HSA long term strategy

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Saving$
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HSA long term strategy

Post by Saving$ »

Like many on this forum, I use my HSA as a super Roth - put max amount in tax free, don't spend any of it so it will grow.
I meticulously track my HSA eligible expenses for reimbursement sometime in the future when I no longer need the HSA to grow.

The info about Medicare and related out of pocket costs in another thread leads me to consider strategy. Specifically, in viewtopic.php?f=2&t=323678&p=5455833#p5455833 cashmoney stated:
"If your premiums is 165 for med supp and 50 for part d then your minimum and maximum annual out of pocket for medical expenses is 2,580 + 198 part B deductible = 2,778"

Is it correct that, in today's dollars:
- Medicare Part A= $0 cost
- Medicare Part B= $144.60/month (don't expect to have income over the limit of the first tier)
- Medicare Part ?? (Supplement/Medigap) = $165
- Medicare Part D= $50
Total monthly Medicare costs = $360; annual Medicare costs = (360*12)+198 = $4,515

Googling indicates the cost of the Medicare Supplement/Medigap coverage is not reimbursable from an HSA, so
Annual HSA depletion for Medicare = $2,535
Annual HSA depletion for Dental expenses = $1k (est)
Annual HSA depletion for 1 pair/glasses/year = $200
Est total annual depletion = $3,735

Presuming one retires at 65 and lives for 25 years, and that the growth rate of the account = inflation, max useable HSA = $93,375
I know there is also the possibility of long term nursing care or other major issue, but at that point medical expenses would presumably be sufficient to make them all deductible anyway.

Since an HSA only goes to a spouse tax free, presuming no spouse at death, is there any advantage to continuing to add to an HSA once you get to a projected value of about $95k at retirement, other than a tax free transfer to a non profit organization as a beneficiary?

On the other hand, is there any disadvantage to continuing to add to an HSA? If you really needed the money later for non medical expenses, couldn't you just take out the funds and pay the tax?
Impatience
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Re: HSA long term strategy

Post by Impatience »

You can withdraw the money from it at retirement age and pay income tax on it - exactly like a 401k. So medical expenses aside it can function as a boost to your income tax deferral limit. Plus when you add to your HSA via payroll deductions you don’t have to pay FICA which is a bonus over even a 401k. I think everyone should max their HSA every year, period.
Olemiss540
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Re: HSA long term strategy

Post by Olemiss540 »

WORST case is the excess HSA funds are treated as IRA funds in term of withdrawal. What alternative do you propose to do with the money you are not contributing to your HSA once you reach your calculated cap?
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
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grabiner
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Re: HSA long term strategy

Post by grabiner »

If you may have excess money in your HSA, another option is to name a charity as the beneficiary; this will avoid the tax issue on the inheritance. (For comparison, if you leave an IRA to your heirs rather than a charity, it doesn't become taxable immediately; your heirs can still get 10 years of tax-deferred growth, or spread out the withdrawals over 10 years.)
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Re: HSA long term strategy

Post by Spirit Rider »

Fidelity has done an annual study of heath care costs in Retirement starting at age 65 for many years. It keeps going up and up.
  • The Fidelity Retiree Health Care Cost Estimates, an average retired couple age 65 in 2020 may need approximately $295,000 saved (after tax) to cover health care expenses in retirement. Of course, the amount you'll need will depend on when and where you retire, how healthy you are, and how long you live.
The chances that the vast majority of people will have more HSA funds than qualified medical expenses in retirement is remote. Not to mention, you should always prioritize HSA distributions for unreimbursed qualified medical expenses before Roth assets. Tax-free distributions without strings are always better than those with strings.

Just be cause you can do something does not mean you should do something. You should almost never take non-qualified HSA distributions after age 65 and pay ordinary income taxes unless you have no other pre-tax accounts. Why would you give up future tax free earnings over the likely 20+ years.

Otherwise, the only circumstances where this would make sense is if you are overfunded, with a short life expectancy and only non-spouse beneficiaries. Or you can follow @grabiner's excellent point and prioritize your charitable bequests to the HSA account.
AnEngineer
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Re: HSA long term strategy

Post by AnEngineer »

Spirit Rider wrote: Wed Aug 26, 2020 10:21 am Fidelity has done an annual study of heath care costs in Retirement starting at age 65 for many years. It keeps going up and up.
  • The Fidelity Retiree Health Care Cost Estimates, an average retired couple age 65 in 2020 may need approximately $295,000 saved (after tax) to cover health care expenses in retirement. Of course, the amount you'll need will depend on when and where you retire, how healthy you are, and how long you live.
The chances that the vast majority of people will have more HSA funds than qualified medical expenses in retirement is remote. Not to mention, you should always prioritize HSA distributions for unreimbursed qualified medical expenses before Roth assets. Tax-free distributions without strings are always better than those with strings.

Just be cause you can do something does not mean you should do something. You should almost never take non-qualified HSA distributions after age 65 and pay ordinary income taxes unless you have no other pre-tax accounts. Why would you give up future tax free earnings over the likely 20+ years.

Otherwise, the only circumstances where this would make sense is if you are overfunded, with a short life expectancy and only non-spouse beneficiaries. Or you can follow @grabiner's excellent point and prioritize your charitable bequests to the HSA account.
Does the study talk about the distribution of the health care savings needed? With only the average you can't say it won't be a split between healthy people who spend little and others who spend a lot.
MrJedi
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Re: HSA long term strategy

Post by MrJedi »

You don't seem to be factoring in any out of pocket costs on Medicare, only the premiums and deductibles.
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FIREchief
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Re: HSA long term strategy

Post by FIREchief »

Saving$ wrote: Tue Aug 25, 2020 8:24 pm I meticulously track my HSA eligible expenses for reimbursement sometime in the future when I no longer need the HSA to grow.

Since an HSA only goes to a spouse tax free, presuming no spouse at death, is there any advantage to continuing to add to an HSA once you get to a projected value of about $95k at retirement, other than a tax free transfer to a non profit organization as a beneficiary?
Am I correct in assuming that you are not married?

Why are you only looking at your retirement medical expenses when, as you already posted, you are meticulously tracking your HSA eligible expenses on a regular basis? You can add all those historical expenses to your retirement totals to get a larger amount eligible for tax free withdrawal in the future. Why not continue to grow the HSA and then start whittling it down (tax free) at an age when you realistically don't expect to live another 20 or 30 years?

You do bring up a very good topic for discussion. I've scratched my head over this as well. An HSA is fantastic as an investment tool until you die unexpectedly with a large balance. This is mitigated somewhat by those who are married for the first-to-die spouse. An overfunded HSA, with a stack of unreimbursed eligible medical expenses, makes an excellent "emergency fund" (or, more likely, ready source of liquidity) for those who are post-FIRE and executing a well planned strategy of Roth conversions, tax gain harvesting, IRMAA avoidance, etc. It's an immediate source of tax-free cash that can be tapped without any impact on the current year's strategic financial plan. 8-)
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backpacker61
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Re: HSA long term strategy

Post by backpacker61 »

I anticipate reserving a substantial part of my HSA for funding long term care. I don't want to buy LT care insurance.
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BolderBoy
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Re: HSA long term strategy

Post by BolderBoy »

Impatience wrote: Tue Aug 25, 2020 8:28 pmI think everyone should max their HSA every year, period.
+1.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
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