Deferring HSA by paying medical Out-of-Pocket: Overblown?

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Hanksmoney
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Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by Hanksmoney » Wed Mar 27, 2019 11:42 am

It seems as though it's widely accepted investing advice to defer using your HSA for medical expenses. The advise is to pay medical out of pocket and save the receipts and get reimbursed at a later date.

I have a few questions:
1) How much HSA do you need at minimum for retirement? HSA would only be used in retirement after medicare or other retiree medical plans fail to cover. In other words, how much is typical to pay OOP after those services?

2)If you have a large sum in the HSA at retirement b/c you haven't been spending it, upon your death it goes to your spouse which can be used in the same manner. For other beneficiaries, it becomes taxable. Does this roll into a IRA after tax or is it a taxed cash balance?

My thoughts are:
3)During retirement, Roth IRA distributions and 401k would be more valuable because they can be used for ANY expenses. That's why it would make more sense to max those out before building up an HSA nest egg since HSA is limited to medical expenses not covered by medicare.

4)Spending post tax money for medical expenses and being reimbursed with pre-tax money is a loss equivalent to the taxes paid. It requires more income to pay post-tax.

5)The limitations on the money make it less attractive and a risk in and of itself.

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dodecahedron
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by dodecahedron » Wed Mar 27, 2019 12:06 pm

Hanksmoney wrote:
Wed Mar 27, 2019 11:42 am
It seems as though it's widely accepted investing advice to defer using your HSA for medical expenses. The advise is to pay medical out of pocket and save the receipts and get reimbursed at a later date.

I have a few questions:
1) How much HSA do you need at minimum for retirement? HSA would only be used in retirement after medicare or other retiree medical plans fail to cover. In other words, how much is typical to pay OOP after those services? Lots of things Medicare does not cover, notably dental, which can get quite expensive. But elephant in the room is long term care costs. That could include paying for home health aides and modifications to my home to make it safe to age in place if and when I am considered in need of LTC by the tax laws, e.g., adding handrails, widening doorways, installing a ramp. It could also pay for nursing home, assisted living, etc. Or LTC premiums. At a minimum, your Medicare Part B and D premiums, and Part C if you have it can be paid for by HSA. These vary but $2K per year per person is close to absolute bare minimum for super healthy person not subject to IRMAA with a couple of dental exam/cleanings per year. Could be a lot more for same person with higher income subject to IRMAA. And there has been a steady upward trend over time. I think it prudent to plan on assumption the trend will continue.

2)If you have a large sum in the HSA at retirement b/c you haven't been spending it, upon your death it goes to your spouse which can be used in the same manner. For other beneficiaries, it becomes taxable. Does this roll into a IRA after tax Noor is it a taxed cash balance? Yes but ...my HSA beneficiary is my charitable DAF, which is tax exempt.
My hope is that I do not need LTC. I will be grateful if, when my time comes, I can go quickly and gracefully into the next world and the funds left behind can benefit charities chosen by my daughters (the successor advisors to my DAF) with an informal letter of guidance with suggestions I am leaving behind for them.
Last edited by dodecahedron on Wed Mar 27, 2019 12:20 pm, edited 5 times in total.

TravelforFun
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by TravelforFun » Wed Mar 27, 2019 12:12 pm

The main reason HSA is considered the best saving account is because you don't pay taxes on the money you put in it and you don't pay taxes on the money you withdraw from it (your contributions plus gains).

I would not worry about keeping small receipts for withdrawals from HSA in the future. Your medical bills and medicare premium will come in droves.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by DonIce » Wed Mar 27, 2019 12:19 pm

Hanksmoney wrote:
Wed Mar 27, 2019 11:42 am
It seems as though it's widely accepted investing advice to defer using your HSA for medical expenses. The advise is to pay medical out of pocket and save the receipts and get reimbursed at a later date.

I have a few questions:
1) How much HSA do you need at minimum for retirement? HSA would only be used in retirement after medicare or other retiree medical plans fail to cover. In other words, how much is typical to pay OOP after those services?

