughts?
Last edited by MrBeaver on Sun Aug 19, 2018 10:23 am, edited 2 times in total.

KlangFool
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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by KlangFool » Sun Aug 19, 2018 10:21 am

OP,

In my simple mind, you are over-complicating a very simple issue. It is complicated because you linked 2 separate items into your decision. Contribution to HSA and when to use HSA.

A) HSA is a tax management tool. It is tax-free going in and tax-free going out. So, it makes sense to contribute to HSA.

B) When to use HSA. This is a year by year issue. You know exactly whether you would pay tax and how much tax that you would pay for each medical expense.

i) If you would generate capital gain and pay a lot of taxes, use the HSA.

ii) If your LTCG is 0%, it does not make sense to use HSA.

So, where is the problem?

C) For a retiree, I would assume that the person would have enough cash for 1 year of expense as the buffer. Hence, they do not need to sell anything for the immediate expense. The decision of what and when to sell an investment to refill the buffer can be done much later.

My apology if I misinterpreted your post.

KlangFool

MrBeaver
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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by MrBeaver » Sun Aug 19, 2018 10:33 am

KlangFool wrote:
Sun Aug 19, 2018 10:21 am
In my simple mind, you are over-complicating a very simple issue. It is complicated because you linked 2 separate items into your decision. Contribution to HSA and when to use HSA.
Thanks for the perspective, that's exactly what I need.
KlangFool wrote:
Sun Aug 19, 2018 10:21 am
C) For a retiree, I would assume that the person would have enough cash for 1 year of expense as the buffer. Hence, they do not need to sell anything for the immediate expense. The decision of what and when to sell an investment to refill the buffer can be done much later.
I suppose I should have stated that an assumed premise is that prior to retirement I have enough cash flow from income to cover the out of pocket medical expenses. This means that I don't pay any LTCG tax on that money when I spend it.

My attempt here is to investigate whether I have higher expected long-term return either by paying expenses out of pocket and leaving the same amount of money in the HSA to grow, or by using the medical expense to effectively transfer that money from the HSA to a taxable account with no income tax burden on the HSA withdrawal and leave it in the taxable account to grow. This analysis (if correct) suggests that at the point where the future HSA balance exceeds cumulative qualified medical expenses, it takes a long time for money left in an HSA and withdrawn at income tax rates to exceed the return of a taxable account.
Last edited by MrBeaver on Sun Aug 19, 2018 10:36 am, edited 1 time in total.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by jhfenton » Sun Aug 19, 2018 10:34 am

My assumption is that we are going to have more than adequate expenses in retirement to withdraw tax-free every penny of a six-figure HSA account. I don't even bother tracking every tiny medical expense, only those that (a) show up on year-end credit statements with no doubt that it was a medical expense (e,g. a direct payment to a medical provider) or (b) that are significant enough to save a backup receipt (e.g. a >$100 prescription paid to Kroger or Walgreens). We probably have $10,000 just in dental and orthodontics payments for the kids over the past few years.

If you assume that you will have more than enough medical expenses to exhaust your HSA tax-free, the reduced "value" of current expenses in future years is irrelevant. The only question is whether to keep funds in your HSA or more them to taxable now, and that is not a difficult question.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by columbia » Sun Aug 19, 2018 10:40 am

I don’t keep any receipts, knowing that the Health Savings.org (or whatever it is) will have a record of each transaction. If I get audited....well, that will be unpleasant, regardless of having receipts.
Last edited by columbia on Sun Aug 19, 2018 10:41 am, edited 1 time in total.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by tfb » Sun Aug 19, 2018 10:41 am

MrBeaver wrote:
Sun Aug 19, 2018 10:07 am
In HSA accounts, we get an income tax deduction at the time of contribution. We get tax-free withdrawals when we withdrawal for a qualified medical expense in that year or a year prior. Because of this, a strategy is often suggested where we cash-flow medical expenses and leave HSA assets in the HSA to grow, saving receipts to withdrawal at a future year.
I don't follow that strategy. Each year after I make the contribution, I take a distribution to reimburse myself the qualified medical expenses incurred in the previous year. The remainder is invested and left to grow. This way it's very clean. I lose tax-free compounding on the expenses but the expenses are low enough that they are not worth worrying about.
Harry Sit, taking a break from the forums.

