HSABank: How to withdraw money and reflect it in taxes?

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VictoriaF
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HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Fri Sep 16, 2016 12:40 pm

I have a sizeable HSA account at HSABank. I have been planning to keep it long into retirement and use the accumulated money for paying for eventual large expenses. However, after a discussion with David Grabiner, I am now thinking that I may be better off taking money out of HSABank as soon as possible, when I have qualified expenses. I have never taken money out from an HSA account before and would like to avoid making obvious mistakes. Thus, I have some questions.

Background:
I have made some qualifying out-of-pocket payments in past years as well as this year. Let's assume that my past out-of-pocket expenses were $700, $800, and $1,000 in different previous years (when I had HSA), and this year my out-of-pocket expenses are $1,500. The total is $4,000.

Questions:
1. Can I take $4,000 out of my HSABank account as a single distribution, or must I take a series of distributions, one per each year?
2. Is there an upper limit on how much I can withdraw from HSABank in a single transaction?
3. Do I have to justify to HSABank why I am withdrawing the money?
4. How do I reflect the distribution in my 2015 tax return?
5. Do I have to justify to the IRS why I withdrew the money?
6. How long must I keep the record of the qualifying medical expenses that I used to justify the HSA withdrawal?
7. Are there any possible issues I have to watch out for?

Thank you,
Victoria
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clydewolf
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by clydewolf » Fri Sep 16, 2016 1:42 pm

With your form 1040 you should have been filing form 8889 to report your HSA contributions. Contributions are reported in Part I of the form while distributions are reported in part II, line 14a. You identify the amount of your qualified medical expenses on line 15. When both 14a and 15 show the same amount, there is no taxable distribution.

Pub 969 has more information: https://www.irs.gov/pub/irs-pdf/p969.pd ... 1372461052
Form 8889: https://www.irs.gov/pub/irs-pdf/f8889.pdf
Form 8889 Instructions: https://www.irs.gov/pub/irs-pdf/i8889.pdf

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VictoriaF
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Fri Sep 16, 2016 1:57 pm

clydewolf wrote:With your form 1040 you should have been filing form 8889 to report your HSA contributions. Contributions are reported in Part I of the form while distributions are reported in part II, line 14a. You identify the amount of your qualified medical expenses on line 15. When both 14a and 15 show the same amount, there is no taxable distribution.

Pub 969 has more information: https://www.irs.gov/pub/irs-pdf/p969.pd ... 1372461052
Form 8889: https://www.irs.gov/pub/irs-pdf/f8889.pdf
Form 8889 Instructions: https://www.irs.gov/pub/irs-pdf/i8889.pdf
Thank you. I have been filing form 8889 with my returns, but I never looked beyond the contributions section. I will read Pub 969.

Victoria
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BL
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by BL » Fri Sep 16, 2016 2:04 pm

I had a tiny HSA which I decided to cash out for already paid Medicare payments. I filled out a form from the company, including what it was to be used for, and that took care of applying for it. (I could have used it for upcoming future Medicare payments to get the amount periodically, I believe.) Used the proper form/schedule for that year's 1040 to report the amount and that took care of it. I am glad to be rid of it for simplicity's sake.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Fri Sep 16, 2016 2:13 pm

BL wrote:I had a tiny HSA which I decided to cash out for already paid Medicare payments. I filled out a form from the company, including what it was to be used for, and that took care of applying for it. (I could have used it for upcoming future Medicare payments to get the amount periodically, I believe.) Used the proper form/schedule for that year's 1040 to report the amount and that took care of it. I am glad to be rid of it for simplicity's sake.
I am not Medicare eligible. To file a withdrawal form with an HSA custodian such as HSABank, do I need to attach the receipts?

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by MossySF » Fri Sep 16, 2016 2:33 pm

I don't know about HSA Bank's policies but with Patelco, I've used multiple methods of payment -- linked debit card, online billpay directly to medical practitioners/vendors, online billpay to myself for reimbursement, paper check to myself for reimbursement (10 starter checks from Patelco) -- and Patelco has never asked me to verify the medical purpose. (After all, you can use HSA money for anything before age 65 -- you just have to pay tax & penalty.)

The receipts, I kept/scanned in case of possible IRS audit.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by hcj » Fri Sep 16, 2016 2:38 pm

I have filed some HSA reimbursement claims. Ours is an online interface and I just go in and request the money to be deposited into my bank account. I do not upload receipts (no place to do that). There is a space to write a memo to myself for record keeping.

At the end of the year they send a tax form that sums up my withdrawals.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by TOJ » Fri Sep 16, 2016 2:42 pm

Custodians do not care if you follow the rules. They won't ask for receipts. That's between you and the IRS.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Fri Sep 16, 2016 2:45 pm

MossySF wrote:I don't know about HSA Bank's policies but with Patelco, I've used multiple methods of payment -- linked debit card, online billpay directly to medical practitioners/vendors, online billpay to myself for reimbursement, paper check to myself for reimbursement (10 starter checks from Patelco) -- and Patelco has never asked me to verify the medical purpose. (After all, you can use HSA money for anything before age 65 -- you just have to pay tax & penalty.)