2)If you have a large sum in the HSA at retirement b/c you haven't been spending it, upon your death it goes to your spouse which can be used in the same manner. For other beneficiaries, it becomes taxable. Does this roll into a IRA after tax or is it a taxed cash balance?
Once you are over the age of 65, you can withdraw from your HSA for ANY reason and pay only normal income tax on it, just as you would on a tIRA or 401k. In addition, you can withdraw money from your HSA for medical expenses tax free. Furthermore, unlike a tIRA, an HSA has no RMDs. This makes an HSA a strictly superior retirement savings vehicle compared to a tIRA or a traditional 401k (other than the company match).

runner3081
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by runner3081 » Wed Mar 27, 2019 12:22 pm

Hanksmoney wrote:
Wed Mar 27, 2019 11:42 am
I have a few questions:
1) How much HSA do you need at minimum for retirement? HSA would only be used in retirement after medicare or other retiree medical plans fail to cover. In other words, how much is typical to pay OOP after those services?

My thoughts are:
3)During retirement, Roth IRA distributions and 401k would be more valuable because they can be used for ANY expenses. That's why it would make more sense to max those out before building up an HSA nest egg since HSA is limited to medical expenses not covered by medicare.
You are missing something. If you save the receipts, you can buy whatever you want, with completely tax-free money.

Example... you have a balance of $125K in an HSA. You have paid out-of-pocket for medical expenses for 20 years and have receipts of $90K in medical expenses.

You want a new Tesla for $90K. Cash out $90K from the HSA (tax and penalty free) and buy the Tesla.

Your queries only apply if you DID NOT keep receipts or DID NOT have significant medical expenses.

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dodecahedron
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by dodecahedron » Wed Mar 27, 2019 12:26 pm

DonIce wrote:
Wed Mar 27, 2019 12:19 pm
Once you are over the age of 65, you can withdraw from your HSA for ANY reason and pay only normal income tax on it, just as you would on a tIRA or 401k. In addition, you can withdraw money from your HSA for medical expenses tax free. Furthermore, unlike a tIRA, an HSA has no RMDs. This makes an HSA a strictly superior retirement savings vehicle compared to a tIRA or a traditional 401k (other than the company match).
Not *quite* ¨strictly superior¨ to tIRA or 401k. If you die with a large HSA balance and intended beneficiary is not your spouse, there is no ¨stretch¨ for your beneficiary. Full balance immediately taxable to your beneficiary in a single tax year. A large HSA balance is a much bigger tax hit than large IRA/401k balance.

Edited to add: But for me, HSA has been a no brainer. I was only able to get HDHP qualifying inurance four years ago. Have been maxing out all tax advantaged space during that time (Roth 403b, Roth IRA, *and* HSA) so it did not need to be strictly superior.

Not sure what I would have done if faced with either/or choice rather than just do them all.
Last edited by dodecahedron on Wed Mar 27, 2019 12:37 pm, edited 2 times in total.

DonIce
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by DonIce » Wed Mar 27, 2019 12:31 pm

dodecahedron wrote:
Wed Mar 27, 2019 12:26 pm
DonIce wrote:
Wed Mar 27, 2019 12:19 pm
Once you are over the age of 65, you can withdraw from your HSA for ANY reason and pay only normal income tax on it, just as you would on a tIRA or 401k. In addition, you can withdraw money from your HSA for medical expenses tax free. Furthermore, unlike a tIRA, an HSA has no RMDs. This makes an HSA a strictly superior retirement savings vehicle compared to a tIRA or a traditional 401k (other than the company match).
Not *quite* ¨strictly superior¨ to tIRA or 401k. If you die with a large HSA balance and intended beneficiary is not your spouse, there is no ¨stretch¨ for your beneficiary. A large HSA balance is a much bigger tax hit than large IRA/401k balance.
Sure. I guess at 32 and single I'm not so much thinking of tax consequences for potential heirs, just for myself at this point :)

BD w/ Kung-Fu Grip
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by BD w/ Kung-Fu Grip » Wed Mar 27, 2019 12:36 pm

I withdraw money from my HSA when I have medical expenses. If I have too much cash building up in my checking account, I increase my Mega Backdoor Roth contribution. Other people with low expected retirement tax brackets could invest in a taxable S&P 500 fund paying only qualified dividends, assuming no Roth space available. The end result is still tax-free growth, without having to preserve receipts forever.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by pasadena » Wed Mar 27, 2019 12:36 pm

Hanksmoney wrote:
Wed Mar 27, 2019 11:42 am
I have a few questions:
1) How much HSA do you need at minimum for retirement? HSA would only be used in retirement after medicare or other retiree medical plans fail to cover. In other words, how much is typical to pay OOP after those services?
HSA funds can also be used to pay for insurance premiums, including Medicare (edit: after 65 mostly, see comment by Willthrill81 a few posts below)
3)During retirement, Roth IRA distributions and 401k would be more valuable because they can be used for ANY expenses. That's why it would make more sense to max those out before building up an HSA nest egg since HSA is limited to medical expenses not covered by medicare.
But the money you put in was tax free, so you had more money growing (compounding). The same amount put into an HSA costs you less than if you put it in a Roth IRA.
If you use it for medical expenses, which can get very high in retirement, including premiums, then it's entirely tax free, forever. That's money you will NEVER pay taxes on. If you saved your receipts over the years, you have access to it.