MrBeaver
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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by MrBeaver » Sun Aug 19, 2018 10:42 am

jhfenton wrote:
Sun Aug 19, 2018 10:34 am
If you assume that you will have more than enough medical expenses to exhaust your HSA tax-free, the reduced "value" of current expenses in future years is irrelevant.
Completely agree. This only enters the equation when your future expected HSA balance dwarfs your cumulative medical expenses. For those with low HSA balances or who are near retirement, it's a non issue.

Currently, I'm 37 years old and my maximum yearly medical OOP is 4.3% of my HSA balance. If I continue to cashflow all medical expenses and let my HSA grow without any withdrawals, my HSA balance could be over $1M at age 70 in 2018 dollars, which would represent a SWR of $40k per year in medical expenses in retirement. That seems higher than all estimates of medical expenses in retirement I've heard.

KlangFool
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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by KlangFool » Sun Aug 19, 2018 10:52 am

MrBeaver wrote:
Sun Aug 19, 2018 10:42 am
jhfenton wrote:
Sun Aug 19, 2018 10:34 am
If you assume that you will have more than enough medical expenses to exhaust your HSA tax-free, the reduced "value" of current expenses in future years is irrelevant.
Completely agree. This only enters the equation when your future expected HSA balance dwarfs your cumulative medical expenses. For those with low HSA balances or who are near retirement, it's a non issue.

Currently, I'm 37 years old and my maximum yearly medical OOP is 4.3% of my HSA balance. If I continue to cashflow all medical expenses and let my HSA grow without any withdrawals, my HSA balance could be over $1M at age 70 in 2018 dollars, which would represent a SWR of $40k per year in medical expenses in retirement. That seems higher than all estimates of medical expenses in retirement I've heard.
MrBeaver,

<<Currently, I'm 37 years old and my maximum yearly medical OOP is 4.3% of my HSA balance. If I continue to cashflow all medical expenses and let my HSA grow without any withdrawals, my HSA balance could be over $1M at age 70 in 2018 dollars, >>

This is assuming that you are fully-employed continuously until the age of 70. The likelihood of that happened is slim to none.

A) If you are doing very well financially, you will be early retired.

B) If you are not doing well, you will have short-term unemployment between 37 years old and 70 years old. Aka, 33 years.

It costs me around 20K per year in medical cost when I was unemployed.

<<If I continue to cashflow all medical expenses and let my HSA grow without any withdrawals, >>

This is a year by year decision. Is it worthwhile to pay X% in tax via cash flow versus withdrawal?

KlangFool

P.S.: In summary, do not let your HSA grow until X amount. Withdraw some before it hits that number seems to be the best decision.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by KlangFool » Sun Aug 19, 2018 10:58 am

columbia wrote:
Sun Aug 19, 2018 10:40 am
I don’t keep any receipts, knowing that the Health Savings.org (or whatever it is) will have a record of each transaction. If I get audited....well, that will be unpleasant, regardless of having receipts.
columbia,

OP is talking about the medical expense that was not paid by the HSA. For example, he paid $1,000 in medical expense in 2015 without using his HSA. Now, he wants to reimburse himself $1,000 from HSA for that 2015 $1,000 expense. He needs the $1,000 receipt if he is audited by IRS.

KlangFool

columbia
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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by columbia » Sun Aug 19, 2018 11:02 am

KlangFool wrote:
Sun Aug 19, 2018 10:58 am
columbia wrote:
Sun Aug 19, 2018 10:40 am
I don’t keep any receipts, knowing that the Health Savings.org (or whatever it is) will have a record of each transaction. If I get audited....well, that will be unpleasant, regardless of having receipts.
columbia,

OP is talking about the medical expense that was not paid by the HSA. For example, he paid $1,000 in medical expense in 2015 without using his HSA. Now, he wants to reimburse himself $1,000 from HSA for that 2015 $1,000 expense. He needs the $1,000 receipt if he is audited by IRS.

KlangFool
Gotcha - yes, big difference.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by letsgobobby » Sun Aug 19, 2018 11:07 am

tfb wrote:
Sun Aug 19, 2018 10:41 am
MrBeaver wrote:
Sun Aug 19, 2018 10:07 am
In HSA accounts, we get an income tax deduction at the time of contribution. We get tax-free withdrawals when we withdrawal for a qualified medical expense in that year or a year prior. Because of this, a strategy is often suggested where we cash-flow medical expenses and leave HSA assets in the HSA to grow, saving receipts to withdrawal at a future year.
I don't follow that strategy. Each year after I make the contribution, I take a distribution to reimburse myself the qualified medical expenses incurred in the previous year. The remainder is invested and left to grow. This way it's very clean. I lose tax-free compounding on the expenses but the expenses are low enough that they are not worth worrying about.
There is a paradox. The greater one's medical expenses, the more worthwhile to defer reimbursement; but the greater the burden to keep receipts. Over 7 years of HSA my stack of receipts is two feet tall. That excludes the emailed, online, and other receipts which were originally in electronic format and are stored on my hard drive. Gee, I sure hope that doesn't die (it's backed up, twice... Sure hope that flash drive doesn't get lost and the second hard drive doesn't die!).

