HSA - 2 parts: contribute and spend. When to spend?

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Topic Author
markcoop
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HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Mon Jun 17, 2019 4:51 pm

HSA's are a unique product offering triple tax advantages: No taxes on the way in, possible no Social Security and Medicare on the way in (via payroll deduction) and no taxes on the way out (if used for medical expenses). Seems like a no-brainer to max-out this product if available and you are able to. It probably should be ranked right behind 401Ks that offer matches. However, the second part of the HSA equation, when to spend it, is not so clear to me. You basically have two choices - the year of a medical expense or a future year. Clearly letting the money sit till a future year maxes out the tax-free growth. But that is a separate decision than the contribution decision. This would also need to be ranked against all your other tax-advantaged accounts assuming space is limited. Factors such as investment options, costs, ease of use, etc. would need to be weighed. For my situation, I have the following ranking:

1) My 401K up to employee match
2) My HSA contributions
3) My 401K contributions after match
4) My and Spouse's Roth contributions
5) Spending medical expenses out of pocket instead of raiding HSA
6) Spouse's 403B (lousy plan with high fees)
7) Company stock at small discount
8) Taxable

Since I am over 50 years old, I can contribute $25K into my 401K and $7K to each Roth. In addition, my employer deposits approx $11K into my 401K via matches and an extra pension benefit. That's about $50K being saved using my 401Ks and Roth IRAs. I do max out my HSA contributions of $7K (that includes my contributions and employer contribution). So, going through my ranking, I have $57K invested in (1) through (5) above. To be honest, I definitely can't afford to contribute any more than that. In fact, I believe I am comfortable with spending my HSA money in the year of the expense (meaning $50K/yr is enough savings to meet my retirement goals). In an emergency, I can still withdraw Roth contributions (I have $170K worth of contributions) if needed for the 10 or so years till I retire. I also understand the financial aid benefit of HSAs that I have seen mentioned on this board, but would rather not consider that for this discussion.

Am I looking at this correctly? Anyone see any problems with my logic? I just seem to always hear about the great advantages of HSAs, and they are great, but they involve two separate decisions. Anyone think it is worth it to cut back on Roth or 401K contributions to keep money saved in my HSA?
Mark

terran
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by terran » Mon Jun 17, 2019 6:02 pm

If I could max out all tax advantaged accounts and wanted to invest more I would cash flow medical expenses and leave the money invested in an HSA before contributing to a taxable account. If I could not otherwise max all tax advantaged accounts I would pay medical expenses from the HSA and invest in other tax advantaged accounts. Once you've contributed you've already gotten two of the three tax advantages, so the only one left is tax free growth. You can get this one with Roth (in which case you don't have to continue keeping track of medical expenses) or often it's better to get the tax deduction now and pay tax on the growth later.

Bacchus01
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by Bacchus01 » Mon Jun 17, 2019 6:52 pm

For us, we are planning for our HSAs to pay for major medical expenses in retirement, but likely before that we will use them as living expenses along with taxable withdrawals in order to maintain lower incomes for ACA and/or ROTH conversions. It may not work out that way but in the worst case we will have some catastrophic medical coverage. We have about $50K in our HSA now at age 45. I suspect if the law stays unchanged we will have several hundred thousand $k by 65 or later.

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FiveK
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by FiveK » Mon Jun 17, 2019 8:28 pm

markcoop wrote:
Mon Jun 17, 2019 4:51 pm
Am I looking at this correctly? Anyone see any problems with my logic? I just seem to always hear about the great advantages of HSAs, and they are great, but they involve two separate decisions. Anyone think it is worth it to cut back on Roth or 401K contributions to keep money saved in my HSA?
See Prioritizing investments and Investment Order for similar logic.

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markcoop
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Tue Jun 18, 2019 9:50 am

FiveK wrote:
Mon Jun 17, 2019 8:28 pm
markcoop wrote:
Mon Jun 17, 2019 4:51 pm
Am I looking at this correctly? Anyone see any problems with my logic? I just seem to always hear about the great advantages of HSAs, and they are great, but they involve two separate decisions. Anyone think it is worth it to cut back on Roth or 401K contributions to keep money saved in my HSA?
See Prioritizing investments and Investment Order for similar logic.
The reason for my post are posts like those links. I have typically seen HSA contributions listed very high (usually right after 401K with match), but I have never seen paying medical bills out if pocket (which means leaving the HSA in tact) or withdrawing from the HSA to pay the medical listed in the order. It would seem to me that decision is similar to the other items in the prioritizing investments.
Mark

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FiveK
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by FiveK » Tue Jun 18, 2019 10:20 am

markcoop wrote:
Tue Jun 18, 2019 9:50 am
FiveK wrote:
Mon Jun 17, 2019 8:28 pm
markcoop wrote:
Mon Jun 17, 2019 4:51 pm
Am I looking at this correctly? Anyone see any problems with my logic? I just seem to always hear about the great advantages of HSAs, and they are great, but they involve two separate decisions. Anyone think it is worth it to cut back on Roth or 401K contributions to keep money saved in my HSA?
See Prioritizing investments and Investment Order for similar logic.
The reason for my post are posts like those links. I have typically seen HSA contributions listed very high (usually right after 401K with match), but I have never seen paying medical bills out if pocket (which means leaving the HSA in tact) or withdrawing from the HSA to pay the medical listed in the order. It would seem to me that decision is similar to the other items in the prioritizing investments.
There is an affordability component to any such list. As one starts prioritizing investments, having enough left over for the proverbial food, clothing, and shelter is always a constraint. Lump medical bills in with food, clothing, and shelter, and the thought process doesn't change: if there is not enough investable money to fill all the buckets in the list, one drops the lower priority investments.

In other words, pay the medical bills out of pocket instead of investing taxably, if that is the required choice.

megabad
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by megabad » Tue Jun 18, 2019 10:28 am

markcoop wrote:
Tue Jun 18, 2019 9:50 am
FiveK wrote:
Mon Jun 17, 2019 8:28 pm
markcoop wrote:
Mon Jun 17, 2019 4:51 pm
Am I looking at this correctly? Anyone see any problems with my logic? I just seem to always hear about the great advantages of HSAs, and they are great, but they involve two separate decisions. Anyone think it is worth it to cut back on Roth or 401K contributions to keep money saved in my HSA?
See Prioritizing investments and Investment Order for similar logic.
The reason for my post are posts like those links. I have typically seen HSA contributions listed very high (usually right after 401K with match), but I have never seen paying medical bills out if pocket (which means leaving the HSA in tact) or withdrawing from the HSA to pay the medical listed in the order. It would seem to me that decision is similar to the other items in the prioritizing investments.
You want to delay withdrawal of HSA funds as long as possible. If you spend the HSA contributions quickly, you have just eliminated one of the tax advantages. If you let the funds accumulate, it is by far the most tax advantaged account if withdrawn with supporting healthcare related receipts. If you spend the funds each year, it may be that you are better off with an HRA or FSA (in fact, I think it is rather likely that you are).

ctuser1
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by ctuser1 » Tue Jun 18, 2019 10:29 am

We need a "spending order" made up by the experts.

Half-*** rookie attempt at a spending order:

1. HSA
It loses tax protections (as far as I understand) at the death of both spouses.
Not only that, if passed on to kids, it becomes immediately taxable as income - which is scary! No RMD based on beneficiary's age, like IRAs!!

You have been saving up medical receipts for the past 30 years - right?

This is a significant trade-off! You will lose the tax-free growth for the duration of your retirement draw-down years! However, it will lose those tax-free growth aspects anyway once both spouses die, AND will immediately become taxable as ordinary income for the beneficiary (losing ALL tax-free growth benefits accumulated so far).

It is also possible to do a more graduated approach. Save all medical receipts. Submit them after one spouse dies and use that money for living. Continue using the money for all medical expenses (AND medicare premium) from that point onwards. Somehow, however, I don't trust my DW to be able to execute such complicated financial maneuvers correctly in case she ends up being the surviving spouse. So this would be a no-go for us.