The receipts, I kept/scanned in case of possible IRS audit.
Good point about being able to use money and pay taxes and penalties. Thanks!

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Fri Sep 16, 2016 2:57 pm

It seems too simple, and I am still wondering if there is a catch.
1. So, I can just withdraw money from HSABank, receive a tax form from them for 2016, and put the same amounts for "distributions" and "qualified medical expenses" on Form 8889 lines 14a and 15, respectively.
2. HSABank will not ask me if my withdrawal is justified, as several people have indicated above.
3. The IRS form 8889 does not require medical receipts to be attached.
4. If in the future my tax returns are audited, I will have to show the receipts to the IRS at that time.

Do I have to keep the receipts only for three years since filing a tax return until the statute of limitations expires? I have large piles of papers showing various bills from various providers, Explanations of Benefits (EOB) from insurance companies showing how much they cover and how much is my responsibility, modified bills from providers, and my corresponding payments. In some cases, I only have a credit card receipt that I've paid a particular bill.

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by TimeRunner » Fri Sep 16, 2016 3:19 pm

VictoriaF wrote:...I have been planning to keep it long into retirement and use the accumulated money for paying for eventual large expenses. However, after a discussion with David Grabiner, I am now thinking that I may be better off taking money out of HSABank as soon as possible, when I have qualified expenses....
I've come to that conclusion independently and recently. I'd be interested in your thinking. I've been considering this also because I'm:
1. Retiring at the end of the year.
2. Switching health plans at that time to a more traditional PPO.
3. Concerned about account getting too large and then being on IRS' radar with large withdrawals, and having to keep "unused" expense paperwork for years going forward while account is open.
4. Reaching for simplicity, especially when account goes under $5K balance at which time I would want to pull it all and close the account so as to not incur fees (since they would be on me and not insurance by then).
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VictoriaF
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Fri Sep 16, 2016 3:39 pm

TimeRunner wrote:
VictoriaF wrote:...I have been planning to keep it long into retirement and use the accumulated money for paying for eventual large expenses. However, after a discussion with David Grabiner, I am now thinking that I may be better off taking money out of HSABank as soon as possible, when I have qualified expenses....
I've come to that conclusion independently and recently. I'd be interested in your thinking. I've been considering this also because I'm:
1. Retiring at the end of the year.
2. Switching health plans at that time to a more traditional PPO.
3. Concerned about account getting too large and then being on IRS' radar with large withdrawals, and having to keep "unused" expense paperwork for years going forward while account is open.
4. Reaching for simplicity, especially when account goes under $5K balance at which time I would want to pull it all and close the account so as to not incur fees (since they would be on me and not insurance by then).
My main reason is that I am converting traditional retirement accounts into Roth. Right now I am paying for conversions out of my taxable accounts, but eventually I will run out of taxable funds and start reducing my retirement funds. Roth is more flexible than HSA and it makes sense for me to use up HSA before I start using Roth.

You are making a good point about maintaining the account when it drops below $5k. I will have to time the last withdrawal to avoid fees.

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by curmudgeon » Fri Sep 16, 2016 3:41 pm

VictoriaF wrote:It seems too simple, and I am still wondering if there is a catch.
1. So, I can just withdraw money from HSABank, receive a tax form from them for 2016, and put the same amounts for "distributions" and "qualified medical expenses" on Form 8889 lines 14a and 15, respectively.
2. HSABank will not ask me if my withdrawal is justified, as several people have indicated above.
3. The IRS form 8889 does not require medical receipts to be attached.
4. If in the future my tax returns are audited, I will have to show the receipts to the IRS at that time.

Do I have to keep the receipts only for three years since filing a tax return until the statute of limitations expires? I have large piles of papers showing various bills from various providers, Explanations of Benefits (EOB) from insurance companies showing how much they cover and how much is my responsibility, modified bills from providers, and my corresponding payments. In some cases, I only have a credit card receipt that I've paid a particular bill.

Victoria
It's that simple, from a reporting perspective. In an audit, you would have the theoretical challenge of "proving a negative", that is, proving that you did NOT get reimbursed for those expenses that you claimed. I don't know how obnoxious the IRS might get in those cases; I suspect if you have an EOB in addition to the receipt that should be sufficient. Just a receipt by itself is less conclusive, but probably OK if you are not obviously pushing limits in other ways. Being able to clear it off the books after three years is a definite plus.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by nps » Fri Sep 16, 2016 7:06 pm

I have read of HSA custodians that do require receipts or claim forms, but HSA Bank does not. Last I knew their daily direct withdrawal limit was $500.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Fri Sep 16, 2016 7:13 pm

Thank you, nps.

In the meantime, I found a gotcha. The IRS wants you to prove that you have not claimed these medical expenses as itemized deductions. If I am to take distribution for the expenses that I have made in 2011, I must keep my Form 1040 including Schedule A from 2011 until now.