I try to be optimistic about my health, thus I keep all receipts, not wanting to believe that thirty years from now we will have six figures of out of pocket expenses which consume our entire account. It seems rather, er, fatalistic to assume one's entire HSA will be diverted to a nursing home facility or the federal government for Medicare premiums. I'd rather plan for the eventuality that I'll need those receipts to empty out my account.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by BusterMcTaco » Sun Aug 19, 2018 12:30 pm

I think of it this way, in the accumulation phase: I have to pay this $1000 expense. I can pay it out of potentially taxable investment money or an HSA. I'd rather have that money grow without tax drag and reimburse myself for it later.

Put another way, assume my portfolio exactly keeps up with 2x inflation over 10 years. My $1000 would always be worth the same after inflation. So I could have paid out of the HSA and decades later still have $1000 in today's money in a taxable account less tax drag, or HSA at full value.

Situation 1: say $1800 after drag, with $800 taxable gains
Situation 2: $1000, reimbursed from HSA for old expense, $1000 in HSA that would now be taxable if not used for health expense.

In short, the non taxable portion is the same, but the extra, potentially taxable growth, is higher if deferred.

At least, this is how I worked it out in my own mind. The only cost is locking up that growth until I reach eligibility.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by Grogs » Sun Aug 19, 2018 2:11 pm

To me, it seems like a bet on whether one will or won't have substantial medical costs. I hedge my bets towards the "will" category, but it's a bet I will be happy to lose. If so, it probably means that I've reached my senior years fairly healthy and with lower than anticipated medical costs. That should more than make up for the additional taxes or lost growth opportunities at that point.
letsgobobby wrote:
Sun Aug 19, 2018 11:07 am
tfb wrote:
Sun Aug 19, 2018 10:41 am
MrBeaver wrote:
Sun Aug 19, 2018 10:07 am
In HSA accounts, we get an income tax deduction at the time of contribution. We get tax-free withdrawals when we withdrawal for a qualified medical expense in that year or a year prior. Because of this, a strategy is often suggested where we cash-flow medical expenses and leave HSA assets in the HSA to grow, saving receipts to withdrawal at a future year.
I don't follow that strategy. Each year after I make the contribution, I take a distribution to reimburse myself the qualified medical expenses incurred in the previous year. The remainder is invested and left to grow. This way it's very clean. I lose tax-free compounding on the expenses but the expenses are low enough that they are not worth worrying about.
There is a paradox. The greater one's medical expenses, the more worthwhile to defer reimbursement; but the greater the burden to keep receipts. Over 7 years of HSA my stack of receipts is two feet tall. That excludes the emailed, online, and other receipts which were originally in electronic format and are stored on my hard drive. Gee, I sure hope that doesn't die (it's backed up, twice... Sure hope that flash drive doesn't get lost and the second hard drive doesn't die!).
I'm on the 3rd year of my HSA and I've accrued about 30 receipts. My setup is similar to yours. About 20 of the receipts are < $25, and the total of them is only about $150. I'm planning to get those reimbursed this year and just keep the 10 big ones, which total around $4k. It won't eliminate the need to keep the receipts, but it will at least mean fewer receipts to maintain long-term.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by yatesd » Sun Aug 19, 2018 2:21 pm

Related, but changing the subject slightly. I am disappointed with HSA options (wish Vanguard offered HSA's) and for now use a local bank that provides basic savings account interest (basically nothing). Add to that...a relatively low balance, $15K, and it amounts to the healthcare portion of my emergency fund.

Not really investing it yet. Right now, only equates to about 1 year of maximum family medical out of pocket, wouldn't mind if it was double for the same purpose. Again, just basic savings account interest. So far...for simplicity, I've been using it as needed in conjunction with a High deductible plan. On Monday we will be using it for my daughters braces. At this pace, it will probably take another 4 years to reach $30k and then might pay more attention.