2. Taxable
Any growth in this is taxable, so no reason to carry it for the long term unless you have too much anyway.

3. Social Security Money
Keep it in a separate individual account and don't mix with any other funds, including your spouses SS funds.
This money has more creditor protections that normal "taxable" money lacks.
I'll probably use it as spending money after HSA/taxable.

4. 401k up to some income tax threshold.
You will hopefully have some 0-marginal-tax space to get some 401k money. If you don't need this after HSA/Taxable - then do a Roth rollover instead.
RMD's may force your hand on this.

5. Roth

There are special situations in which this order will change. e.g. Yours truly plans to fund an SNT/SSNT. It seems that is best funded with after-tax money. Maybe it will be most tax efficient for us to NOT use our taxable money for living expenses in retirement, leave it aside for SNT/SSNT and spend first from 401k/Roth.

The order might also look different if you are not concerned at all about that tax efficiency or size of any legacy you happen to leave behind once you die.
Last edited by ctuser1 on Tue Jun 18, 2019 10:51 am, edited 1 time in total.

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BolderBoy
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by BolderBoy » Tue Jun 18, 2019 10:49 am

To answer the question posed in your subject:

Until you are on Medicare (MC), contribute as much as possible per year to your HSA. Do this without regard to any other investing you are doing. To the extent possible, pay all current bills out of after tax income and save all medically-related receipts going forward. Once MC starts, begin draining the HSA (for MC premiums, etc) going forward. If at any time along the way toward getting on MC, additional spendable funds are needed and unavailable from the usual sources (emergency funds, non-retirement savings, etc), use some of the accumulated medically-related receipts to write yourself a "reimbursement" check from the HSA account for those amounts. Keep good records just in case of an IRS challenge.

As you grow older, your medical expenditures will grow so your HSA will come in quite handy.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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markcoop
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Tue Jun 18, 2019 11:09 am

Maybe my question can be simplified. Assuming all my tax-advantaged accounts (401K, 403B, Roth IRAs, HSAs) are all equal as far as choices and fees (just making this assumption to clarify the choice), then would it be adviseable to first max out everything listed above before paying medical bills with out of pocket money(instead of from the HSA)? In my case, being over 50, that is $64K for the accounts other than the HSA. In other words, if I have 64K to invest, should I max out the 401K, 403B, and Roth IRAs and pay any medical bills from the HSA? If I have future medical bills, they can be paid using money from the 401K, 403B, and Roth IRAs (using Roth contributions prior to retirement). Any money above 64K can be used for medical bills. Is that what people are saying?
Mark

PeterParker
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by PeterParker » Tue Jun 18, 2019 11:26 am

I don't know. I think people are overestimating the 'needle moved' by not spending the HSA right away when possible.

You're already getting the biggest tax break --- no taxes ever on principal.

Otherwise it might be 5% gain rate, which would otherwise be taxed at maybe 25% .... that's 1% of money drawn out from HSA as opposed to a taxable spend.

I guess it makes sense to leave it in. I would say there is real possibility in retirement if you amass $100k in HSA nest -- despite "hoping to get cancer" or something --- if you have good medical insurance, it may literally IMPOSSIBLE to spend that down and realize the true tax benefits on principal.

You will have to treat it as retirement IRA, which is a massive loss, or if you croak, it will also be taxed.

I think it's good to let it built but if you draw on it for medical expenses from time to time, you realized 95% of the big tax break, no foul.

ctuser1
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by ctuser1 » Tue Jun 18, 2019 11:40 am

markcoop wrote:
Tue Jun 18, 2019 11:09 am
Maybe my question can be simplified. Assuming all my tax-advantaged accounts (401K, 403B, Roth IRAs, HSAs) are all equal as far as choices and fees (just making this assumption to clarify the choice), then would it be adviseable to first max out everything listed above before paying medical bills with out of pocket money(instead of from the HSA)? In my case, being over 50, that is $64K for the accounts other than the HSA. In other words, if I have 64K to invest, should I max out the 401K, 403B, and Roth IRAs and pay any medical bills from the HSA? If I have future medical bills, they can be paid using money from the 401K, 403B, and Roth IRAs (using Roth contributions prior to retirement). Any money above 64K can be used for medical bills. Is that what people are saying?
Apologies, I jumped the gun to answer the "spending" question per your subject, where you are asking more of a "saving" question.

Assumptions:
401k + 403B + Roth = $64k.
HSA = $7k
All of the above are before tax.
Marginal tax rate (effective, i.e. state + federal) = ~25%. For simplicity - let's assume this to be the case in retirement as well. This is not far fetched if you have been saving $50k for a long time.

Medical bill = $7k.

Scenario 1 - you pay medical bill from HSA.
Tax deferred savings left = $64k.

Scenario 2 - you use taxable funds for medical bill.
You need $9k tax deferred to pay for $7k after tax, i.e. you have $2k less you can afford.
So, in this scenario, you save "only" $55k in all non-HSA accounts, AND have $7k in HSA.

Fast forward 30 years. For simplicity, let's assume your returns are the same in all accounts, and that the money has increased tenfold by now.

Scenario 1:
you have $640k in tax deferred accounts. You owe 25% taxes on this money. i.e. you effectively have $480k to spend.

scenario 2
you have $550k in tax deferred account. You owe 25% taxes on this money. i.e. you effectively have $412.5k to spend.
From HSA, you have $70k tax free. i.e. total money available to spend: $492.5k.

i.e. you come out $12.5k ahead in scenario 2.

There are many complicating factors that will come in. In all but the most extreme scenarios, you will come out ahead by saving in HSA *before* you max out 401k, paying medical bills from taxable, AND saving $2k (or whatever tax amount necessary) less in tax advantaged accounts.

Did I understand your question this time and answer correctly?

ctuser1
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by ctuser1 » Tue Jun 18, 2019 11:44 am

PeterParker wrote:
Tue Jun 18, 2019 11:26 am
I don't know. I think people are overestimating the 'needle moved' by not spending the HSA right away when possible.

You're already getting the biggest tax break --- no taxes ever on principal.

Otherwise it might be 5% gain rate, which would otherwise be taxed at maybe 25% .... that's 1% of money drawn out from HSA as opposed to a taxable spend.

I guess it makes sense to leave it in. I would say there is real possibility in retirement if you amass $100k in HSA nest -- despite "hoping to get cancer" or something --- if you have good medical insurance, it may literally IMPOSSIBLE to spend that down and realize the true tax benefits on principal.

You will have to treat it as retirement IRA, which is a massive loss, or if you croak, it will also be taxed.

I think it's good to let it built but if you draw on it for medical expenses from time to time, you realized 95% of the big tax break, no foul.
>>I don't know. I think people are overestimating the 'needle moved' by not spending the HSA right away when possible.

If you *can* spend HSA today, then you have medical bills today that you need to pay.

Just keep digital copy of EOB and receipts, but don't submit today.
In 30 years, submit these bills when the HSA has had the benefit of tax-free compounded growth.

The benefits will be substantial if the compounded growth is substantial (which it should be).

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Flobes
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by Flobes » Tue Jun 18, 2019 11:56 am

BolderBoy wrote:
Tue Jun 18, 2019 10:49 am
To answer the question posed in your subject:

Until you are on Medicare (MC), contribute as much as possible per year to your HSA. Do this without regard to any other investing you are doing. To the extent possible, pay all current bills out of after tax income and save all medically-related receipts going forward. Once MC starts, begin draining the HSA (for MC premiums, etc) going forward. If at any time along the way toward getting on MC, additional spendable funds are needed and unavailable from the usual sources (emergency funds, non-retirement savings, etc), use some of the accumulated medically-related receipts to write yourself a "reimbursement" check from the HSA account for those amounts. Keep good records just in case of an IRS challenge.

As you grow older, your medical expenditures will grow so your HSA will come in quite handy.
Bolder Boy nailed it!

One more thing: If you retire before Medicare, and purchase health insurance via ACA Exchange, your HSA may help you qualify for subsidies. You can flow cash from your HSA based on prior years' (or decades) receipts, without increasing MAGI.

Also, HSA can be used for COBRA payments in early retirement bridge to Medicare.