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by Aptenodytes » Fri Sep 16, 2016 7:20 pm

VictoriaF wrote:Thank you, nps.

In the meantime, I found a gotcha. The IRS wants you to prove that you have not claimed these medical expenses as itemized deductions. If I am to take distribution for the expenses that I have made in 2011, I must keep my Form 1040 including Schedule A from 2011 until now.

Victoria
I'm not sure that's quite right. I believe you have to be capable of proving that you have not claimed these medical expenses as itemized deductions, but you don't have to actually prove it each time you make a qualified withdrawal from an HSA.

If I'm wrong and you are right my tax returns in my 80s (God willing) are going to be enormous.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Fri Sep 16, 2016 7:30 pm

Aptenodytes wrote:
VictoriaF wrote:Thank you, nps.

In the meantime, I found a gotcha. The IRS wants you to prove that you have not claimed these medical expenses as itemized deductions. If I am to take distribution for the expenses that I have made in 2011, I must keep my Form 1040 including Schedule A from 2011 until now.

Victoria
I'm not sure that's quite right. I believe you have to be capable of proving that you have not claimed these medical expenses as itemized deductions, but you don't have to actually prove it each time you make a qualified withdrawal from an HSA.

If I'm wrong and you are right my tax returns in my 80s (God willing) are going to be enormous.
Here is relevant text from Pub 969, page 9 (2015):
IRS wrote:Recordkeeping.
You must keep records sufficient to show that:
- The distributions were exclusively to pay or reimburse qualified medical expenses,
- The qualified medical expenses had not been previously paid or reimbursed from another source, and
- The medical expenses had not been taken as an itemized deduction in any year.
Do not send these records with your tax return. Keep them with your tax records.
If I take a distribution in 2016 for the expenses I incurred in 2016, I have the same three years for the statute of limitations of my entire tax filing.

However, if I take a distribution in 2016 for the expenses I incurred in 2011, I must prove that I did not use the same expenses on Schedule A for 2011. Thus, I must keep my 2011 tax filing until 2020 when my 2016 filing will expire.

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by Drew31 » Fri Sep 16, 2016 8:31 pm

nps wrote:I have read of HSA custodians that do require receipts or claim forms, but HSA Bank does not. Last I knew their daily direct withdrawal limit was $500.
I have HSA with HSA Bank. This was true at beginning of this year for me, but I called customer service and they were able to override the limit for me and submit withdrawal over the phone.

However, a month or two later (April-ish), I was able to make a withdrawal over the 500. Might have been an agreement with my employer though....not sure.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by TimeRunner » Fri Sep 16, 2016 9:21 pm

The limit is a DAILY $500 limit for transfers between HSABank and your bank, however you can request a check to be mailed to you for the full amount of your withdrawal. I'm skipping the check and submitting a daily withdrawal transfer until I get to my number.
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by gclancer » Fri Sep 16, 2016 10:14 pm

TimeRunner wrote:The limit is a DAILY $500 limit for transfers between HSABank and your bank, however you can request a check to be mailed to you for the full amount of your withdrawal. I'm skipping the check and submitting a daily withdrawal transfer until I get to my number.
Some practical feedback on this is that the checks do seem to arrive super fast. Even though you don't have to, I make withdrawals in the exact amount of each expense and in the notes put the insurance claim number. I figure if I ever get audited it will be very clear what each transaction represents (but I also withdrawal as I go).

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by Spirit Rider » Fri Sep 16, 2016 10:35 pm

VictoriaF wrote:My main reason is that I am converting traditional retirement accounts into Roth. Right now I am paying for conversions out of my taxable accounts, but eventually I will run out of taxable funds and start reducing my retirement funds. Roth is more flexible than HSA and it makes sense for me to use up HSA before I start using Roth.
This is an extra important point for single HSA account holders with non-spouse beneficiaries. An HSA ceases to be an HSA on the date of death. Short of IRA guidance to the contrary, there does not appear to be an ability for a non-spouse beneficiary to make tax free distributions for previously paid qualified expenses. Therefore, everyone should always prioritize tax-free HSA distributions over Roth IRA distributions.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by Aptenodytes » Sat Sep 17, 2016 12:04 am

Right about how long to keep tax returns, but the regs you quote confirm my understanding that you don't have to actively prove no deductions, you just have to able to prove in the event of a challenge.
VictoriaF wrote:
Aptenodytes wrote:
VictoriaF wrote:Thank you, nps.

In the meantime, I found a gotcha. The IRS wants you to prove that you have not claimed these medical expenses as itemized deductions. If I am to take distribution for the expenses that I have made in 2011, I must keep my Form 1040 including Schedule A from 2011 until now.

Victoria
I'm not sure that's quite right. I believe you have to be capable of proving that you have not claimed these medical expenses as itemized deductions, but you don't have to actually prove it each time you make a qualified withdrawal from an HSA.