For now, I really like the flexibility (and ease of use) of just giving the HSA Visa card for every medical, dental, and vision appointment plus all prescriptions at time of need. Nothing to really worry about. Not enough cashflow to really want to do it differently and seems like too much hassle to worry about the receipts for the potential return.

Maximize 401K, have always itemized, but not sure if itemizing will be worth it with the new tax laws. I seem to hit the sweet spot with taxes where I don't see myself benefiting from any of the changes. :oops:

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by MrBeaver » Sun Aug 19, 2018 2:49 pm

BusterMcTaco wrote:
Sun Aug 19, 2018 12:30 pm
Situation 1: say $1800 after drag, with $800 taxable gains
Situation 2: $1000, reimbursed from HSA for old expense, $1000 in HSA that would now be taxable if not used for health expense.
I think you're right that an example will help. Let's go with an example similar to yours, but add formal numbers:
Example: nominal doubling at 10 years (before taxes)
CAGR: 7.18%
Dividend rate: 1.5%
Growth rate: 5.68%
Initial balance: 1000
LTCG rate: 15%
Income Tax rate: 22%

Code: Select all

 Year      | Taxable   | Dividends | Tax Paid  | Reinvest  | Sh.Price  | Sh.Bought | Avg.Basis | HSA Balance
 1         |1069.55    |15.00      |2.25       |12.75      |1.06       |12.06      |1.001      |1071.80
 2         |1143.94    |16.04      |2.41       |13.64      |1.12       |12.21      |1.002      |1148.76
 3         |1223.50    |17.16      |2.57       |14.59      |1.18       |12.36      |1.004      |1231.24
 4         |1308.59    |18.35      |2.75       |15.60      |1.25       |12.51      |1.007      |1319.64
 5         |1399.60    |19.63      |2.94       |16.68      |1.32       |12.66      |1.011      |1414.39
 6         |1496.95    |20.99      |3.15       |17.84      |1.39       |12.81      |1.015      |1515.94
 7         |1601.06    |22.45      |3.37       |19.09      |1.47       |12.96      |1.021      |1624.79
 8         |1712.41    |24.02      |3.60       |20.41      |1.56       |13.12      |1.027      |1741.45
 9         |1831.51    |25.69      |3.85       |21.83      |1.64       |13.28      |1.035      |1866.48
 10        |1958.89    |27.47      |4.12       |23.35      |1.74       |13.44      |1.043      |2000.50
At the end of 10 years, we have:
Taxable basis: 1175.79
Taxable LTCG: 117.47
Taxable after-tax balance: 1841.43

HSA basis (tax free from receipt): 1000
HSA Income Tax: 220.11
HSA after-tax balance: 1780.39

HSA loses by $61.04

The HSA remains at a disadvantage until its compounded tax-deferred gains claw back to equality with the taxable account at 55 years after investment:

Taxable balance: 40370.12
Taxable basis: 8217.38
Taxable LTCG: 4822.91
Taxable after-tax balance: 35547.21

HSA balance: 45316.50
HSA basis (tax free from receipt): 1000
HSA Income Tax: 9749.63
HSA after-tax balance: 35566.87

HSA wins by $19.66
BusterMcTaco wrote:
Sun Aug 19, 2018 12:30 pm
In short, the non taxable portion is the same, but the extra, potentially taxable growth, is higher if deferred.
See example above. The taxable account initially has a higher after-tax spendable balance until many years later (55 years in this setup).

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by MrBeaver » Sun Aug 19, 2018 3:08 pm

letsgobobby wrote:
Sun Aug 19, 2018 11:07 am
tfb wrote:
Sun Aug 19, 2018 10:41 am
MrBeaver wrote:
Sun Aug 19, 2018 10:07 am
In HSA accounts, we get an income tax deduction at the time of contribution. We get tax-free withdrawals when we withdrawal for a qualified medical expense in that year or a year prior. Because of this, a strategy is often suggested where we cash-flow medical expenses and leave HSA assets in the HSA to grow, saving receipts to withdrawal at a future year.
I don't follow that strategy. Each year after I make the contribution, I take a distribution to reimburse myself the qualified medical expenses incurred in the previous year. The remainder is invested and left to grow. This way it's very clean. I lose tax-free compounding on the expenses but the expenses are low enough that they are not worth worrying about.
There is a paradox. The greater one's medical expenses, the more worthwhile to defer reimbursement; but the greater the burden to keep receipts.
I think the paradox is slightly different: the greater one's future medical expenses, the more worthwhile to defer reimbursement. But I agree with you that this leads to quite a bit of fatalism. If future medical expenses are low, then paying income tax on the appreciated HSA balance is worse than paying LTCG on a taxable account, even when accounting for the tax drag. If they end up being high, then the future withdrawals will be qualified, so it is better to leave the money in the deferred account where it will be withdrawn tax-free later because of future medical expenses.
Grogs wrote:
Sun Aug 19, 2018 2:11 pm
To me, it seems like a bet on whether one will or won't have substantial medical costs. I hedge my bets towards the "will" category, but it's a bet I will be happy to lose. If so, it probably means that I've reached my senior years fairly healthy and with lower than anticipated medical costs. That should more than make up for the additional taxes or lost growth opportunities at that point.
Yes, I think this is the right way to look at it. As the account grows though, the decision to defer or withdrawal may change if we haven't also increased our estimate of what future health costs will be.