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markcoop
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Tue Jun 18, 2019 12:37 pm

ctuser1 wrote:
Tue Jun 18, 2019 11:40 am
markcoop wrote:
Tue Jun 18, 2019 11:09 am
Maybe my question can be simplified. Assuming all my tax-advantaged accounts (401K, 403B, Roth IRAs, HSAs) are all equal as far as choices and fees (just making this assumption to clarify the choice), then would it be adviseable to first max out everything listed above before paying medical bills with out of pocket money(instead of from the HSA)? In my case, being over 50, that is $64K for the accounts other than the HSA. In other words, if I have 64K to invest, should I max out the 401K, 403B, and Roth IRAs and pay any medical bills from the HSA? If I have future medical bills, they can be paid using money from the 401K, 403B, and Roth IRAs (using Roth contributions prior to retirement). Any money above 64K can be used for medical bills. Is that what people are saying?
Apologies, I jumped the gun to answer the "spending" question per your subject, where you are asking more of a "saving" question.

Assumptions:
401k + 403B + Roth = $64k.
HSA = $7k
All of the above are before tax.
Marginal tax rate (effective, i.e. state + federal) = ~25%. For simplicity - let's assume this to be the case in retirement as well. This is not far fetched if you have been saving $50k for a long time.

Medical bill = $7k.

Scenario 1 - you pay medical bill from HSA.
Tax deferred savings left = $64k.

Scenario 2 - you use taxable funds for medical bill.
You need $9k tax deferred to pay for $7k after tax, i.e. you have $2k less you can afford.
So, in this scenario, you save "only" $55k in all non-HSA accounts, AND have $7k in HSA.

Fast forward 30 years. For simplicity, let's assume your returns are the same in all accounts, and that the money has increased tenfold by now.

Scenario 1:
you have $640k in tax deferred accounts. You owe 25% taxes on this money. i.e. you effectively have $480k to spend.

scenario 2
you have $550k in tax deferred account. You owe 25% taxes on this money. i.e. you effectively have $412.5k to spend.
From HSA, you have $70k tax free. i.e. total money available to spend: $492.5k.

i.e. you come out $12.5k ahead in scenario 2.

There are many complicating factors that will come in. In all but the most extreme scenarios, you will come out ahead by saving in HSA *before* you max out 401k, paying medical bills from taxable, AND saving $2k (or whatever tax amount necessary) less in tax advantaged accounts.

Did I understand your question this time and answer correctly?

ok...Nice analysis. A few small mistakes that actually will demonstrate my point.

1) "All of the above are before tax." - Not actually true as some of the money was Roth money that would have been contributed post-tax. However, no harm on that point. We can assume all is tax-deffered for this example.

2) "You need $9k tax deferred to pay for $7k after tax, i.e. you have $2k less you can afford." - Well, not exactly. You need $9,333.33 to pay $7K after tax in the 25% tax-bracket. That leaves $54,666.67 in the tax-deffered. At 10X and after taxes, that leaves $410K to spend. So you were over by $2.5K above.

3) " i.e. total money available to spend: $492.5k." When you added $412.5K to $70K, you got $10K too much. Should have been $482.5K in your example.

So, with the 2.5K in my point 2 and the $10K in my point 3, you have your outcome of $12.5 ahead in scenario 2. In other words, they came out the same! That is my point. If you have a choice, why restrict to medical in an HSA with all that record keeping when it would come out the same to just put it in other tax-advantaged accounts.

Flobes - your point is valid about ACA Exchange and your HSA helping you qualify for subsidies. At the moment, though, this does not apply to me. Not sure this advantage outweighs the disadvantages but it may.
Mark

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FiveK
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by FiveK » Tue Jun 18, 2019 1:00 pm

markcoop wrote:
Tue Jun 18, 2019 12:37 pm
In other words, they came out the same!
Need to start both scenarios with the same pre-tax amounts to get apples v. apples.

If one assumes $64K to pre-tax non-HSA (401k, etc.), $7K to an HSA, and a $7K medical bill, that's $64K + $7K + $7K/0.75 = $80,333.33.

If the medical bill is paid after tax, that leaves $64K in the pre-tax non-HSA, $7K in the HSA, and $0 in taxable. 10X growth and 25% tax on the non-HSA withdrawals leaves $480K + $70K = $550K.

If the medical bill is paid through the HSA, that leaves $64K in the pre-tax non-HSA, $0 in the HSA, and $7K in taxable. 10X growth and 25% tax on the non-HSA tax advantaged accounts leaves $480K from those, but the taxable account won't get 10X growth due to tax drag. This option will be worse by the amount of annual tax drag on dividends, interest, etc., and capital gains tax on withdrawals.

It's a similar analysis to that in Maxing out your retirement accounts.

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markcoop
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Tue Jun 18, 2019 1:23 pm

FiveK wrote:
Tue Jun 18, 2019 1:00 pm
markcoop wrote:
Tue Jun 18, 2019 12:37 pm
In other words, they came out the same!
Need to start both scenarios with the same pre-tax amounts to get apples v. apples.

If one assumes $64K to pre-tax non-HSA (401k, etc.), $7K to an HSA, and a $7K medical bill, that's $64K + $7K + $7K/0.75 = $80,333.33.

If the medical bill is paid after tax, that leaves $64K in the pre-tax non-HSA, $7K in the HSA, and $0 in taxable. 10X growth and 25% tax on the non-HSA withdrawals leaves $480K + $70K = $550K.

If the medical bill is paid through the HSA, that leaves $64K in the pre-tax non-HSA, $0 in the HSA, and $7K in taxable. 10X growth and 25% tax on the non-HSA tax advantaged accounts leaves $480K from those, but the taxable account won't get 10X growth due to tax drag. This option will be worse by the amount of annual tax drag on dividends, interest, etc., and capital gains tax on withdrawals.

It's a similar analysis to that in Maxing out your retirement accounts.
Sure. You are comparing paying from taxable vs paying from the HSA. I agree with your analysis. I was comparing paying from money that would have been used for a tax-advantaged account vs paying from the HSA. In that case, there is no taxable drag resulting in the same result.

My whole point here is once the money is in the HSA, it is just like any other tax-advantaged account if used for medical bills. If you can max out all your tax-advantaged space and save in an HSA, all the power to you. But if you can't, like most people, you have to make choices. For my case, I prefer money sitting in my 401K and Roth over my HSA. However, my wife's lousy 403B comes in last place in my savings choices.
Mark

ctuser1
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by ctuser1 » Tue Jun 18, 2019 1:27 pm

markcoop wrote:
Tue Jun 18, 2019 12:37 pm
ok...Nice analysis. A few small mistakes that actually will demonstrate my point.

1) "All of the above are before tax." - Not actually true as some of the money was Roth money that would have been contributed post-tax. However, no harm on that point. We can assume all is tax-deffered for this example.

2) "You need $9k tax deferred to pay for $7k after tax, i.e. you have $2k less you can afford." - Well, not exactly. You need $9,333.33 to pay $7K after tax in the 25% tax-bracket. That leaves $54,666.67 in the tax-deffered. At 10X and after taxes, that leaves $410K to spend. So you were over by $2.5K above.

3) " i.e. total money available to spend: $492.5k." When you added $412.5K to $70K, you got $10K too much. Should have been $482.5K in your example.

So, with the 2.5K in my point 2 and the $10K in my point 3, you have your outcome of $12.5 ahead in scenario 2. In other words, they came out the same! That is my point. If you have a choice, why restrict to medical in an HSA with all that record keeping when it would come out the same to just put it in other tax-advantaged accounts.

Flobes - your point is valid about ACA Exchange and your HSA helping you qualify for subsidies. At the moment, though, this does not apply to me. Not sure this advantage outweighs the disadvantages but it may.
Valid point. If I did not mess up my math (da** fat-fingers) - it would have come out the same in both scenarios as they were set up! I have to think a bit more on the tax-deferred vs. HSA comparison.

It's easy to show, however, that HSA *should* come out ahead of Roth, as you would pay no taxes putting the money in.

Let's set it up as follows:

Scenario 1
$64k in tax deferred (50k) + Roth ($14k).
You save pay $7k in medical bills using $7k in HSA. Nothing left here.