If I'm wrong and you are right my tax returns in my 80s (God willing) are going to be enormous.
Here is relevant text from Pub 969, page 9 (2015):
IRS wrote:Recordkeeping.
You must keep records sufficient to show that:
- The distributions were exclusively to pay or reimburse qualified medical expenses,
- The qualified medical expenses had not been previously paid or reimbursed from another source, and
- The medical expenses had not been taken as an itemized deduction in any year.
Do not send these records with your tax return. Keep them with your tax records.
If I take a distribution in 2016 for the expenses I incurred in 2016, I have the same three years for the statute of limitations of my entire tax filing.

However, if I take a distribution in 2016 for the expenses I incurred in 2011, I must prove that I did not use the same expenses on Schedule A for 2011. Thus, I must keep my 2011 tax filing until 2020 when my 2016 filing will expire.

Victoria

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by ABQ4804 » Sat Sep 17, 2016 12:31 am

gclancer wrote:Even though you don't have to, I make withdrawals in the exact amount of each expense and in the notes put the insurance claim number. I figure if I ever get audited it will be very clear what each transaction represents (but I also withdrawal as I go).
Are you with HSA Bank? We just use the HSA credit card to pay each medical bill, and don't have to bother with check reimbursements.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by *3!4!/5! » Sat Sep 17, 2016 1:53 am

nps wrote:I have read of HSA custodians that do require receipts or claim forms, but HSA Bank does not. Last I knew their daily direct withdrawal limit was $500.
Wouldn't that violate HIPAA or somesuch. The HSA custodian has no legitimate reason for any medical information whatsoever. They should comply with your request for a distribution, and report it to the IRS. HealthEquity HSA asks for medical information to get your money, and I wonder if it is legal.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by gclancer » Sat Sep 17, 2016 5:27 am

alisa4804 wrote:
gclancer wrote:Even though you don't have to, I make withdrawals in the exact amount of each expense and in the notes put the insurance claim number. I figure if I ever get audited it will be very clear what each transaction represents (but I also withdrawal as I go).
Are you with HSA Bank? We just use the HSA credit card to pay each medical bill, and don't have to bother with check reimbursements.
Yes. I do a number of things that are probably overkill, but one that I think is actually worthwhile is paying medical expenses with my 2% cash back credit card. Since expenses are larger, often it ends up being a free $20(!) - I'm sure I inconvenience myself in greater ways for less elsewhere in my financial life, and I certainly understand people who don't want to bother.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by HueyLD » Sat Sep 17, 2016 6:36 am

Spirit Rider wrote:
VictoriaF wrote:My main reason is that I am converting traditional retirement accounts into Roth. Right now I am paying for conversions out of my taxable accounts, but eventually I will run out of taxable funds and start reducing my retirement funds. Roth is more flexible than HSA and it makes sense for me to use up HSA before I start using Roth.
This is an extra important point for single HSA account holders with non-spouse beneficiaries. An HSA ceases to be an HSA on the date of death. Short of IRA guidance to the contrary, there does not appear to be an ability for a non-spouse beneficiary to make tax free distributions for previously paid qualified expenses. Therefore, everyone should always prioritize tax-free HSA distributions over Roth IRA distributions.
Extremely valuable statement from Spirit Rider.

Also regarding itemized deductions for medical expenses, it is entirely possible that the OP did not have enough medical expenses to show any deductible medical expense on Schedule A because the total amount was less than 7.5% or 10% of the AGI. In that case, the OP had not deducted those expenses in prior year(s).

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by Artsdoctor » Sat Sep 17, 2016 9:27 am

Victoria,

I like the idea of affixing one's 1040 with Schedule A to each year's HSA medical file in order to prove that medical deductions were not taken. However, the IRS does have its own records and they should be able to produce the Schedule A if they're really launching an audit. Nonetheless, it's convenient.

I understand the desire to liquidate your HSA now that you're retired, but I'd ask you to consider ways to do this without paying tax (or worse, a penalty). I can certainly reimburse yourself for all of the expenses incurred from the time you opened your HSA. Then, you can continue reimburse yourself for most things going forward as well as they occur in real time.

As far as the beneficiary goes, it is true that a non-spouse beneficiary will have to pay tax on the balance once they inherit your HSA. But if you're charitably inclined, you can name a charity as a beneficiary at it would retain its tax-free status.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by Pops1860 » Sat Sep 17, 2016 10:20 am

Victoria,

Here's what we did, worked for us, just FYI. You are approaching/in a similar situation it appears.

We are now retired and on Medicare for maybe 4 years now. We have our Medicare Part B and D premiums deducted directly from our SS benefit.

Prior to retirement, we contributed to our HSA full amount allowed each year, and also used the account for routine (minimal) medical expenses. When we stopped working (employer coverage ceased) and went on Medicare, we stopped contributions but continued to draw down the account for routine (minimal) medical expenses.