If you wait until 65, you can withdraw the money for non-medical expenses without penalty, and you will pay income taxes on it, so it behaves like a 401(k), except it has no RMD.
4)Spending post tax money for medical expenses and being reimbursed with pre-tax money is a loss equivalent to the taxes paid. It requires more income to pay post-tax.
No, you're deferring the tax saving.
Last edited by pasadena on Wed Mar 27, 2019 8:38 pm, edited 1 time in total.

Jb11
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by Jb11 » Wed Mar 27, 2019 12:52 pm

I pay medical expenses out of pocket. Currently, when I incur the medical expense I also make a distribution from my HSA and then make a corresponding contribution to my Roth IRA on the same day. Doesn't that keep the tax benefits the same than if I waited to retirement to start withdrawing? (We don't currently max our Roth IRAs.)

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by Spirit Rider » Wed Mar 27, 2019 1:16 pm

Hanksmoney wrote:
Wed Mar 27, 2019 11:42 am
1) How much HSA do you need at minimum for retirement? HSA would only be used in retirement after medicare or other retiree medical plans fail to cover. In other words, how much is typical to pay OOP after those services?
Recent analysis indicates that a 65 year old married couple retiring in 2018 will need $280,000 in 2018 dollars to pay for healthcare coverage in addition to Medicare in their lifetime.

What you are missing is that the following are out-of-pocket expenses after Medicare coverage and HSA qualified medical expenses. Medicare Part B and Part D premiums. Depending on your IRMAA MAGI this can be several hundred$/month/person. Dental, vision, hearing insurance/care/products. Medicare Supplement premiums are not an HSA qualified medical expense, but you can select a high deductible plan to safe on premiums and use your HSA to self-insure the deductible with tax-free distributions. This can run into several thousand$/year and doesn't begin to include LTC insurance and/or care as has already been mentioned.
2)If you have a large sum in the HSA at retirement b/c you haven't been spending it, upon your death it goes to your spouse which can be used in the same manner. For other beneficiaries, it becomes taxable. Does this roll into a IRA after tax or is it a taxed cash balance?
Inherited HSA accounts can never be rolled over to an IRA. A spouse beneficiary takes full control, but an HSA is taxable to a non-spouse beneficiary in the year of death. Simple solution, don't die with a large HSA. Fortunately, this will not happen to most people. If you have a large HSA, a limited life expectancy and only non-spouse beneficiaries. This is one of the few cases where it might make sense to take taxable distributions depending on the tax effect on those beneficiaries. Just as there is a tax-efficient placement of investments, there is a tax-efficient estate plan. You should prioritize your charitable bequests to come first from your HSA.
3)During retirement, Roth IRA distributions and 401k would be more valuable because they can be used for ANY expenses. That's why it would make more sense to max those out before building up an HSA nest egg since HSA is limited to medical expenses not covered by medicare.
Yes, Roth IRA and 401k balances are more valuable than HSA balances (not including unreimbursed qualified medical expenses). You have a fundamental misunderstanding of the recommendations. HSA contributions themselves are more valuable than anything other than match employer plan contributions. Once contributed, you should only pay medical expenses out-of-pocket if you have maximized your available other tax-advantaged contributions. You should always use your HSA to pay qualified medical expenses if to do otherwise would prevent you from maximizing your other tax-advantaged accounts.
4)Spending post tax money for medical expenses and being reimbursed with pre-tax money is a loss equivalent to the taxes paid. It requires more income to pay post-tax.
Huh???
5)The limitations on the money make it less attractive and a risk in and of itself.
When it comes to your withdrawal phase you should always take tax-free HSA distributions of unreimbursed qualified medical expenses when tax-free distributions are needed/advantageous before Roth accounts. Then you are exchanging tax-free assets with strings for tax-free assets without strings.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by jeffyscott » Wed Mar 27, 2019 4:28 pm

BD w/ Kung-Fu Grip wrote:
Wed Mar 27, 2019 12:36 pm
Other people with low expected retirement tax brackets could invest in a taxable S&P 500 fund paying only qualified dividends, assuming no Roth space available. The end result is still tax-free growth, without having to preserve receipts forever.
Yes, taxable investments in US stock index funds are pretty tax efficient for most people, since most of us (that is most Americans, maybe not most here) are in the 0% bracket for capital gains and qualified dividends.