@10X, you will have 500k tax deferred, and 140k tax-free in 30 years.

Scenario 2
You save 50k tax deferred, $7k in Roth and $7k in HSA.
You use the other $7k that you would have saved in Roth to pay for the medical bills.
This would result in a tax saving of $1.75k at tax time, since HSA goes in tax free, whereas Roth does not.
Let's assume you plowed this money back into Roth (since you have run out of space in HSA).
i.e. updated savings are $50k Tax Deferred, $8.75k Roth, $7k HSA.

@10X, you will have $500k tax deferred, $87.5k roth, and $70k HSA.

You are ahead by $17.5k tax free money (with tax free growth) in Roth.

So, strictly going by the simplified assumptions above, you should probably fund HSA before Roth. However, I don't think that is the correct choice in the real world. You want money in both types of accounts - tax deferred and tax sheltered for situations like the ACA eligibility that a poster above mentioned.

Usually, tax deferred is much larger, providing you with much less wiggle room in retirement. If you increase Roth + HSA, and decrease the 401k instead, you can potentially have much more options in retirement.

Your point about increased paperwork is valid. If you streamline things, however, it is really fast. I have a NAS (with replication) set up. I scan receipts in a specific folder with a naming convention that includes a lot of details - including date, provider, amount etc. Total effort is usually < 15 minutes every month.

This is the receipt scanning side of things. Submission can be similarly simple (I have a limited FSA by same provider - for dental/vision - so I know exact process). I can submit ALL my receipts for last 10 years if I spend half a day!!

To be honest - I only keep the paperwork for larger receipts, not the $1.50 Vitamin D pills!!

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by FiveK » Tue Jun 18, 2019 1:35 pm

markcoop wrote:
Tue Jun 18, 2019 1:23 pm
My whole point here is once the money is in the HSA, it is just like any other tax-advantaged account if used for medical bills.
But it isn't. :)

$7K pre-tax into an HSA, and growth therefrom, never gets taxed if used for medical bills.

$7K pre-tax into a tIRA, and growth therefrom, is taxed on withdrawal.

To get $7K into a Roth takes $9333.33 pre-tax, not $7K.

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Tue Jun 18, 2019 1:37 pm

ctuser1 wrote:
Tue Jun 18, 2019 1:27 pm
markcoop wrote:
Tue Jun 18, 2019 12:37 pm
ok...Nice analysis. A few small mistakes that actually will demonstrate my point.

1) "All of the above are before tax." - Not actually true as some of the money was Roth money that would have been contributed post-tax. However, no harm on that point. We can assume all is tax-deffered for this example.

2) "You need $9k tax deferred to pay for $7k after tax, i.e. you have $2k less you can afford." - Well, not exactly. You need $9,333.33 to pay $7K after tax in the 25% tax-bracket. That leaves $54,666.67 in the tax-deffered. At 10X and after taxes, that leaves $410K to spend. So you were over by $2.5K above.

3) " i.e. total money available to spend: $492.5k." When you added $412.5K to $70K, you got $10K too much. Should have been $482.5K in your example.

So, with the 2.5K in my point 2 and the $10K in my point 3, you have your outcome of $12.5 ahead in scenario 2. In other words, they came out the same! That is my point. If you have a choice, why restrict to medical in an HSA with all that record keeping when it would come out the same to just put it in other tax-advantaged accounts.

Flobes - your point is valid about ACA Exchange and your HSA helping you qualify for subsidies. At the moment, though, this does not apply to me. Not sure this advantage outweighs the disadvantages but it may.
Valid point. If I did not mess up my math (da** fat-fingers) - it would have come out the same in both scenarios as they were set up! I have to think a bit more on the tax-deferred vs. HSA comparison.

It's easy to show, however, that HSA *should* come out ahead of Roth, as you would pay no taxes putting the money in.

Let's set it up as follows:

Scenario 1
$64k in tax deferred (50k) + Roth ($14k).
You save pay $7k in medical bills using $7k in HSA. Nothing left here.

@10X, you will have 500k tax deferred, and 140k tax-free in 30 years.

Scenario 2
You save 50k tax deferred, $7k in Roth and $7k in HSA.
You use the other $7k that you would have saved in Roth to pay for the medical bills.
This would result in a tax saving of $1.75k at tax time, since HSA goes in tax free, whereas Roth does not.
Let's assume you plowed this money back into Roth (since you have run out of space in HSA).
i.e. updated savings are $50k Tax Deferred, $8.75k Roth, $7k HSA.

@10X, you will have $500k tax deferred, $87.5k roth, and $70k HSA.

You are ahead by $17.5k tax free money (with tax free growth) in Roth.

So, strictly going by the simplified assumptions above, you should probably fund HSA before Roth. However, I don't think that is the correct choice in the real world. You want money in both types of accounts - tax deferred and tax sheltered for situations like the ACA eligibility that a poster above mentioned.

Usually, tax deferred is much larger, providing you with much less wiggle room in retirement. If you increase Roth + HSA, and decrease the 401k instead, you can potentially have much more options in retirement.

Your point about increased paperwork is valid. If you streamline things, however, it is really fast. I have a NAS (with replication) set up. I scan receipts in a specific folder with a naming convention that includes a lot of details - including date, provider, amount etc. Total effort is usually < 15 minutes every month.

This is the receipt scanning side of things. Submission can be similarly simple (I have a limited FSA by same provider - for dental/vision - so I know exact process). I can submit ALL my receipts for last 10 years if I spend half a day!!

To be honest - I only keep the paperwork for larger receipts, not the $1.50 Vitamin D pills!!
I am not sure I followed what you have above, but I am pretty sure the Roth will yield the same result at the end as well, assuming tax rates stay the same.
Mark

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by ctuser1 » Tue Jun 18, 2019 1:46 pm

markcoop wrote:
Tue Jun 18, 2019 1:37 pm
I am not sure I followed what you have above, but I am pretty sure the Roth will yield the same result at the end as well, assuming tax rates stay the same.
Everything hinges on this part: "This would result in a tax saving of $1.75k at tax time, since HSA goes in tax free, whereas Roth does not."

If you agree to this, everything else follows!!

To simplify, assume you have only $7k in put either in HSA or Roth. Everything else is the same.

If you put it in Roth - you will pay taxes on this money = $1.75k, @25% on $7k. If you put it in HSA instead, you will save this $1.75k since HSA is tax free going in!!

$1.75k saving now -> @10X in 30 years -> $17.5k.

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Tue Jun 18, 2019 2:08 pm

FiveK wrote:
Tue Jun 18, 2019 1:35 pm
markcoop wrote:
Tue Jun 18, 2019 1:23 pm
My whole point here is once the money is in the HSA, it is just like any other tax-advantaged account if used for medical bills.
But it isn't. :)

$7K pre-tax into an HSA, and growth therefrom, never gets taxed if used for medical bills.

$7K pre-tax into a tIRA, and growth therefrom, is taxed on withdrawal.

To get $7K into a Roth takes $9333.33 pre-tax, not $7K.
Look at it this way - assuming I put the money into the HSA, no matter how I pay for current medical bills, I received the benefit of the tax-free contribution into the HSA. If I pay for it from the HSA, that money loses any more tax benefit, but I gain an extra tax benefit from money I now have available to put into a 401K or Roth. If I pay for it from taxable with money that would have went into a 401K or Roth, then the HSA gets the extra tax benefit.

Let's go back to the example with two scenarios. After correcting for the math errors, doesn't that show they come out the same? If not, please point out what is wrong. You did mention that "Need to start both scenarios with the same pre-tax amounts to get apples v. apple". But that was the whole point of ctuser1 saying "You need $9k tax deferred to pay for $7k after tax, i.e. you have $2k less you can afford" in the example.
Mark

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Tue Jun 18, 2019 2:15 pm

ctuser1 wrote:
Tue Jun 18, 2019 1:46 pm
markcoop wrote:
Tue Jun 18, 2019 1:37 pm
I am not sure I followed what you have above, but I am pretty sure the Roth will yield the same result at the end as well, assuming tax rates stay the same.
Everything hinges on this part: "This would result in a tax saving of $1.75k at tax time, since HSA goes in tax free, whereas Roth does not."

