Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the math?

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HenryPorter
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Joined: Sat Dec 05, 2009 2:09 am

Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the math?

Post by HenryPorter »

I have medical bills that are reimbursable by an HSA I have had opened prior to receiving the medical bills.

I am thinking that maybe it would be better to use the HSA to reimburse some of the medical bills and then use that money to fund part of my 2021 Roth IRA.

What am I overlooking? I do lose the compounding of the HSA holdings by the amount withdrawn. BTW, I am not qualified to contribute to an HSA in 2021. I do not have a qualified high deductible health insurance health plan currently.

The money placed into a Roth would grow unrestricted without a required minimum withdrawal schedule and would be tax-free.

I just can not see if I am missing anything if I do use the HSA money to reimburse my medical bills and then put the money into a Roth.

If I need emergency money down the road to cover medical bills, I can always with draw prinicipal from one of my long established Roth accounts.
Silk McCue
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Re: Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the m

Post by Silk McCue »

Funds currently in the HSA have the same tax efficiency as those in the Roth. Shifting the funds from the HSA results in the same growth potential if invested in the same manner in the Roth. There is no downside from a value and tax efficiency of the accounts.

However, if you have other funds that could go towards the Roth in their place then you are leaving even greater tax efficient growth on the table by not fully funding the Roth and allowing the HSA to grow tax free.

Cheers
runninginvestor
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Re: Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the m

Post by runninginvestor »

You can always just hold on to the documentation of your medical expenses and pay them out of pocket. Then if you ever need an emergency down the line, you withdraw from your HSA to cover those expenses. That way you have both your Roth contributions and past medical expense reimbursement you can draw from.
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FiveK
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Re: Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the m

Post by FiveK »

HenryPorter wrote: Mon Sep 13, 2021 4:14 pm I have medical bills that are reimbursable by an HSA I have had opened prior to receiving the medical bills.

I am thinking that maybe it would be better to use the HSA to reimburse some of the medical bills and then use that money to fund part of my 2021 Roth IRA.
How to use [an HSA] plan discusses some alternatives. After reading that, what do you think?
Topic Author
HenryPorter
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Re: Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the m

Post by HenryPorter »

FiveK wrote: Mon Sep 13, 2021 10:21 pm
HenryPorter wrote: Mon Sep 13, 2021 4:14 pm I have medical bills that are reimbursable by an HSA I have had opened prior to receiving the medical bills.

I am thinking that maybe it would be better to use the HSA to reimburse some of the medical bills and then use that money to fund part of my 2021 Roth IRA.
How to use [an HSA] plan discusses some alternatives. After reading that, what do you think?

I did not think about my 401k. I can actually increase my 401k contribution too if I take qualified HSA withdrawals to cover that money.

I guess the only thing that lingers is that I like the idea that there are no required minimum distributions for an HSA. I can let it keep growing, not taking RMDs after age 72 w/o penalty if I want.
MrJedi
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Re: Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the m

Post by MrJedi »

I would distribute from HSA to max out other tax advantaged accounts if not already maxing those out. No receipts to track, other accounts are more flexible once you are qualified, and some states (CA and NJ) tax HSAs. HSAs are also not as good for beneficiaries.
diy60
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Re: Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the m

Post by diy60 »

HenryPorter wrote: Tue Sep 14, 2021 12:45 am I guess the only thing that lingers is that I like the idea that there are no required minimum distributions for an HSA. I can let it keep growing, not taking RMDs after age 72 w/o penalty if I want.
While true, you should consider what happens after your demise. I believe non-spousal heirs will have to take the full HSA distribution and incur ordinary income tax rates on those funds in the year of your death. As such, I think it's wise to have a "winddown" plan. I'm using my HSA to pay for Medicare premiums over a fairly long term time frame (> 10 yrs).
KineticSync
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Re: Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the m

Post by KineticSync »

We're leaving everything in HSA in equities, planning on using the HSA as a long term care resource later. We're also saving receipts in case we decide we need the cash. The only gotcha we're seeing is what diy60 mentioned: we slip up and the HSA turns into an inheritance.
privateID
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Re: Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the m

Post by privateID »

KineticSync wrote: Tue Sep 14, 2021 10:03 am We're leaving everything in HSA in equities, planning on using the HSA as a long term care resource later. We're also saving receipts in case we decide we need the cash. The only gotcha we're seeing is what diy60 mentioned: we slip up and the HSA turns into an inheritance.
Isn't that a pretty big gottcha? It's because of that gotcha that I think any time you have the opportunity to shift money from an HSA to a different retirement account, one should take advantage of that scenario. However, I do believe if you could max out all retirement accounts and not spend down your HSA early, that is the way to go. I also believe in retirement one should spend down the HSA before Roth accounts (and maybe before other retirement accounts), assuming you have past medical bills to do so.
runninginvestor
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Re: Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the m

Post by runninginvestor »

privateID wrote: Tue Sep 14, 2021 10:50 am
KineticSync wrote: Tue Sep 14, 2021 10:03 am We're leaving everything in HSA in equities, planning on using the HSA as a long term care resource later. We're also saving receipts in case we decide we need the cash. The only gotcha we're seeing is what diy60 mentioned: we slip up and the HSA turns into an inheritance.
Isn't that a pretty big gottcha? It's because of that gotcha that I think any time you have the opportunity to shift money from an HSA to a different retirement account, one should take advantage of that scenario. However, I do believe if you could max out all retirement accounts and not spend down your HSA early, that is the way to go. I also believe in retirement one should spend down the HSA before Roth accounts (and maybe before other retirement accounts), assuming you have past medical bills to do so.
Also, if married and your spouse is a beneficiary, the HSA will just become their HSA. Not to be morbid, but death usually comes with medical bills, which can be used to pay for from the HSA. Healthcare expenses for dependents on your tax return are also eligible for reimbursement, so you could save all of those bills as well.

Edit: of course the bills need to occur after you have the hsa opened.
dsmil
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Re: Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the m

Post by dsmil »

Yes, I like this plan assuming you wouldn't be maxing the Roth otherwise. I've done this in the couple of years recently that I had access to a HSA and wasn't already maxing my Roth.
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FiveK
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Re: Use HSA funds to reimburse medical bills and then use the proceeds to fund 2021 Roth IRA. What am I missing in the m

Post by FiveK »

The law (26 U.S. Code § 223 - Health savings accounts) says that while one is still alive (see (f)(1), emphasis added),
Any amount paid or distributed out of a health savings account which is used exclusively to pay qualified medical expenses of any account beneficiary shall not be includible in gross income.
Further down in that law (see (8)(B)(ii)(I)) it says (emphasis added),
The amount includible in gross income under clause (i) by any person (other than the estate) shall be reduced by the amount of qualified medical expenses which were incurred by the decedent before the date of the decedent’s death and paid by such person within 1 year after such date.
We know that for normal HSA use, one may pay for medical expenses now, and then years later reimburse one's self for that expense out of the HSA. It would seem the verb "pay" as used in the first quote includes the meaning "reimburse already paid."

Applying that interpretation, the non-spouse HSA heir could avoid tax if the original HSA owner had a record of qualified, unreimbursed medical expenses greater than or equal to the HSA balance.

But it isn't 100% clear (to me, anyway) whether the heir has that option, or if the law means that only "as yet unpaid" medical expenses of the original owner may be used to offset the inherited HSA balance. I know how I'd like the law to be interpreted, but...?
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