And heirs get a stepped up cost basis, so there may be no tax on accumulated gains.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by Artsdoctor » Wed Mar 27, 2019 4:47 pm

Hanksmoney wrote:
Wed Mar 27, 2019 11:42 am
It seems as though it's widely accepted investing advice to defer using your HSA for medical expenses. The advise is to pay medical out of pocket and save the receipts and get reimbursed at a later date.

I have a few questions:
1) How much HSA do you need at minimum for retirement? HSA would only be used in retirement after medicare or other retiree medical plans fail to cover. In other words, how much is typical to pay OOP after those services?

FIRST OF ALL, YOU CAN USE YOUR HSA TO PAY FOR YOUR MEDICARE PREMIUMS. SECOND, THERE ARE PLENTY OF THINGS THAT MEDICARE WILL NOT PAY FOR WHICH YOU CAN PAY OUT OF YOUR HSA; CERTAINLY LONG-TERM CARE IS A POTENTIALLY LARGE EXPENSE. THIRD, YOU CAN REIMBURSE YOURSELF FOR EXPENSES YOU'VE PAIN IN THE PAST IF YOU LIKE AS LONG AS YOU'VE GET THOSE RECEIPTS.

2)If you have a large sum in the HSA at retirement b/c you haven't been spending it, upon your death it goes to your spouse which can be used in the same manner. For other beneficiaries, it becomes taxable. Does this roll into a IRA after tax or is it a taxed cash balance?

IT'S UNLIKELY THAT YOU'LL HAVE A LARGE SUM IN THE HSA IF YOU'VE BEEN SPENDING THROUGH YOUR HSA CORRECTLY BUT IT WILL PASS TO YOUR SPOUSE ON DEATH. IF YOU HAVE AN ANY PHILANTHROPIC INTERESTS AT ALL, YOU'D LEAVE YOUR HSA TO A CHARITABLE ORGANIZATION WHICH WOULD LEAVE OTHER ASSETS THAT YOU MIGHT HAVE DONATED TO BE PASSED ON TO ANY HEIR(S) YOU'D LIKE.

My thoughts are:
3)During retirement, Roth IRA distributions and 401k would be more valuable because they can be used for ANY expenses. That's why it would make more sense to max those out before building up an HSA nest egg since HSA is limited to medical expenses not covered by medicare.

ANY 401K DISTRIBUTIONS WILL BE TAXABLE, EVEN IF USED FOR MEDICAL EXPENSES, SO I DON'T SEE AN ADVANTAGE THERE. YOU ARE CORRECT THAT IF YOU CANNOT CONTRIBUTE TO ALL OF YOUR SAVINGS VEHICLES FULLY, AN HSA MAY NOT HAVE THE HIGHEST PRIORITY.

4)Spending post tax money for medical expenses and being reimbursed with pre-tax money is a loss equivalent to the taxes paid. It requires more income to pay post-tax.

I DON'T THINK I'M FOLLOWING THIS.

5)The limitations on the money make it less attractive and a risk in and of itself.

AGAIN, IT WOULD BE UNLIKELY THAT YOU AND YOUR WIFE WOULD NOT BE ABLE TO SPEND YOUR MONEY, BUT IF YOU HAVE AMASSED A FORTUNE IN YOUR HSA AND HAVE MAXIMIZED ALL OF YOUR OTHER ACCOUNTS, YOU'RE GOING TO BE FINE NO MATTER WHAT YOU DO.

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teen persuasion
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by teen persuasion » Wed Mar 27, 2019 7:01 pm

Contributions to an HSA thru payroll deductions are free of FICA tax (7.65% savings). They are also not included in either line 7 wages or AGI, so are useful for increasing EITC (21% phaseout rate, plus my state matches EITC at 30%, so additional 6.3% phaseout avoided). Add our 10% federal tax rate and 4% state rate, for a total of 48.95% tax reduction for us on HSA contributions.