If you agree to this, everything else follows!!

To simplify, assume you have only $7k in put either in HSA or Roth. Everything else is the same.

If you put it in Roth - you will pay taxes on this money = $1.75k, @25% on $7k. If you put it in HSA instead, you will save this $1.75k since HSA is tax free going in!!

$1.75k saving now -> @10X in 30 years -> $17.5k.
Ok...looked closer. What you are forgetting about is that in scenario 1 you did save on the money you put into the HSA and then spent. You got a tax benefit there that is not part of your calculations. If you factor it in, they come out the same.
Mark

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by ctuser1 » Tue Jun 18, 2019 2:30 pm

markcoop wrote:
Tue Jun 18, 2019 2:15 pm
Ok...looked closer. What you are forgetting about is that in scenario 1 you did save on the money you put into the HSA and then spent. You got a tax benefit there that is not part of your calculations. If you factor it in, they come out the same.
That is a good point!

If you "spent" that tax benefit in both scenario 1 and scenario 2 - you are even!! In that case, the additional $1.75k in Roth should not exist.

If you had "saved" that tax benefit - scenario 2 is better. In scenario 1, you have no more room on Roth to save $1.75k more. You save in taxable, and pay taxes on the growth (9X1.75X0.25= ~$4k).

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by Artsdoctor » Tue Jun 18, 2019 3:04 pm

PeterParker wrote:
Tue Jun 18, 2019 11:26 am
I don't know. I think people are overestimating the 'needle moved' by not spending the HSA right away when possible.

You're already getting the biggest tax break --- no taxes ever on principal.

Otherwise it might be 5% gain rate, which would otherwise be taxed at maybe 25% .... that's 1% of money drawn out from HSA as opposed to a taxable spend.

I guess it makes sense to leave it in. I would say there is real possibility in retirement if you amass $100k in HSA nest -- despite "hoping to get cancer" or something --- if you have good medical insurance, it may literally IMPOSSIBLE to spend that down and realize the true tax benefits on principal.

You will have to treat it as retirement IRA, which is a massive loss, or if you croak, it will also be taxed.

I think it's good to let it built but if you draw on it for medical expenses from time to time, you realized 95% of the big tax break, no foul.
As someone who works with patients on Medicare every working day, I can assure you that there are many, many medical expenses which Medicare (or the secondary insurance) will not cover. It is true that there are many seniors who are extraordinarily healthy and require very little medical care, even in very late retirement. However, it is more likely that people require increasing levels of medical care with advancing age.

There are smaller ticket items to consider, of course. Your HSA will be able to pay for your Medicare premiums throughout retirement. You can pay for all of your deductibles and co-pays. And don't forget, you can reimburse yourself for medical expenses you've incurred throughout your working years after you established your HSA as long as you've saved the receipts.

But the big ticket items should not be underestimated. The elephant in the room in nursing home expense--that comes out of savings, not Medicare. Unless you're going to pay for nursing home expenses through Medicaid, you can expect to pay several thousand dollars per month in nursing home expenses. That balance of $100,000 will evaporate relatively quickly if you have the misfortune of requiring a nursing home at some point. And if you don't have the money, it's possible that family members may feel obligated to help you out so "it's not just about you."

There are things that can be done at home following a hospital stay (IV antibiotics, for example) which will not be fully covered although Medicare will pay for the whole bill if you're placed in a skilled nursing facility (a nursing home) for course of treatment. It's very, very sad to tell someone who's vibrant that they're going to be spending 4-6 weeks in a nursing home for IV antibiotics because of limitations in Medicare payments.

And don't forget dental expenses. Talk to someone who's had implants in an attempt to avoid dentures. Caps, root canals, implants--that's thousands of dollars which won't be touched my Medicare. And hearing aids . . . We're not talking about lunch money here.

At the very worst, you don't spend all of your HSA. Your spouse can inherit it. If there's no spouse, then name a charity as a beneficiary--no taxes will be owed. And if you were going to give something to the charity anyway, you can donate the HSA and have more of your taxable account left over for any family member or friend you'd like.

There are many reasons to prefer one savings vehicle over another. But to think that you couldn't possibly spend $100,000 throughout your retirement on health care expenses is definitely not one of them.

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Tue Jun 18, 2019 3:14 pm

Artsdoctor wrote:
Tue Jun 18, 2019 3:04 pm
There are many reasons to prefer one savings vehicle over another. But to think that you couldn't possibly spend $100,000 throughout your retirement on health care expenses is definitely not one of them.
Lots of great points in your post. I am not questioning the need to save (or maybe even insure) for such events. I am questioning the need for it to be in an HSA when you have other tax-advantaged space available. Perhaps a point can be made that having the money in a separate health bucket nudges people not to use it for other reasons. But that would be simply mental accounting.
Mark

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by brianH » Tue Jun 18, 2019 3:27 pm

Artsdoctor wrote:
Tue Jun 18, 2019 3:04 pm
And don't forget, you can reimburse yourself for medical expenses you've incurred throughout your working years after you established your HSA as long as you've saved the receipts.
Though I certainly don't have a crystal ball, I have a hard time believing that this 'trick' will always be available. A 1040X will only be accepted for 3 years back, and I would wager that some similar time limit will be imposed on HSA expenses. After all, how could you really prove a 20 year old receipt from a now-defunct medical provider was legitimate?

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by Hector » Tue Jun 18, 2019 3:49 pm

Equities are tax efficient. For someone with small non retirement accounts and not enough capital loss carryover, does it make sense to forgo ROTH contribution in favor of taxable?

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by Artsdoctor » Tue Jun 18, 2019 4:08 pm

brianH wrote:
Tue Jun 18, 2019 3:27 pm
Artsdoctor wrote:
Tue Jun 18, 2019 3:04 pm
And don't forget, you can reimburse yourself for medical expenses you've incurred throughout your working years after you established your HSA as long as you've saved the receipts.
Though I certainly don't have a crystal ball, I have a hard time believing that this 'trick' will always be available. A 1040X will only be accepted for 3 years back, and I would wager that some similar time limit will be imposed on HSA expenses. After all, how could you really prove a 20 year old receipt from a now-defunct medical provider was legitimate?
Planning for the future is always challenging. Rules change, to be sure.

However, unless there is legislation which is actively ongoing about a specific topic, you can really only make the best decisions based on the laws that currently exist. For now, we are all permitted to reimburse ourselves for medical expenses in the distant past from our HSAs. The only thing we're obligated to do is to provide a receipt and an itemized bill.

How one saves to pay for medical expenses in the future is a very broad enterprise. However, I have been reading posts dating back several years written by very hopeful people that savers can have "too much money" in an HSA. As a healthcare provider dealing with the financial limitations of the current system more than I'd prefer, I can only share my professional experiences by warning people that you just can't have "too much" money set aside for medical expenses if you're anticipating a lengthy retirement. I would have no argument whatsoever if someone has to choose between a Roth and an HSA--and opts for the Roth, for example; however, if you have an opportunity to contribute to all types of investment accounts to the maximal accounts, I am going to bet that you will not be sorry. If you can afford to contribute maximally to your HSA and not withdraw much until retirement, I find it hard to imagine that you'll regret it.

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by FiveK » Tue Jun 18, 2019 8:43 pm

markcoop wrote:
Tue Jun 18, 2019 2:08 pm
FiveK wrote:
Tue Jun 18, 2019 1:35 pm
markcoop wrote:
Tue Jun 18, 2019 1:23 pm
My whole point here is once the money is in the HSA, it is just like any other tax-advantaged account if used for medical bills.
But it isn't. :)

$7K pre-tax into an HSA, and growth therefrom, never gets taxed if used for medical bills.

$7K pre-tax into a tIRA, and growth therefrom, is taxed on withdrawal.

To get $7K into a Roth takes $9333.33 pre-tax, not $7K.
Look at it this way - assuming I put the money into the HSA, no matter how I pay for current medical bills, I received the benefit of the tax-free contribution into the HSA. If I pay for it from the HSA, that money loses any more tax benefit, but I gain an extra tax benefit from money I now have available to put into a 401K or Roth. If I pay for it from taxable with money that would have went into a 401K or Roth, then the HSA gets the extra tax benefit.