A very broad way to look at this is that tax deferral is worth a lot less than the initial tax deduction in the current climate of lower LTCG rates than Income tax rates. With an HSA, we can separate the two once we have qualified medical expenses (we deduct when we contribute, and choose to defer or not once we have qualified expenses, as KF pointed out). If tax deferral were as good as a deduction, we would see a lot more people creating non-deductible IRAs even if they can't convert them to a Roth. Instead, we don't see that. They only use non-deductible IRAs if they can convert to a Roth and save the rest in taxable.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by ryman554 » Sun Aug 19, 2018 3:24 pm

MrBeaver wrote:
Sun Aug 19, 2018 3:08 pm

I think the paradox is slightly different: the greater one's future medical expenses, the more worthwhile to defer reimbursement. But I agree with you that this leads to quite a bit of fatalism. If future medical expenses are low, then paying income tax on the appreciated HSA balance is worse than paying LTCG on a taxable account, even when accounting for the tax drag. If they end up being high, then the future withdrawals will be qualified, so it is better to leave the money in the deferred account where it will be withdrawn tax-free later because of future medical expenses.
But there's another consideration: if you have large medical expenses, modulo a 10% floor, you can utilize a tIRA withdrawal and deduct the medical expenses making the tIRA distribution effectively tax free. Not sure how that works out with HSA payments (probably can't double dip), but if you have a large 401(k), it sounds like this can change the calculus, too.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by BusterMcTaco » Sun Aug 19, 2018 7:39 pm

MrBeaver wrote:
Sun Aug 19, 2018 2:49 pm
See example above. The taxable account initially has a higher after-tax spendable balance until many years later (55 years in this setup).
I was not considering the impact of LTCG in a taxable account. Obviously a pretty big oversight, especially if one expects to find themselves in a high tax bracket in retirement. Thanks for clarifying. I might just go ahead and reimburse as I go, in that case.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by Jags4186 » Sun Aug 19, 2018 8:00 pm

I too don’t bother keeping receipts. I download all of my EOBs at the end of the year and will roll the dice if I get audited 30 years down the line. If I get away with it then great if not, the HSA is just an IRA.

jdilla1107
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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by jdilla1107 » Sun Aug 19, 2018 8:04 pm

How about use the HSA to hold bond allocation? Then it becomes clearly better to defer the withdrawals. (ie; you aren't comparing income tax to LTCG tax)

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by grabiner » Mon Aug 20, 2018 8:41 pm

Waiting to take reimbursements only produces a tax drag in your HSA if your HSA is larger than your total medical expenses. This is not common, as you must stop contributing to your HSA when you start Medicare, but you will usually have large medical bills after age 65. Even if you don't save receipts, you will probably exhaust the HSA.

This is a minor argument to prefer bonds in the HSA, and stocks in a Roth IRA. If the stock market booms and you have stocks in your HSA, your HSA might exceed your medical expenses, resulting in taxable stock gains. If the stocks are in your Roth IRA instead, they grow tax-free regardless of your health, and if you don't need to spend all the money, your heirs inherit the Roth IRA tax-free.