Further, payroll HSA deductions are essentially invisible on the FAFSA, unlike 401k contributions (which get added back to Available Income, increasing EFC). Leaving funds in the HSA by paying health expenses OOP reduces Available Assets that might need to be reported on the FAFSA (higher Available Assets would increase EFC). They can function as an emergency fund that can be tapped w/o tax consequences in a pinch in future years as long as we keep receipts, especially useful in years when we might be Roth converting and don't wish to drive taxable income higher by touching other retirement funds.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by willthrill81 » Wed Mar 27, 2019 7:09 pm

pasadena wrote:
Wed Mar 27, 2019 12:36 pm
HSA funds can also be used to pay for insurance premiums, including Medicare.
You can only pay for certain types of insurance with HSA funds.
You can’t treat insurance premiums as qualified medical expenses unless the premiums are for:

1. Long-term care insurance.
2. Health care continuation coverage (such as coverage under COBRA).
3. Health care coverage while receiving unemployment compensation under federal or state law.
4. Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

Here is the link to the IRS document:

https://www.irs.gov/publications/p969/a ... 1000204081
https://ttlc.intuit.com/questions/37845 ... e-premiums
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by Spirit Rider » Wed Mar 27, 2019 8:20 pm

willthrill81 wrote:
Wed Mar 27, 2019 7:09 pm
pasadena wrote:
Wed Mar 27, 2019 12:36 pm
HSA funds can also be used to pay for insurance premiums, including Medicare.
You can only pay for certain types of insurance with HSA funds.
You can’t treat insurance premiums as qualified medical expenses unless the premiums are for:

1. Long-term care insurance.
2. Health care continuation coverage (such as coverage under COBRA).
3. Health care coverage while receiving unemployment compensation under federal or state law.
4. Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).
We are talking about medical costs in retirement. You need to pay more attention to the last bullet.

Once you are are 65, you can pretty much pay for any medical insurance (health, dental, vision, etc...) for yourself, your spouse and any dependents. For example, when you turn 65 you can pay your spouse and/or dependents medical insurance premiums tax-free from your HSA.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by willthrill81 » Wed Mar 27, 2019 8:23 pm

Spirit Rider wrote:
Wed Mar 27, 2019 8:20 pm
willthrill81 wrote:
Wed Mar 27, 2019 7:09 pm
pasadena wrote:
Wed Mar 27, 2019 12:36 pm
HSA funds can also be used to pay for insurance premiums, including Medicare.
You can only pay for certain types of insurance with HSA funds.
You can’t treat insurance premiums as qualified medical expenses unless the premiums are for:

1. Long-term care insurance.
2. Health care continuation coverage (such as coverage under COBRA).
3. Health care coverage while receiving unemployment compensation under federal or state law.
4. Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).
We are talking about medical costs in retirement. You need to pay more attention to the last bullet.

Once you are are 65, you can pretty much pay for any medical insurance (health, dental, vision, etc...) for yourself, your spouse and any dependents. For example, when you turn 65 you can pay your spouse and/or dependents medical insurance premiums tax-free from your HSA.
I'm well aware of that. But the statement as written by pasadena didn't refer to the caveats, and many novices appear to erroneously believe that they can use HSA funds to pay for pre-65 health insurance premiums.
“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: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by Spirit Rider » Wed Mar 27, 2019 8:29 pm

willthrill81 wrote:
Wed Mar 27, 2019 8:23 pm
I'm well aware of that. But the statement as written by pasadena didn't refer to the caveats, and many novices appear to erroneously believe that they can use HSA funds to pay for pre-65 health insurance premiums.
Then aren't you guilty of the same thing as @pasadena, because many novices would have erroneously believed that those other 65+ insurance premiums weren't qualified medical expenses.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by jeffyscott » Wed Mar 27, 2019 8:31 pm

Jb11 wrote:
Wed Mar 27, 2019 12:52 pm
I pay medical expenses out of pocket. Currently, when I incur the medical expense I also make a distribution from my HSA and then make a corresponding contribution to my Roth IRA on the same day. Doesn't that keep the tax benefits the same than if I waited to retirement to start withdrawing? (We don't currently max our Roth IRAs.)
Yes, money in an HSA, with saved receipts that would permit you to withdraw it would be functionally pretty much like having a Roth account. Moving the money from HSA to Roth in your situation is not changing the tax benefits for you and makes things better for your heirs if you don't use the Roth money.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by pasadena » Wed Mar 27, 2019 8:37 pm

willthrill81 wrote:
Wed Mar 27, 2019 8:23 pm

I'm well aware of that. But the statement as written by pasadena didn't refer to the caveats, and many novices appear to erroneously believe that they can use HSA funds to pay for pre-65 health insurance premiums.
Thnaks Willthrill and Spirit Rider. You are right, I will edit my post.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by pasadena » Wed Mar 27, 2019 8:37 pm

pasadena wrote:
Wed Mar 27, 2019 8:37 pm
willthrill81 wrote:
Wed Mar 27, 2019 8:23 pm

