Draining HSA?

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winterfan
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Draining HSA?

Post by winterfan »

My child needs orthodontia. My husband and I are trying to decide if we should use the funds in our new HSA for this (yes, it's qualified). We were first eligible for an HSA in 2021 and we maxed it out. Would you drain it to pay for the procedure? I'd hate to use up the HSA we've built since we probably only have a couple more years to fund it. OTOH, that's what an HSA is for, right?

The other option is to use money in a taxable account, or part of my husband's IRA (he's over 59.5). We have some cash, but not enough and a lot of it is earmarked for other things this year. We have the bulk of our net worth in 401k/IRAs. We are in the 12% bracket, plus state. The ortho has a monthly plan, but we don't want to do that.
MrJedi
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Re: Draining HSA?

Post by MrJedi »

Are you maxing 401k/IRA?

Will paying out of pocket cause you to not max 401k/IRA?
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winterfan
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Re: Draining HSA?

Post by winterfan »

MrJedi wrote: Thu Jan 13, 2022 4:38 pm Are you maxing 401k/IRA?

Will paying out of pocket cause you to not max 401k/IRA?
This year we've decided only to max our Roths, fund the 401k to the match and max out our HSA. We have some expenses coming up (besides ortho!) that we need to save for. Our budget is pretty tight when we max all three.
MrJedi
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Re: Draining HSA?

Post by MrJedi »

I would use the HSA if it means you can put more into 401k/IRA.
nalor511
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Re: Draining HSA?

Post by nalor511 »

Go ahead and use it
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willthrill81
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Re: Draining HSA?

Post by willthrill81 »

winterfan wrote: Thu Jan 13, 2022 4:43 pm
MrJedi wrote: Thu Jan 13, 2022 4:38 pm Are you maxing 401k/IRA?

Will paying out of pocket cause you to not max 401k/IRA?
This year we've decided only to max our Roths, fund the 401k to the match and max out our HSA. We have some expenses coming up (besides ortho!) that we need to save for. Our budget is pretty tight when we max all three.
Remember that withdrawals from an HSA operate just like a Roth when they are used for qualified medical expenses (i.e., they are tax-free).

With that in mind, you should not want to withdraw funds from a Roth account so that you can retain funds in a taxable account.

The question of whether to withdraw from a traditional IRA or an HSA is more complicated because it involves estimating whether your current tax rate is likely to be lower or higher than your future tax rate. If your current tax rate is lower, then it makes more sense to withdraw from the IRA than the HSA, and vice versa, though other factors can certainly impact the decision as well.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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beyou
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Re: Draining HSA?

Post by beyou »

I would use the HSA given your age, and lack of other good options to pay.

HSA is a great savings vehicle if you have many years to let it grow, as for 20-40 somethings. At some point you need to spend it on some medical costs. If not when in your 60s, when ?

Finally as you started late and will stop soon, seems line an opportunity to simplify, spending down a smaller less impactful account
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willthrill81
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Re: Draining HSA?

Post by willthrill81 »

beyou wrote: Thu Jan 13, 2022 5:04 pm I would use the HSA given your age, and lack of other good options to pay.

HSA is a great savings vehicle if you have many years to let it grow, as for 20-40 somethings. At some point you need to spend it on some medical costs. If not when in your 60s, when ?

Finally as you started late and will stop soon, seems line an opportunity to simplify, spending down a smaller less impactful account
The OP's husband is over 59.5, but we don't know the OP's age.

Why would the OP be better off by withdrawing from a Roth, which is what an HSA effectively is for medical expenses, to avoid paying 12% tax on traditional IRA withdrawals? Once SS benefits begin, it's a near certainty that the OP's marginal tax rate will be higher than 12%.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
260chrisb
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Re: Draining HSA?

Post by 260chrisb »

Sure, use it! It's a great long term retirement option for folks with a lot of years to potentially not need it and let it grow. The way I look at it is you didn't pay taxes on the money so you're getting a discount on the expense.
invest4
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Re: Draining HSA?

Post by invest4 »

The information you provided is provides limited insight / sense for your overall finances. Based upon what you shared, I would go ahead and use the HSA.

Going forward, most people are not able to max out all the available tax advantaged options and have to prioritize accordingly. You may wish to consider building up more cash reserves instead of stretching yourselves thin so you may more easily handle these types of expenses and future contributions to something like an HSA are then more sticky / assured.
Running Bum
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Re: Draining HSA?