Then, after several years, when the account balance dropped to the point where we would be charged a maintenance fee, we 'cashed out (single withdrawal)' the account, and copied our previous annual SSA-1099 tax forms (provided by government once you start getting SS, that lists all deductions including those for Medicare premium payments) for our personal records that tax year. Yes, conveniently, several years of Medicare premium payments (be careful, only some premiums count as qualified HSA expenses) covered the remaining account balance. Convenient. We 'cashed out' at that point mostly because of the concern about loosing the HSA tax benefit if not used before death of account owner/spouse, but also for simplicity (not a lot of money involved at that point, and we have lots of other tax-advantaged accounts to invest in), and because it was going to finally start costing us something to keep it (that small fee). We don't itemize anymore, so that was not a issue for us.

Worked for us.

Minor point - I am actually waiting until 70 to claim SS on my earnings record, but am claiming spousal in the meanwhile, so both DW and I get SS benefits at this point. Again, convenient for our situation.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Sat Sep 17, 2016 10:36 am

gclancer wrote:
TimeRunner wrote:The limit is a DAILY $500 limit for transfers between HSABank and your bank, however you can request a check to be mailed to you for the full amount of your withdrawal. I'm skipping the check and submitting a daily withdrawal transfer until I get to my number.
Some practical feedback on this is that the checks do seem to arrive super fast. Even though you don't have to, I make withdrawals in the exact amount of each expense and in the notes put the insurance claim number. I figure if I ever get audited it will be very clear what each transaction represents (but I also withdrawal as I go).
According to the HSABank's web site, requesting a check carries a $10 fee.
HSABank wrote: Manual Withdrawal

A manual withdrawal is best suited for large healthcare expenses or to reimburse yourself for medical expenses paid out-of-pocket. The request is processed within 2 business days and accountholders will receive the funds in 7-10 days, based upon mail delivery. To make a manual withdrawal, complete the Withdrawal Form and mail or fax it to HSA Bank (you can access the Withdrawal Form in the Member Website.) A $10 processing fee will be deducted from your account.
I prefer to do online transfers, according to the following statement:
HSABank wrote:Manual Online Transfers

With this option you can transfer funds from your HSA to your regular checking or savings account. You can then pay for healthcare expenses through your bank's online bill pay. You have the flexibility to set the time of the transfer so you know exactly when your funds are available. Or you can reimburse yourself for out-of-pocket healthcare expenses by transferring funds from your regular checking or savings account to your HSA.
Can anyone confirm that there are no fees if I transfer money directly from HSABank to my bank?

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Sat Sep 17, 2016 10:38 am

gclancer wrote:
alisa4804 wrote:
gclancer wrote:Even though you don't have to, I make withdrawals in the exact amount of each expense and in the notes put the insurance claim number. I figure if I ever get audited it will be very clear what each transaction represents (but I also withdrawal as I go).
Are you with HSA Bank? We just use the HSA credit card to pay each medical bill, and don't have to bother with check reimbursements.
Yes. I do a number of things that are probably overkill, but one that I think is actually worthwhile is paying medical expenses with my 2% cash back credit card. Since expenses are larger, often it ends up being a free $20(!) - I'm sure I inconvenience myself in greater ways for less elsewhere in my financial life, and I certainly understand people who don't want to bother.
Likewise, I use my credit cards strategically to accumulate points and miles. It makes more sense for me to pay out-of-pocket expenses directly and then get reimbursed.

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Sat Sep 17, 2016 10:48 am

HueyLD wrote:Also regarding itemized deductions for medical expenses, it is entirely possible that the OP did not have enough medical expenses to show any deductible medical expense on Schedule A because the total amount was less than 7.5% or 10% of the AGI. In that case, the OP had not deducted those expenses in prior year(s).
This is true, I could not have deducted medical expenses on Schedule A because they were much lower than these thresholds. Hopefully, the IRS would be able to verify this from their records. The question is how much of the burden of proof is on me and whether I would have to pay to the IRS to look up my old records.

Right now, I am inclined to forget about my old out-of-pocket medical expenses and just get reimbursed for my 2016 expenses. In the future years, I will take distributions for those specific tax year amounts. After I start paying for Medicare, the distributions will accelerate.

I am not planning to die any time soon. But if I did die before I had received all my HSA funds, my heir would financially benefit far more from the inheritance than from waiting for me to streamline my accounts.