I'm well aware of that. But the statement as written by pasadena didn't refer to the caveats, and many novices appear to erroneously believe that they can use HSA funds to pay for pre-65 health insurance premiums.
Thanks Willthrill and Spirit Rider. You are right, I will edit my post.
Last edited by pasadena on Wed Mar 27, 2019 8:59 pm, edited 1 time in total.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by willthrill81 » Wed Mar 27, 2019 8:51 pm

Spirit Rider wrote:
Wed Mar 27, 2019 8:29 pm
willthrill81 wrote:
Wed Mar 27, 2019 8:23 pm
I'm well aware of that. But the statement as written by pasadena didn't refer to the caveats, and many novices appear to erroneously believe that they can use HSA funds to pay for pre-65 health insurance premiums.
Then aren't you guilty of the same thing as @pasadena, because many novices would have erroneously believed that those other 65+ insurance premiums weren't qualified medical expenses.
The quote I provided specifically stated that they are.
“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: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by Spirit Rider » Wed Mar 27, 2019 8:57 pm

willthrill81 wrote:
Wed Mar 27, 2019 8:51 pm
Spirit Rider wrote:
Wed Mar 27, 2019 8:29 pm
willthrill81 wrote:
Wed Mar 27, 2019 8:23 pm
I'm well aware of that. But the statement as written by pasadena didn't refer to the caveats, and many novices appear to erroneously believe that they can use HSA funds to pay for pre-65 health insurance premiums.
Then aren't you guilty of the same thing as @pasadena, because many novices would have erroneously believed that those other 65+ insurance premiums weren't qualified medical expenses.
The quote I provided specifically stated that they are.
Yes, but the reason I responded is that just as many if not more novices might be likely to miss the importance of the last bullet in your post as would @pasendenas' post that you qualified. So it was right, proper and a service to forum members to qualify your post.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by yeahman » Wed Mar 27, 2019 10:24 pm

Hanksmoney wrote:
Wed Mar 27, 2019 11:42 am
3)During retirement, Roth IRA distributions and 401k would be more valuable because they can be used for ANY expenses. That's why it would make more sense to max those out before building up an HSA nest egg since HSA is limited to medical expenses not covered by medicare.
During retirement, a Roth IRA/401k is far superior to a traditional IRA/401k. At contribution, the traditional is superior, making it a wash at the same tax rate. An HSA is superior to both because it gets traditional treatment at contribution and Roth treatment at distribution. Max out HSA first.
Hanksmoney wrote:
Wed Mar 27, 2019 11:42 am
4)Spending post tax money for medical expenses and being reimbursed with pre-tax money is a loss equivalent to the taxes paid. It requires more income to pay post-tax.
If you're going to reimburse yourself immediately, of course they're identical. The point is the tax-free growth. Otherwise, you might as well spend down your Roth IRA every year too.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by BL » Wed Mar 27, 2019 10:32 pm

If you make a pretax contribution to your HSA,, it is not subject to federal income tax, Medicare tax or Social Security tax. If you pay on an after-tax basis, your contributions are subject to all of those taxes.
from
https://budgeting.thenest.com/can-hsa-r ... 24716.html

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by willthrill81 » Wed Mar 27, 2019 11:03 pm

Spirit Rider wrote:
Wed Mar 27, 2019 8:57 pm
willthrill81 wrote:
Wed Mar 27, 2019 8:51 pm
Spirit Rider wrote:
Wed Mar 27, 2019 8:29 pm
willthrill81 wrote:
Wed Mar 27, 2019 8:23 pm
I'm well aware of that. But the statement as written by pasadena didn't refer to the caveats, and many novices appear to erroneously believe that they can use HSA funds to pay for pre-65 health insurance premiums.
Then aren't you guilty of the same thing as @pasadena, because many novices would have erroneously believed that those other 65+ insurance premiums weren't qualified medical expenses.
The quote I provided specifically stated that they are.
Yes, but the reason I responded is that just as many if not more novices might be likely to miss the importance of the last bullet in your post as would @pasendenas' post that you qualified. So it was right, proper and a service to forum members to qualify your post.
The 'qualification' you're referring to was directly in my post. :D
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by JustinR » Wed Mar 27, 2019 11:54 pm

Hanksmoney wrote:
Wed Mar 27, 2019 11:42 am
My thoughts are:
3)During retirement, Roth IRA distributions and 401k would be more valuable because they can be used for ANY expenses. That's why it would make more sense to max those out before building up an HSA nest egg since HSA is limited to medical expenses not covered by medicare.

