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HSA Withdraw Strategy

Posted: Fri Mar 02, 2018 12:55 pm
by boogiehead
Hi all,

I know most people here think of HSA as another vehicle for a tax advantaged retirement account... with that said, I am going to get some dental work done this year that's going to cost me about $3,000. I'm still about 20+ years away from retirement. Should I just use money out of my savings vs. withdrawing money from my HSA to pay for the dental work? Thanks in advance

Re: HSA Withdraw Strategy

Posted: Fri Mar 02, 2018 12:59 pm
by Pranav
I prefer to use the HSA for current medical expenses.

Re: HSA Withdraw Strategy

Posted: Fri Mar 02, 2018 1:06 pm
by BL
It is a bit of a toss-up. I would be more inclined to pay the small bills with HSA and save one large bill for future pay-off, if I could easily pay for it up front. Some might pay everything upfront and have it all to use tax-free after retirement or when the need for cash arises (that means a shoe-box full of receipts and keeping tax returns to show you didn't deduct it in past, and also keeping HSA records.)

I had a minute amount in an HSA, so used it one year for paying Medicare payments. That took care of mine in a single year with simplicity.

Re: HSA Withdraw Strategy

Posted: Fri Mar 02, 2018 1:08 pm
by BolderBoy
boogiehead wrote: Fri Mar 02, 2018 12:55 pmShould I just use money out of my savings vs. withdrawing money from my HSA to pay for the dental work?
IMO, if you can comfortably afford it, pay for current medical expenses out of pocket, carefully save your medical/dental receipts year-over-year (they don't expire) and continue to max out your HSA contributions each year.

If you ever really need an infusion of cash into your checking account, you can pull out enough of the saved receipts to approximate the $$$ you need and write yourself a check from the HSA to cover it. Some people use this technique as their "emergency fund" though it does take some years to aggregate enough receipts...

The longer you can put off tapping your HSA account, the better.

Re: HSA Withdraw Strategy

Posted: Fri Mar 02, 2018 1:42 pm
by soccerrules
I typically try and pay for medical expenses out of pocket and let the HSA grow. As suggested by others savings receipts each year and then if you need the cash, you can withdraw. My plan is to try and save HSA money for after 60, when I retire and might have need for more medical care--thus using the HSA then to help offset withdrawals from nest egg.
In the case you described I would put the $3,000 on my cash back credit card and then pay out of cash flow.

Re: HSA Withdraw Strategy

Posted: Fri Mar 02, 2018 1:55 pm
by PharmerBrown
If you have Roth space available and you can move the HSA money to a Roth, that will make your future record keeping and withdraws much easier.

Re: HSA Withdraw Strategy

Posted: Fri Mar 02, 2018 2:03 pm
by Darth Xanadu
PharmerBrown wrote: Fri Mar 02, 2018 1:55 pm If you have Roth space available and you can move the HSA money to a Roth, that will make your future record keeping and withdraws much easier.
Can you please expand on this, I'm not sure I understand.

Re: HSA Withdraw Strategy

Posted: Fri Mar 02, 2018 2:12 pm
by Edie
Darth Xanadu wrote: Fri Mar 02, 2018 2:03 pm
PharmerBrown wrote: Fri Mar 02, 2018 1:55 pm If you have Roth space available and you can move the HSA money to a Roth, that will make your future record keeping and withdraws much easier.
Can you please expand on this, I'm not sure I understand.
If you're not maxing your Roth already, and can afford to not "keep" the HSA reimbursements (i.e. don't need them to pay the bills out of pocket), then you reimburse yourself from the HSA for your medical expenses, and then use the amount you reimbursed toward your Roth contribution.

Re: HSA Withdraw Strategy

Posted: Fri Mar 02, 2018 2:27 pm
by marcopolo
I pay current expenses out of taxable and allow all my tax-free accounts continue to grow. This is true for HSA and Roth IRA.
I think the same calculation should apply for both.

If you needed car repairs and had taxable funds to cover it, would you remove money out a Roth IRA to pay for it? Probably not, because the tax-free space is limited and you want as much as possible to continue to grow tax free. Not clear to me why the same would not apply to HSA accounts.

I am also not sure i see the need for saving receipts. Maybe because our HSA is not excessively large (only had HSA eligible plan for last 5 or 6 years), but i don't think there will be any shortage of opportunities to incur medical expenses as we age :?

Re: HSA Withdraw Strategy

Posted: Fri Mar 02, 2018 3:15 pm
by Spirit Rider
boogiehead wrote: Fri Mar 02, 2018 12:55 pm I know most people here think of HSA as another vehicle for a tax advantaged retirement account...
No..., not a tax-advantaged retirement account. An HSA should be thought of as a retirement Health Savings Account. Many people have no idea just how much of their retirement budget will be spent on health care expenses in retirement.

To expand on the replies from PharmerBrown and Edie. Very often the perspective is lost on why certain options should be elected. You do not do a Backdoor Roth because it is a Roth, you do it because it is additional tax-advantaged contribution space preferable to taxable. This should also be the drive between current HSA reimbursement and deferred reimbursement assuming you do not absolutely need to use the reimbursement for current expenses.

If you are not current maxing out all your other tax-advantaged investment options, you should take the reimbursement and use the immediate tax savings to fund additional retirement plan contributions. If you have already maxed out your retirement plan contributions, you should pay current expenses out-of-pocket. Like the Backdoor Roth you are gaining additional tax-advantaged space. You are using the fact that money is fungible to defer distributions, effectively gaining contribution space.

When is becomes necessary to make withdrawals from tax-free accounts you should always take qualified withdrawals from HSA accounts before Roth accounts. You will be reducing the encumbered account before the unencumbered account. You should also withdraw from all other pre-tax account balances before an HSA after age 65. Reserve it for tax-free withdrawals of qualified medical expenses.