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Sat Sep 17, 2016 10:58 am

Artsdoctor wrote:Victoria,

I like the idea of affixing one's 1040 with Schedule A to each year's HSA medical file in order to prove that medical deductions were not taken. However, the IRS does have its own records and they should be able to produce the Schedule A if they're really launching an audit. Nonetheless, it's convenient.
Artsdoctor,

Yes, keeping Schedule A with each year's HSA file is a good suggestion. Also, as I wrote above, I am now considering getting distribution only for the 2016 out-of-pocket qualifying medical expenses. In 2017 and beyond, I will be taking distributions for on-going expenses.
Artsdoctor wrote:I understand the desire to liquidate your HSA now that you're retired, but I'd ask you to consider ways to do this without paying tax (or worse, a penalty). I can certainly reimburse yourself for all of the expenses incurred from the time you opened your HSA. Then, you can continue reimburse yourself for most things going forward as well as they occur in real time.
Yes, of course. This was implicit in my questions. I don't need the money, and only trying to optimize my finances and taxes. Paying taxes or fees on HSA distributions would defeat that purpose.
Artsdoctor wrote:IAs far as the beneficiary goes, it is true that a non-spouse beneficiary will have to pay tax on the balance once they inherit your HSA. But if you're charitably inclined, you can name a charity as a beneficiary at it would retain its tax-free status.
Thank you, it's a good point.

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Sat Sep 17, 2016 11:06 am

Pops1860 wrote:Victoria,

Here's what we did, worked for us, just FYI. You are approaching/in a similar situation it appears.

We are now retired and on Medicare for maybe 4 years now. We have our Medicare Part B and D premiums deducted directly from our SS benefit.

Prior to retirement, we contributed to our HSA full amount allowed each year, and also used the account for routine (minimal) medical expenses. When we stopped working (employer coverage ceased) and went on Medicare, we stopped contributions but continued to draw down the account for routine (minimal) medical expenses.

Then, after several years, when the account balance dropped to the point where we would be charged a maintenance fee, we 'cashed out (single withdrawal)' the account, and copied our previous annual SSA-1099 tax forms (provided by government once you start getting SS, that lists all deductions including those for Medicare premium payments) for our personal records that tax year. Yes, conveniently, several years of Medicare premium payments (be careful, only some premiums count as qualified HSA expenses) covered the remaining account balance. Convenient. We 'cashed out' at that point mostly because of the concern about loosing the HSA tax benefit if not used before death of account owner/spouse, but also for simplicity (not a lot of money involved at that point, and we have lots of other tax-advantaged accounts to invest in), and because it was going to finally start costing us something to keep it (that small fee). We don't itemize anymore, so that was not a issue for us.

Worked for us.

Minor point - I am actually waiting until 70 to claim SS on my earnings record, but am claiming spousal in the meanwhile, so both DW and I get SS benefits at this point. Again, convenient for our situation.
Thank you, Pops1860. It's a very good story of how to handle HSA distributions. As my HSA account starts approaching the threshold triggering maintenance fees, I will pause withdrawals until I can empty the account at once.

From reading IRS publications, it appears that Medicare Part B premiums are qualifying expenses, but Medigap is not. I will keep my GEHA insurance in conjunction with Medicare, and I am wondering if GEHA insurance expenses are qualifying medical expenses. Does anyone know this?

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by HueyLD » Sat Sep 17, 2016 11:11 am

FEHB insurances are not medigap or supplemental insurances and thus qualify for HSA reimbursement for those 65 or better.
Insurance premiums. You cannot treat insurance premiums as qualified medical expenses unless the premiums are for:

Long-term care insurance.

Health care continuation coverage (such as coverage under COBRA).

Health care coverage while receiving unemployment compensation under federal or state law.

Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).
p.s. FEHB insurances are "secondary" insurances if used with Medicare for those 65 and over.
Last edited by HueyLD on Sat Sep 17, 2016 11:16 am, edited 1 time in total.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Sat Sep 17, 2016 11:15 am

HueyLD wrote:FEHB insurances are not medigap or supplemental insurances and thus qualify for HSA reimbursement for those 65 or better.
Insurance premiums. You cannot treat insurance premiums as qualified medical expenses unless the premiums are for:

Long-term care insurance.

Health care continuation coverage (such as coverage under COBRA).

Health care coverage while receiving unemployment compensation under federal or state law.

Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).
Excellent. Thank you, HueyLD!

I will be able to unwind my HSA account faster, and have less need to dig out old expenses.

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by tuningfork » Sat Sep 17, 2016 11:17 am

VictoriaF wrote:Can anyone confirm that there are no fees if I transfer money directly from HSABank to my bank?
According to the HSABank list of fees, you are correct. It says to avoid the $10 transaction fee for a direct [check] reimbursement, use online transfers through Internet Banking.
http://www.hsabank.com/webster/~/media/ ... ption_2_25

Thanks for posting this question. I am in a similar situation as you: early retirement, doing Roth conversions every year, HSA account at HSABank, paying for current medical expenses out of pocket to allow HSA account to grow tax-free, past unreimbursed medical expenses with receipts. I've been concerned for a while that this HSA strategy may be overly complex to maintain over many years. Even though I've got a very organized receipt tracking method in place, it contradicts my long range goal of simplifying my investment accounts as I get older. Thinking it might be time to start withdrawing to pay for those unreimbursed expenses and [in effect] put that money into Roth.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Sat Sep 17, 2016 11:33 am

tuningfork wrote:
VictoriaF wrote:Can anyone confirm that there are no fees if I transfer money directly from HSABank to my bank?
According to the HSABank list of fees, you are correct. It says to avoid the $10 transaction fee for a direct [check] reimbursement, use online transfers through Internet Banking.
http://www.hsabank.com/webster/~/media/ ... ption_2_25
tuningfork,