4)Spending post tax money for medical expenses and being reimbursed with pre-tax money is a loss equivalent to the taxes paid. It requires more income to pay post-tax.

5)The limitations on the money make it less attractive and a risk in and of itself.
You're looking at it absolutely incorrectly. You're conflating a bunch of things that don't matter. It's much simpler than that.

Let's say you owe $5,000 for a medical procedure. You have $5,000 in your bank account, and $5,000 cash in your HSA.

You can either:

A) Pay it from your HSA, and let your $5,000 grow in a taxable account.
B) Pay it from your bank account, and let your $5,000 grow in a tax-free account.

The financially correct answer is obvious: B


By paying out of pocket you get to invest the $5,000 and let it grow tax free forever. And you can withdraw it at any time for any expense since when you pay out of pocket, you're "credited" that amount to withdraw from your HSA later tax free.

Where the money came from or how it was taxed in the past is irrelevant. Literally nothing else matters other than how the $5,000 grows going forward.
Last edited by JustinR on Thu Mar 28, 2019 2:12 am, edited 7 times in total.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by jeffyscott » Thu Mar 28, 2019 6:33 am

JustinR wrote:
Wed Mar 27, 2019 11:54 pm
Let's say you owe $5,000 for a medical procedure. You have $5,000 in your bank account, and $5,000 cash in your HSA.

You can either:

A) Pay it from your HSA, and let your $5,000 grow in a taxable account.
B) Pay it from your bank account, and let your $5,000 grow in a tax-free account.

The financially correct answer is obvious: B


By paying out of pocket you get to invest the $5,000 and let it grow tax free forever. And you can withdraw it at any time for any expense since when you pay out of pocket, you're "credited" that amount to withdraw from your HSA later tax free.
It is true that the $5000 HSA money becomes equivalent to Roth, by paying out of pocket and saving receipts. But if, like about 80% of taxpayers, someone is in the 0% cap gains tax bracket and pays the $5000 from the HSA, then invests $5000 in a Vanguard US stock fund that will distribute only qualified dividends and long term capital gains, there will be no taxes on the taxable investment either. In this case there will be no difference. Paying as you go from the HSA is simpler and heirs will be happier inheriting a taxable account, rather than an HSA and 30 years of medical receipts.
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by Bacchus01 » Thu Mar 28, 2019 7:22 am

jeffyscott wrote:
Thu Mar 28, 2019 6:33 am
JustinR wrote:
Wed Mar 27, 2019 11:54 pm
Let's say you owe $5,000 for a medical procedure. You have $5,000 in your bank account, and $5,000 cash in your HSA.

You can either:

A) Pay it from your HSA, and let your $5,000 grow in a taxable account.
B) Pay it from your bank account, and let your $5,000 grow in a tax-free account.

The financially correct answer is obvious: B


By paying out of pocket you get to invest the $5,000 and let it grow tax free forever. And you can withdraw it at any time for any expense since when you pay out of pocket, you're "credited" that amount to withdraw from your HSA later tax free.
It is true that the $5000 HSA money becomes equivalent to Roth, by paying out of pocket and saving receipts. But if, like about 80% of taxpayers, someone is in the 0% cap gains tax bracket and pays the $5000 from the HSA, then invests $5000 in a Vanguard US stock fund that will distribute only qualified dividends and long term capital gains, there will be no taxes on the taxable investment either. In this case there will be no difference. Paying as you go from the HSA is simpler and heirs will be happier inheriting a taxable account, rather than an HSA and 30 years of medical receipts.
I don’t care what my heirs think. I don’t plan to leave them anything.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by Hanksmoney » Thu Mar 28, 2019 9:53 am

runner3081 wrote:
Wed Mar 27, 2019 12:22 pm

Example... you have a balance of $125K in an HSA. You have paid out-of-pocket for medical expenses for 20 years and have receipts of $90K in medical expenses.

You want a new Tesla for $90K. Cash out $90K from the HSA (tax and penalty free) and buy the Tesla.
But you did pay taxes on the $90k when you used you post tax, net-income to pay for those medical expenses. Using the HSA allows you to use pre-tax money for those expenses.