Let's go back to the example with two scenarios. After correcting for the math errors, doesn't that show they come out the same? If not, please point out what is wrong. You did mention that "Need to start both scenarios with the same pre-tax amounts to get apples v. apple". But that was the whole point of ctuser1 saying "You need $9k tax deferred to pay for $7k after tax, i.e. you have $2k less you can afford" in the example.
Need to start both scenarios with the same pre-tax amounts to get apples v. apples.

If one assumes $64K to pre-tax non-HSA (401k, etc.), $7K to an HSA, and a $7K medical bill, that's $64K + $7K + $7K/0.75 = $80,333.33.

a) If the medical bill is paid after tax, that leaves $64K in the pre-tax non-HSA, $7K in the HSA, and $0 in taxable. 10X growth and 25% tax on the non-HSA withdrawals leaves $480K + $70K = $550K.

b) If the medical bill is paid through the HSA, that leaves $64K in the pre-tax non-HSA, $0 in the HSA, and $7K in taxable. 10X growth and 25% tax on the non-HSA tax advantaged accounts leaves $480K from those, but the taxable account won't get 10X growth due to tax drag. This option will be worse by the amount of annual tax drag on dividends, interest, etc., and capital gains tax on withdrawals.

c) If the medical bill is paid by contributing less to the 401k, that leaves $54.667K in the pre-tax non-HSA, $7K in the HSA, and $7K in taxable. 10X growth and 25% tax on the non-HSA tax advantaged accounts leaves $410K from those, plus $70K from the HSA for the same $480K in option b). But, again, the taxable account won't get 10X growth due to tax drag. This option will be worse than option a) by the amount of annual tax drag on dividends, interest, etc., and capital gains tax on withdrawals.

Is there another option?

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by FiveK » Tue Jun 18, 2019 10:04 pm

One can also look at things from a scarcity perspective, instead of the abundance perspective used previously.

If finances are very tight (no savings, $7K pre-tax income above what is need for food, etc.), and an unexpected $7K medical bill arrives, the best way to pay that is to run $7K through the HSA.

If one has $9333.33 pre-tax income above what is need for food, etc., and an unexpected $7K medical bill arrives, pay it through the HSA and put $2333.33 into a tax-advantaged account, rather than do anything taxable.

As extra pre-tax income becomes $10K, $20K, etc., keep filling those tax-advantaged accounts. When the tax-advantaged accounts are full, and you have enough extra to pay the medical bill, then pay it with post-tax dollars and leave the tax-advantaged balances to grow. This is the situation analyzed previously.

This all seems consistent with, for example, the suggestions in Investment Order to fund the HSA first. If one doesn't do so, then there is no $7K in the HSA to use when that unexpected bill arrives.

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Tue Jun 18, 2019 10:08 pm

FiveK wrote:
Tue Jun 18, 2019 8:43 pm
markcoop wrote:
Tue Jun 18, 2019 2:08 pm
FiveK wrote:
Tue Jun 18, 2019 1:35 pm
markcoop wrote:
Tue Jun 18, 2019 1:23 pm
My whole point here is once the money is in the HSA, it is just like any other tax-advantaged account if used for medical bills.
But it isn't. :)

$7K pre-tax into an HSA, and growth therefrom, never gets taxed if used for medical bills.

$7K pre-tax into a tIRA, and growth therefrom, is taxed on withdrawal.

To get $7K into a Roth takes $9333.33 pre-tax, not $7K.
Look at it this way - assuming I put the money into the HSA, no matter how I pay for current medical bills, I received the benefit of the tax-free contribution into the HSA. If I pay for it from the HSA, that money loses any more tax benefit, but I gain an extra tax benefit from money I now have available to put into a 401K or Roth. If I pay for it from taxable with money that would have went into a 401K or Roth, then the HSA gets the extra tax benefit.

Let's go back to the example with two scenarios. After correcting for the math errors, doesn't that show they come out the same? If not, please point out what is wrong. You did mention that "Need to start both scenarios with the same pre-tax amounts to get apples v. apple". But that was the whole point of ctuser1 saying "You need $9k tax deferred to pay for $7k after tax, i.e. you have $2k less you can afford" in the example.
Need to start both scenarios with the same pre-tax amounts to get apples v. apples.

If one assumes $64K to pre-tax non-HSA (401k, etc.), $7K to an HSA, and a $7K medical bill, that's $64K + $7K + $7K/0.75 = $80,333.33.

a) If the medical bill is paid after tax, that leaves $64K in the pre-tax non-HSA, $7K in the HSA, and $0 in taxable. 10X growth and 25% tax on the non-HSA withdrawals leaves $480K + $70K = $550K.

b) If the medical bill is paid through the HSA, that leaves $64K in the pre-tax non-HSA, $0 in the HSA, and $7K in taxable. 10X growth and 25% tax on the non-HSA tax advantaged accounts leaves $480K from those, but the taxable account won't get 10X growth due to tax drag. This option will be worse by the amount of annual tax drag on dividends, interest, etc., and capital gains tax on withdrawals.

c) If the medical bill is paid by contributing less to the 401k, that leaves $54.667K in the pre-tax non-HSA, $7K in the HSA, and $7K in taxable. 10X growth and 25% tax on the non-HSA tax advantaged accounts leaves $410K from those, plus $70K from the HSA for the same $480K in option b). But, again, the taxable account won't get 10X growth due to tax drag. This option will be worse than option a) by the amount of annual tax drag on dividends, interest, etc., and capital gains tax on withdrawals.

Is there another option?
I agree with everything you wrote. Yes, if you want to pay for medical expenses out of taxable, that can yield you the best results. That argument works for me if you are maxing out all you tax-advantaged space. If you are not, then you are really choosing between (b) and (c) because any taxable amount used to pay medical bills could have instead been used to invest in whatever tax-advantaged account you are not maxing out. And that has been my point. Since many are not maxing out every possible tax-advantaged account, then wouldn't it usually be better to pay the bill from the HSA and invest that amount in the tax-advantaged space because there are less requirements in retirement accounts?

I can see some cases where this is not the case - You use the HSA later but before retirement (that can be mitigated by using Roth contributions for medical bills assuming you have enough Roth space), you have a lousy 401K, someone above mentioned using the HSA before retirement can help lower your income and that can help certain situations.
Mark

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by FiveK » Tue Jun 18, 2019 10:15 pm

markcoop wrote:
Tue Jun 18, 2019 10:08 pm
Since many are not maxing out every possible tax-advantaged account, then wouldn't it usually be better to pay the bill from the HSA and invest that amount in the tax-advantaged space because there are less requirements in retirement accounts?
Yes. See post made 4 minutes before yours. :) :beer

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Tue Jun 18, 2019 10:32 pm

FiveK wrote:
Tue Jun 18, 2019 10:15 pm
markcoop wrote:
Tue Jun 18, 2019 10:08 pm
Since many are not maxing out every possible tax-advantaged account, then wouldn't it usually be better to pay the bill from the HSA and invest that amount in the tax-advantaged space because there are less requirements in retirement accounts?
Yes. See post made 4 minutes before yours. :) :beer
Although I like the way you wrote it better. Of course, around here it seems that many do max out every possible tax-advantaged space. Next we can get into some other discussions like is it better pay a bill from an HSA or contribute to a 529 plan?
Mark

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by a5ehren » Wed Jun 19, 2019 8:03 am

I've been spending my HSA as I go along, but I'm young (33) and have a wife/child on a HDHP.

The interest rates for plain cash in my HSA are pathetic (as is normal), and they charge an extra fee for holding funds so you have to have a significant balance to make it worthwhile.

So for now, I use the HSA as a 28% discount on medical expenses when I want to top off the checking account/e-fund. I'll let it accumulate more once we are out of our child-bearing years.

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by FiveK » Wed Jun 19, 2019 10:06 am

a5ehren wrote:
Wed Jun 19, 2019 8:03 am
So for now, I use the HSA as a 28% discount on medical expenses when I want to top off the checking account/e-fund. I'll let it accumulate more once we are out of our child-bearing years.
When you decide to let it accumulate, consider moving the balance to Fidelity or Lively where no extra fees are charged (or any other custodian who does likewise).