Thank you for the reference to HSABank's fees. I have noticed some interesting facts:
- The account maintenance fee is "only" $2.25, but it's per month. The annual fee is $27. This is a good reason to close the account at once when it's just above the threshold for the fee ($3,000).
- HSA closure fee of $25 is unavoidable.
tuningfork wrote:Thanks for posting this question. I am in a similar situation as you: early retirement, doing Roth conversions every year, HSA account at HSABank, paying for current medical expenses out of pocket to allow HSA account to grow tax-free, past unreimbursed medical expenses with receipts. I've been concerned for a while that this HSA strategy may be overly complex to maintain over many years. Even though I've got a very organized receipt tracking method in place, it contradicts my long range goal of simplifying my investment accounts as I get older. Thinking it might be time to start withdrawing to pay for those unreimbursed expenses and [in effect] put that money into Roth.
I am glad that the thread has helped you to consider your own strategy. Your last sentence is a good summary of what I am trying to do, i.e., indirectly to shift money from HSA to Roth.

Cheers,
Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by ABQ4804 » Sat Sep 17, 2016 11:41 am

I agree, this is a great thread for many of us in the same position, and there are some really good strategies posted here! Thanks for starting this, Victoria.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by TimeRunner » Sat Sep 17, 2016 5:13 pm

VictoriaF wrote:- The account maintenance fee is "only" $2.25, but it's per month. The annual fee is $27. This is a good reason to close the account at once when it's just above the threshold for the fee ($3,000).
- HSA closure fee of $25 is unavoidable.
Minor update: The fee threshold is currently $5K, see: http://www.hsabank.com/~/media/files/fees_s1
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Sat Sep 17, 2016 5:23 pm

TimeRunner wrote:
VictoriaF wrote:- The account maintenance fee is "only" $2.25, but it's per month. The annual fee is $27. This is a good reason to close the account at once when it's just above the threshold for the fee ($3,000).
- HSA closure fee of $25 is unavoidable.
Minor update: The fee threshold is currently $5K, see: http://www.hsabank.com/~/media/files/fees_s1
Thank you, TimeRunner. The monthly fee has also increased to $2.50, or $30/year.

Victoria
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by TOJ » Sat Sep 17, 2016 5:43 pm

I also use my fidelity CC for medical expenses and reimburse myself in exact amounts. I use a google spreadsheet to track it all. Not a lot of overhead.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by susa » Sat Sep 17, 2016 7:30 pm

Interesting thread.

Question: We've accumulated about 10 years of medical expenses (box of receipts by year) but never touched the funds in the HSA.

If we now pay ourselves but have a balance remaining, is there a condition where we could take out the funds but with Zero income for that year, incur a small or no tax penalty ?

Example: 55,000 in HSA but only 30,000 in medical expenses with receipts, leaving balance 15,000. At age 65 we do not collect SS and have no income so if we were to take out 5,000 wouldn't the MFJ deduction "eat up" any tax consequence from that withdrawal ?

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by TimeRunner » Sat Sep 17, 2016 7:57 pm

susa wrote:Interesting thread.

Question: We've accumulated about 10 years of medical expenses (box of receipts by year) but never touched the funds in the HSA.

If we now pay ourselves but have a balance remaining, is there a condition where we could take out the funds but with Zero income for that year, incur a small or no tax penalty ?

Example: 55,000 in HSA but only 30,000 in medical expenses with receipts, leaving balance 15,000. At age 65 we do not collect SS and have no income so if we were to take out 5,000 wouldn't the MFJ deduction "eat up" any tax consequence from that withdrawal ?
At age 65, you can use your HSA to pay for Medicare parts A, B, D and Medicare HMO premiums tax-free and penalty-free. You cannot use your HSA to pay for Medigap insurance premiums.
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by susa » Sun Sep 18, 2016 6:13 am

TimeRunner wrote: At age 65, you can use your HSA to pay for Medicare parts A, B, D and Medicare HMO premiums tax-free and penalty-free. You cannot use your HSA to pay for Medigap insurance premiums.
Yes, we are aware of that but that was *not* the answer to the question.

Forget about using HSA funds for medical expenses/medicare premium. At 65 we have no income, no SS etc, but could take out 5000 (of the example remaining funds 15,000). Or we could take our the entire 15,000 and still with MFJ standard deductions, would effectively any tax be owed ?

This is similar to our traditional IRA to Roth IRA conversion(s). We convert about 15,000-17,000 each year with Zero tax due since standard MFJ deduction "eats up" any income tax due. If the HSA money can be taken out under similar circumstance(s), we would simply forego ira/roth ira plans for that year.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by TimeRunner » Sun Sep 18, 2016 9:43 am

AFAIK, after age 65 there's no 20% penalty, but your HSA withdrawal for non-qualifired medical expenses is treated as income similarly to a TIRA withdrawal, and is reported on line 21 of Form 1040, which you get there by filling out IRS Form 8889 Part II.
Instructions: https://www.irs.gov/pub/irs-pdf/i8889.pdf
Form: https://www.irs.gov/pub/irs-pdf/f8889.pdf
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by *3!4!/5! » Sun Sep 18, 2016 10:37 am

susa wrote:Interesting thread.