(edited to correct typo; previously said that "heirs would inherit the HSA tax-free", which is only correct for a spouse)
Last edited by grabiner on Tue Aug 21, 2018 7:22 am, edited 1 time in total.
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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by MrBeaver » Mon Aug 20, 2018 10:29 pm

grabiner wrote:
Mon Aug 20, 2018 8:41 pm
Waiting to take reimbursements only produces a tax drag in your HSA if your HSA is larger than your total medical expenses.
I completely agree. Sorry if I didn’t make that clear up front.
grabiner wrote:
Mon Aug 20, 2018 8:41 pm
This is not common, as you must stop contributing to your HSA when you start Medicare, but you will usually have large medical bills after age 65. Even if you don't save receipts, you will probably exhaust the HSA.
Not common for someone who started their HSA later in life, sure. I started mine in 2004 at age 23, and kept contributing with very low out of pocket expenses, so I never took any out. It is now up to 150k. It’s not unreasonable to think it could be 500k-1M at age 65 in 2018 dollars. At that level with the current health care climate, I’d doubt it would all get used up for medical expenses.
grabiner wrote:
Mon Aug 20, 2018 8:41 pm
This is a minor argument to prefer bonds in the HSA, and stocks in a Roth IRA. If the stock market booms and you have stocks in your HSA, your HSA might exceed your medical expenses, resulting in taxable stock gains. If the stocks are in your Roth IRA instead, they grow tax-free regardless of your health,
Interesting. I’ll admit that I’m fairly aggressive in my IPS and I prefer to diversify among less correlated equity asset classes (though they are more correlated than bonds and equities). I’ll definitely keep this in mind when I start adding bonds though. At the same token, I’ve seen a suggestion to do the opposite - to hedge against future health care inflation by overweighting health care equities in an HSA. Though admittedly that’s imperfect since the profit of the industry can deviate from one’s out of pocket and Medicare premium costs.
grabiner wrote:
Mon Aug 20, 2018 8:41 pm
if you don't need to spend all the money, your heirs inherit the HSA tax-free.
This is only true for a spouse heir. Any other heir, if they are a taxable entity, must take the entire lump sum into a taxable account and pay income tax on the full balance in that year. This is why my secondary beneficiary right now is set to a charity.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by grabiner » Tue Aug 21, 2018 7:25 am

MrBeaver wrote:
Mon Aug 20, 2018 10:29 pm
grabiner wrote:
Mon Aug 20, 2018 8:41 pm
if you don't need to spend all the money, your heirs inherit the HSA tax-free.
This is only true for a spouse heir. Any other heir, if they are a taxable entity, must take the entire lump sum into a taxable account and pay income tax on the full balance in that year. This is why my secondary beneficiary right now is set to a charity.
Typo corrected above; I intended to say that your heirs would inherit a Roth IRA tax-free, which is the reason you prefer the chance of higher growth in the Roth IRA.
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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by jhfenton » Tue Aug 21, 2018 8:02 am

MrBeaver wrote:
Mon Aug 20, 2018 10:29 pm
grabiner wrote:
Mon Aug 20, 2018 8:41 pm
This is not common, as you must stop contributing to your HSA when you start Medicare, but you will usually have large medical bills after age 65. Even if you don't save receipts, you will probably exhaust the HSA.
Not common for someone who started their HSA later in life, sure. I started mine in 2004 at age 23, and kept contributing with very low out of pocket expenses, so I never took any out. It is now up to 150k. It’s not unreasonable to think it could be 500k-1M at age 65 in 2018 dollars. At that level with the current health care climate, I’d doubt it would all get used up for medical expenses.
You are correct to point out your early start. HSAs did not exist when I was 23. They didn't exist until my wife and I were 33. (Archer MSAs came earlier, but they weren't very common.) We didn't have an HDHP/HSA until our late 30s. Our income wasn't high enough to max everything out until our 40s. When we hit our age 50 year in 2020, we're again going to be hard-pressed to max out two 401(k)s and two Roths with catchups and an HSA. At that point, it may even make sense to take some reimbursements from our new HSA contributions to make sure that we can max out contributions to all five accounts.

So while we may end up with a $250K HSA account in retirement, we will not end up with a $1MM HSA account in retirement.

In your case, I probably would reimburse myself and invest tax-efficiently in taxable.

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Re: The problem with 'saving receipts' for future qualified HSA withdrawals

Post by Nate79 » Tue Aug 21, 2018 9:46 am

Saving receipts and tracking them is very simple exercise for us. For every receipt I simply scan them, input them into an excel file (all stored on the local computer) and then they are backed up to Google drive. Actual receipts go into a folder but will probably never be needed. In the end the only reason I am keeping the receipts is in the off case I want or need to have access to the HSA money I can pull that money out with the documentation to back it up. Hopefully money will be held and not used until retirement but it's also always there in case we have cash flow problems and need to pay medical expenses or need to pull the money out for emergency reasons.

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