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Wed Jun 19, 2019 10:18 am

a5ehren wrote:
Wed Jun 19, 2019 8:03 am
I've been spending my HSA as I go along, but I'm young (33) and have a wife/child on a HDHP.

The interest rates for plain cash in my HSA are pathetic (as is normal), and they charge an extra fee for holding funds so you have to have a significant balance to make it worthwhile.

So for now, I use the HSA as a 28% discount on medical expenses when I want to top off the checking account/e-fund. I'll let it accumulate more once we are out of our child-bearing years.
Are you maxing out HSA contributions and have medical bills equal to at least that whole amount? If not, I would highly suggest maxing out HSA contributions and then let any unused portion accumulate. This is a big feature of these accounts.
Mark

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by PeterParker » Wed Jun 19, 2019 11:15 am

$100,000 throughout your retirement on health care expenses is definitely not one of them.
You made a few key points in your post.
I'll ignore charity. You can almost make "tax free" donations to Charity. That's largely irrelevant honestly.

The crux of your argument is 1, something like a Nursing Home isn't covered by Medicare. Sure. But what percent of adults wind up in nursing homes? All four of my grandparents and only great aunt -- 5/5 did not ever go to a nursing home, though 1/5 did require a part-time helper for medical reasons so perhaps that's something an HSA could be used for.

2 -- well to be honest I haven't looked into it, but assuming Medicare doesn't cover some things/ will be used by default. My Dad is 61 and largely retired (though not collecting SS yet, not possible). But with his rental property income, he qualifies for the ACA and subsidies. He literally pays like $1.00 a month, yes a shiny dollar, and has like a $200 deductible. Not sure if he will somehow be forced into Medicare at some point though.

I can probably say if he had $100k in an HSA, right now, at age 61 --- well honestly he'd probably start drawing from it as an IRA, especially since he has an appetite for further real estate investment. In his hypothetical case, having $100k in post-tax dollars (because he spent the HSA on as-happened medical expenses) --- would have been preferable obviously, though I guess his tax rate wouldn't be very high.


Cash flow is also important.

I think a happy middle ground is probably best. You can contribute $3,500 to an HSA a year. Maybe get it to $20k before you start drawing from it. Then again, honestly, some people are dead by age 60, or even age 40. Shouldn't feel guilty about using it immediately-- again, you're probably capturing 95% of the tax benefit.

megabad
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by megabad » Wed Jun 19, 2019 11:41 am

markcoop wrote:
Tue Jun 18, 2019 10:08 pm
Since many are not maxing out every possible tax-advantaged account, then wouldn't it usually be better to pay the bill from the HSA and invest that amount in the tax-advantaged space because there are less requirements in retirement accounts?
I don't agree with this. The megaposts with numbers were a bit hard to follow, but this statement doesn't follow for me.

If you are able to spend the HSA every year in total, then all the extra requirements vanish instantly as long as you save receipts. It becomes a retirement account that couples BOTH Roth and pre-tax advantages (and possibly payroll tax). Why would anyone want to pay more taxes than they have to?

Ideally, you would spend your HSA money the day you die and no sooner. (as above poster mentioned, you do not want to pass an HSA on). Barring some hypothetical strange tax situation or market happening--this is the only conclusion I can draw.

As I said above, the main (only?) argument against this for me would be to choose an non-HSA non-HDHP plan that had better economics (since you apparently have significantly medical expenses each year).

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by a5ehren » Wed Jun 19, 2019 12:00 pm

markcoop wrote:
Wed Jun 19, 2019 10:18 am
a5ehren wrote:
Wed Jun 19, 2019 8:03 am
I've been spending my HSA as I go along, but I'm young (33) and have a wife/child on a HDHP.

The interest rates for plain cash in my HSA are pathetic (as is normal), and they charge an extra fee for holding funds so you have to have a significant balance to make it worthwhile.

So for now, I use the HSA as a 28% discount on medical expenses when I want to top off the checking account/e-fund. I'll let it accumulate more once we are out of our child-bearing years.
Are you maxing out HSA contributions and have medical bills equal to at least that whole amount? If not, I would highly suggest maxing out HSA contributions and then let any unused portion accumulate. This is a big feature of these accounts.
I'm not maxing out this year, plan to do so after my next solid raise (or new job). I've put my priority the last two years on increasing my 401k contributions, but HSA is next on the list.

Re: Moving the balance, this is through my employer and they're adding $500 to the account. I will definitely roll it out to someone else when I leave.

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FiveK
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by FiveK » Wed Jun 19, 2019 12:27 pm

a5ehren wrote:
Wed Jun 19, 2019 12:00 pm
Re: Moving the balance, this is through my employer and they're adding $500 to the account. I will definitely roll it out to someone else when I leave.
How To Rollover an HSA On Your Own and Avoid Trustee Transfer Fee might be of interest.

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by Artsdoctor » Wed Jun 19, 2019 12:50 pm

PeterParker wrote:
Wed Jun 19, 2019 11:15 am
$100,000 throughout your retirement on health care expenses is definitely not one of them.
You made a few key points in your post.
I'll ignore charity. You can almost make "tax free" donations to Charity. That's largely irrelevant honestly.

The crux of your argument is 1, something like a Nursing Home isn't covered by Medicare. Sure. But what percent of adults wind up in nursing homes? All four of my grandparents and only great aunt -- 5/5 did not ever go to a nursing home, though 1/5 did require a part-time helper for medical reasons so perhaps that's something an HSA could be used for.

2 -- well to be honest I haven't looked into it, but assuming Medicare doesn't cover some things/ will be used by default. My Dad is 61 and largely retired (though not collecting SS yet, not possible). But with his rental property income, he qualifies for the ACA and subsidies. He literally pays like $1.00 a month, yes a shiny dollar, and has like a $200 deductible. Not sure if he will somehow be forced into Medicare at some point though.

I can probably say if he had $100k in an HSA, right now, at age 61 --- well honestly he'd probably start drawing from it as an IRA, especially since he has an appetite for further real estate investment. In his hypothetical case, having $100k in post-tax dollars (because he spent the HSA on as-happened medical expenses) --- would have been preferable obviously, though I guess his tax rate wouldn't be very high.


Cash flow is also important.

I think a happy middle ground is probably best. You can contribute $3,500 to an HSA a year. Maybe get it to $20k before you start drawing from it. Then again, honestly, some people are dead by age 60, or even age 40. Shouldn't feel guilty about using it immediately-- again, you're probably capturing 95% of the tax benefit.
I see where you're coming from. You've been very fortunate to have healthy family members.

I don't think there's any utility in arguing but perhaps there are some points to generally consider. First, I don't quite know how to interpret the comment that your dad "will somehow be forced into Medicare at some point." Yes, your dad will be forced into Medicare at some point. Everyone who is eligible for Medicare will one day be "forced" into Medicare.

Second, the majority of Americans will definitely not need to be in nursing homes for an extended period of time. However, there is a reasonable likelihood that you'll need some sort of assisted coverage if you live long enough. Clearly, retirees in their 60s are far less likely to need assisted care than retirees in their 80s. There is ample information freely available on the statistics. Your genetic make-up may be better than most.

But finally, I think we'd all agree that we'd like to remain in our own homes and be as independent as possible for as long as possible. That might require modifying your home. It might require having visiting nurses. There's an entire world of ancillary care out there which can make retirees' lives better at home and much of that would be considered a medical expense as defined by the IRS (and be paid for out of your HSA). Much of the care will not be covered by Medicare.

Again, it doesn't really matter where the money comes from. What's important is that it's there. I hope you and your family have very healthy lives and you don't need to spend much in healthcare. I hope the same for me. I'm just reminded daily that healthcare as people age can be quite expensive.