Question: We've accumulated about 10 years of medical expenses (box of receipts by year) but never touched the funds in the HSA.

If we now pay ourselves but have a balance remaining, is there a condition where we could take out the funds but with Zero income for that year, incur a small or no tax penalty ?

Example: 55,000 in HSA but only 30,000 in medical expenses with receipts, leaving balance 15,000. At age 65 we do not collect SS and have no income so if we were to take out 5,000 wouldn't the MFJ deduction "eat up" any tax consequence from that withdrawal ?
Seems like a bad idea. You would use up the 0% tax bracket that could be better used, say for converting some traditional to Roth or various other taxable transactions. One way or another, it seems the opportunity cost would cost you thousands of dollars.

I am operating under the assumption that as one gets older, one's accumulated medical expenses will eventually exceed their HSA balance, so you eventually get to drain the HSA for medical expenses, while keeping those valuable low tax bracket opportunities for other taxable transactions.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by susa » Mon Sep 19, 2016 7:29 am

*3!4!/5! wrote: Seems like a bad idea. You would use up the 0% tax bracket that could be better used, say for converting some traditional to Roth or various other taxable transactions. One way or another, it seems the opportunity cost would cost you thousands of dollars.
Explain how it would cost "thousands.." ? If there is no income, anything we "generate" that looks like income, being under 20k for a couple MJF is effectively canceled out in terms of tax due.

Consider the alternative. No medical expenses (..we are both physically active and come from endurance sports background..) but an accident deep sixes both. The remaining funds become taxable millstones (parable of Mark 9:42) immediately to the kids.

It is true that IF THERE IS a remaining opportunity for traditional IRA/401k to Roth IRA conversion, that would likely be preferred over depleting funds from an HSA but I suspect that even if we hit RMD at 70+ from funds remaining in IRA/401k, the tax bite would still be close to Zero or 10%

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by *3!4!/5! » Mon Sep 19, 2016 1:59 pm

susa wrote:
*3!4!/5! wrote: Seems like a bad idea. You would use up the 0% tax bracket that could be better used, say for converting some traditional to Roth or various other taxable transactions. One way or another, it seems the opportunity cost would cost you thousands of dollars.
Explain how it would cost "thousands.." ? If there is no income, anything we "generate" that looks like income, being under 20k for a couple MJF is effectively canceled out in terms of tax due.

Consider the alternative. No medical expenses (..we are both physically active and come from endurance sports background..) but an accident deep sixes both. The remaining funds become taxable millstones (parable of Mark 9:42) immediately to the kids.

It is true that IF THERE IS a remaining opportunity for traditional IRA/401k to Roth IRA conversion, that would likely be preferred over depleting funds from an HSA but I suspect that even if we hit RMD at 70+ from funds remaining in IRA/401k, the tax bite would still be close to Zero or 10%
I don't know the totality of your personal circumstances. You can figure out what to do in your case.

I just make a general comment that some action may or may not have zero tax cost depending on what else you do, so as a general principal, one has to consider opportunity cost.

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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by TimeRunner » Tue Sep 20, 2016 2:54 pm

Just to clarify on the HSABank fees as shown here: http://www.hsabank.com/~/media/files/fees_s1

If you request a transfer from HSA Bank to your bank checking account, for example, the limit is $500/day. Day means the day when they get around to processing the transaction. That may or may not be one business day, and excludes week-ends. You can also request a check be issued. If you make that request online (through the website), there is no fee for that. If you call them on the phone and request the check, there's a $10 fee.

Bottom line, if you have several thousand dollars to withdraw, it may be faster and less hassle to simply request a check through the website rather than pull $500/transaction, one at a time, via ACH transfer.
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Re: HSABank: How to withdraw money and reflect it in taxes?

Post by VictoriaF » Tue Sep 20, 2016 6:30 pm

TimeRunner wrote:Just to clarify on the HSABank fees as shown here: http://www.hsabank.com/~/media/files/fees_s1

If you request a transfer from HSA Bank to your bank checking account, for example, the limit is $500/day. Day means the day when they get around to processing the transaction. That may or may not be one business day, and excludes week-ends. You can also request a check be issued. If you make that request online (through the website), there is no fee for that. If you call them on the phone and request the check, there's a $10 fee.

Bottom line, if you have several thousand dollars to withdraw, it may be faster and less hassle to simply request a check through the website rather than pull $500/transaction, one at a time, via ACH transfer.
Thank you, TimeRunner,

It's good to know that requesting a check from the HSABank's web site does not carry a fee.

Victoria
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