Post by Running Bum »

MrJedi wrote: Thu Jan 13, 2022 4:45 pm I would use the HSA if it means you can put more into 401k/IRA.
In the 12% bracket? No way. They probably will always be at least this high, and distributions from the 401K will likely impact SS taxability causing a much higher effective tax rate later. The last thing you want to do is do more tax deferred at this rate.

Using the HSA sounds reasonable, but don't put more than the match in the 401K.
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winterfan
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Re: Draining HSA?

Post by winterfan »

beyou wrote: Thu Jan 13, 2022 5:04 pm I would use the HSA given your age, and lack of other good options to pay.

HSA is a great savings vehicle if you have many years to let it grow, as for 20-40 somethings. At some point you need to spend it on some medical costs. If not when in your 60s, when ?

Finally as you started late and will stop soon, seems line an opportunity to simplify, spending down a smaller less impactful account
I am 49. We were hoping to let it grow, but maybe it doesn't really matter much.
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winterfan
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Re: Draining HSA?

Post by winterfan »

invest4 wrote: Thu Jan 13, 2022 5:23 pm The information you provided is provides limited insight / sense for your overall finances. Based upon what you shared, I would go ahead and use the HSA.

Going forward, most people are not able to max out all the available tax advantaged options and have to prioritize accordingly. You may wish to consider building up more cash reserves instead of stretching yourselves thin so you may more easily handle these types of expenses and future contributions to something like an HSA are then more sticky / assured.
Yes! We realized this last year. We were maxing out everything, but it was tight! We had no wriggle room for much of anything and drained what cash we had, plus ended up using some of our taxable account.
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Re: Draining HSA?

Post by MrJedi »

Running Bum wrote: Thu Jan 13, 2022 5:27 pm
MrJedi wrote: Thu Jan 13, 2022 4:45 pm I would use the HSA if it means you can put more into 401k/IRA.
In the 12% bracket? No way. They probably will always be at least this high, and distributions from the 401K will likely impact SS taxability causing a much higher effective tax rate later. The last thing you want to do is do more tax deferred at this rate.

Using the HSA sounds reasonable, but don't put more than the match in the 401K.
If you're worried about deferred then do Roth. I.e. use the HSA to pay the service and then take the savings and put it into Roth.
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beyou
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Re: Draining HSA?

Post by beyou »

willthrill81 wrote: Thu Jan 13, 2022 5:08 pm
beyou wrote: Thu Jan 13, 2022 5:04 pm I would use the HSA given your age, and lack of other good options to pay.

HSA is a great savings vehicle if you have many years to let it grow, as for 20-40 somethings. At some point you need to spend it on some medical costs. If not when in your 60s, when ?

Finally as you started late and will stop soon, seems line an opportunity to simplify, spending down a smaller less impactful account
The OP's husband is over 59.5, but we don't know the OP's age.

Why would the OP be better off by withdrawing from a Roth, which is what an HSA effectively is for medical expenses, to avoid paying 12% tax on traditional IRA withdrawals? Once SS benefits begin, it's a near certainty that the OP's marginal tax rate will be higher than 12%.
I said why, simplify. Small HSA (and few years left to contribute), large 401k/IRA.
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winterfan
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Re: Draining HSA?

Post by winterfan »

beyou wrote: Thu Jan 13, 2022 7:01 pm
willthrill81 wrote: Thu Jan 13, 2022 5:08 pm
beyou wrote: Thu Jan 13, 2022 5:04 pm I would use the HSA given your age, and lack of other good options to pay.

HSA is a great savings vehicle if you have many years to let it grow, as for 20-40 somethings. At some point you need to spend it on some medical costs. If not when in your 60s, when ?

Finally as you started late and will stop soon, seems line an opportunity to simplify, spending down a smaller less impactful account
The OP's husband is over 59.5, but we don't know the OP's age.

Why would the OP be better off by withdrawing from a Roth, which is what an HSA effectively is for medical expenses, to avoid paying 12% tax on traditional IRA withdrawals? Once SS benefits begin, it's a near certainty that the OP's marginal tax rate will be higher than 12%.
I said why, simplify. Small HSA (and few years left to contribute), large 401k/IRA.
We've decided to just use the HSA and start building it back up again. I do think it's simpler too.
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