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markcoop
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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Wed Jun 19, 2019 3:19 pm

megabad wrote:
Wed Jun 19, 2019 11:41 am
markcoop wrote:
Tue Jun 18, 2019 10:08 pm
Since many are not maxing out every possible tax-advantaged account, then wouldn't it usually be better to pay the bill from the HSA and invest that amount in the tax-advantaged space because there are less requirements in retirement accounts?
I don't agree with this. The megaposts with numbers were a bit hard to follow, but this statement doesn't follow for me.

If you are able to spend the HSA every year in total, then all the extra requirements vanish instantly as long as you save receipts. It becomes a retirement account that couples BOTH Roth and pre-tax advantages (and possibly payroll tax). Why would anyone want to pay more taxes than they have to?

Ideally, you would spend your HSA money the day you die and no sooner. (as above poster mentioned, you do not want to pass an HSA on). Barring some hypothetical strange tax situation or market happening--this is the only conclusion I can draw.

As I said above, the main (only?) argument against this for me would be to choose an non-HSA non-HDHP plan that had better economics (since you apparently have significantly medical expenses each year).
I am not sure I follow what you don't agree with or where you are paying more/less in taxes. Let's make an example as simple as possible. Assume you already have an HSA with a balance of $10K and you are not maxing out your Roth IRAs. You have a $1K medical bill. Let's evaluate two choices that allow you to keep $1K in a tax-advantaged account:

1) Pay the bill out of pocket. Your HSA hasn't changed and continues to grow tax-free.
2) Pay the bill out of your HSA and put $1K into the Roth IRA. Your HSA has $1K less in it, but your Roth IRA has $1K more.

In both cases you spent the same amount out of pocket ($1K). In both cases you have the same amount of money that will grow tax-free. In case 1 it's all in the HSA ($10K) and case 2 has part of it in the HSA ($9K) and part in the Roth IRA (the $1K you contributed).

What I am saying is case 2 can be seen as preferable because there are extra restrictions in case 1 having a larger balance in the HSA such as one that you mentioned - if you die with a balance, all inherited HSA money becomes taxable. To look at it slightly differently with your spend it all on the day you die comment - It is not more advantageous to spend your whole HSA (say $10K) on the day you die vs spend a smaller HSA on the day you die (say $9K) and some from your Roth IRA (say $1K). They are the same, so it comes down to other factors such as less in the HSA would be better if you die with money in the HSA (even though you might be able to withdraw the money tax free before your die doesn't mean you will - you can't predict your death). There could be many other factors. In fact, that was the original purpose of my post, to try to discuss these factors and not blindly say let it grow in the HSA.
Mark

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by Artsdoctor » Wed Jun 19, 2019 4:31 pm

Mark,

The easy part will be contributing to both tax-advantaged accounts. No doubt.
The harder part will be choosing which one to use if you can't use both to fund.

Roths are terrific. I doubt you'd find many people who would argue with you. But you do have to remember that you're funding your Roth with post-tax dollars. Everyone's tax situation will be completely different, but if you're in the 22% federal marginal rate, 5% state marginal rate, and you're paying 7.65% in payroll taxes, you're going to have to "earn" $1,530 to make that $1,000 contribution to your Roth. (You earn $1,530; you pay $337 in federal tax; you pay $77 in state tax; you pay $95 in FICA; and, you pay $22 in Medicare tax. After you pay those taxes, you'll have about $1,000 to do whatever you want with.)

On the other hand, if you're able to make your HSA contribution from your workplace through your employer, you're going to be able to contribute the $1,530 to your HSA and you will have paid no taxes on that amount in order to get it in. Like the Roth, you'll owe no taxes on the gains, and you'll owe no taxes to pull it out.

Check my math. But I believe the above calculations are correct.

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Wed Jun 19, 2019 4:52 pm

Artsdoctor wrote:
Wed Jun 19, 2019 4:31 pm
Mark,

The easy part will be contributing to both tax-advantaged accounts. No doubt.
The harder part will be choosing which one to use if you can't use both to fund.

Roths are terrific. I doubt you'd find many people who would argue with you. But you do have to remember that you're funding your Roth with post-tax dollars. Everyone's tax situation will be completely different, but if you're in the 22% federal marginal rate, 5% state marginal rate, and you're paying 7.65% in payroll taxes, you're going to have to "earn" $1,530 to make that $1,000 contribution to your Roth. (You earn $1,530; you pay $337 in federal tax; you pay $77 in state tax; you pay $95 in FICA; and, you pay $22 in Medicare tax. After you pay those taxes, you'll have about $1,000 to do whatever you want with.)

On the other hand, if you're able to make your HSA contribution from your workplace through your employer, you're going to be able to contribute the $1,530 to your HSA and you will have paid no taxes on that amount in order to get it in. Like the Roth, you'll owe no taxes on the gains, and you'll owe no taxes to pull it out.

Check my math. But I believe the above calculations are correct.
You math is fine and everything you said is true comparing a contribution to a Roth IRA vs a contribution to an HSA. However, that is not what I am talking about. In my example you already made the contribution to the HSA in both cases. You did it pre-tax and got that benefit you are talking about. In fact, I too agree that HSA contributions are very high on the pecking order (only after 401K's with a match). What I am talking about is when you have a medical expense. You can pay for it from your HSA immediately or not. I outlined two scenarios that allow you to maintain you tax-advantaged balance. In both cases I do not mention the HSA contribution because it has already been made. It is the same for both cases. I believe I showed that the result is the same in both cases and therefore some other factors would need to be used to determine which is the better option.
Mark

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by Artsdoctor » Wed Jun 19, 2019 5:19 pm

^ If you would otherwise not be able to afford funding a Roth, I agree that paying for your medical expenses out of your HSA directly without waiting would be smart if it would free you up to make a Roth contribution.

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by MrBeaver » Wed Jun 19, 2019 5:28 pm

Like many optimizations, this one requires knowledge from the future (which is impossible).
  • Keeping money in an HSA that you will be able to withdrawal for a qualified expense (current or past medical expense) is always better than removing it from the HSA, paying capital gains taxes, and then using it for the qualified expense.
  • Keeping money in an HSA that you will later withdrawal as a taxable distribution can be worse than withdrawing earlier for a qualified expense and then investing it in taxable account.
See here for more thoughts:
viewtopic.php?f=10&t=256861

My personal plan is to start spending out of an HSA and instead investing in taxable whenever either of the following occurs:
  • A 3.5% SWR from my HSA exceeds my yearly out of pocket maximum for health care plus a reasonable expectation of 'other' qualified expenses (glasses, dental, etc.)
  • The value of my HSA exceeds the amount I would want to leave to charity when I die (a charity is my secondary beneficiary after my spouse)
So far neither has happened yet, but within 10 years it probably will.

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by willthrill81 » Wed Jun 19, 2019 5:47 pm

I don't believe this has come up yet, but if you plan on bequeathing a portion of your portfolio to charity, an HSA is a great account to use for that purpose. It has no tax consequences for the receiving charity, but if a non-spouse inherits an HSA, the tax consequences are terrible since the entire HSA balance is treated as taxable income for them in the year they inherit it (i.e. no 'stretching' allowed).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by markcoop » Wed Jun 19, 2019 8:53 pm

willthrill81 wrote:
Wed Jun 19, 2019 5:47 pm
I don't believe this has come up yet, but if you plan on bequeathing a portion of your portfolio to charity, an HSA is a great account to use for that purpose. It has no tax consequences for the receiving charity, but if a non-spouse inherits an HSA, the tax consequences are terrible since the entire HSA balance is treated as taxable income for them in the year they inherit it (i.e. no 'stretching' allowed).
That is an important point and a way of mitigating a pitfall of HSAs. Of course, you can do the same thing with IRAs. So, if you used the HSA to pay your medical bills and at the same time contributed to a tIRA which you were not previously maxing out, then naming a charity as the beneficiary would achieve the same objective. In fact, it may be even better to do it that way (I need to think about that one more).
Mark

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Re: HSA - 2 parts: contribute and spend. When to spend?

Post by Elsebet » Wed Jun 19, 2019 9:13 pm

We max the HSA and cash flow our deductible. We hope to use the HSA funds in retirement for medical expenses then.
"...the man who adapts himself to his slender means and makes himself wealthy on a little sum, is the truly rich man..." ~Seneca

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