If I have a $5000 bill now I can do 2 things:
1)I can use $6700 of my gross income to pay for it, $5000 after tax.
2)I can use $5000 of gross income to pay for it through the HSA. I can then apply that additional $1700 to my HSA and let that grow.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by JustinR » Thu Mar 28, 2019 12:22 pm

Hanksmoney wrote:
Thu Mar 28, 2019 9:53 am
runner3081 wrote:
Wed Mar 27, 2019 12:22 pm

Example... you have a balance of $125K in an HSA. You have paid out-of-pocket for medical expenses for 20 years and have receipts of $90K in medical expenses.

You want a new Tesla for $90K. Cash out $90K from the HSA (tax and penalty free) and buy the Tesla.
But you did pay taxes on the $90k when you used you post tax, net-income to pay for those medical expenses. Using the HSA allows you to use pre-tax money for those expenses.

If I have a $5000 bill now I can do 2 things:
1)I can use $6700 of my gross income to pay for it, $5000 after tax.
2)I can use $5000 of gross income to pay for it through the HSA. I can then apply that additional $1700 to my HSA and let that grow.
Again, incorrect. Read replies above. How the money on each bucket was taxed is irrelevant.

You have a $5k bill. You need to choose which bucket to take that out of, so that you can invest in the opposite bucket. That's the only consideration.


It's exactly like if someone were to say to you, "You owe me $5,000. You can pay for it from your taxable account or your Roth IRA. You choose."

Obviously you would pay from taxable, since Roth funds grow tax free. Same exact thing. The history of the funds from each account doesn't matter.
Last edited by JustinR on Thu Mar 28, 2019 3:32 pm, edited 3 times in total.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by StellaRose » Thu Mar 28, 2019 12:45 pm

I spoke with the rep from GEHA's plan today and she said that I only have until December 31st of the following year to submit receipts for reimbursement. Can anyone confirm or discredit that? I'm not sure that she was entirely sure since "no one ever asks about that plan."

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by aristotelian » Thu Mar 28, 2019 12:48 pm

You can use it for long term care insurance and medicare premiums. I see no scenario where it will be difficult to spend it down. Plus you can just save your receipts and reimburse yourself 10 years from now.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by willthrill81 » Thu Mar 28, 2019 1:00 pm

aristotelian wrote:
Thu Mar 28, 2019 12:48 pm
You can use it for long term care insurance and medicare premiums. I see no scenario where it will be difficult to spend it down. Plus you can just save your receipts and reimburse yourself 10 years from now.
I agree that spending down an HSA after age 65 shouldn't be difficult. Even someone who maxes out an HSA for 40 years at a 4% real return will have about $665k, which would support withdrawals of about a little over $2k monthly, which hardly seems to be far too much for medical expenses given the trend in rising medical costs. And of course, withdrawals for non-qualified medical expenses can be made as well if needed. Finding the middle ground between retaining one's HSA funds for future medical expenses, especially potentially very costly long-term care, and making taxable HSA withdrawals in order to prevent heirs from getting a big tax hit could be a real challenge though.
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by MrBeaver » Thu Mar 28, 2019 2:00 pm

jeffyscott wrote:
Wed Mar 27, 2019 4:28 pm
BD w/ Kung-Fu Grip wrote:
Wed Mar 27, 2019 12:36 pm
Other people with low expected retirement tax brackets could invest in a taxable S&P 500 fund paying only qualified dividends, assuming no Roth space available. The end result is still tax-free growth, without having to preserve receipts forever.
Yes, taxable investments in US stock index funds are pretty tax efficient for most people, since most of us (that is most Americans, maybe not most here) are in the 0% bracket for capital gains and qualified dividends.

And heirs get a stepped up cost basis, so there may be no tax on accumulated gains.
This.

I tried to do some analysis earlier on how the deflation of the value of saved receipts compares to tax drag in a taxable account. If in the 0% LTCG rate and you will not spend all the money in the account now for medical expenses in the future, it is better to withdrawal now and stick the money in a taxable account. However, this is an impossible strategy to execute on since we cannot know what our individual HSA-reiumbursable expenses will be for the rest of our lives.

viewtopic.php?f=10&t=256861

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by beyou » Thu Mar 28, 2019 2:14 pm

Having not started an HSA until I was late in my career, and now suddenly realizing the local ACA plans are not HSA compliance,
I don't expect to accumulate much in my HSA. So I decided in the interest of simplification to use HSA as a checking account and better alternative to my old FSA when I was on a low deductible plan. I pay my uncovered doctor and dentist bills immediately from my HSA and the balance stays pretty low. When I first opened the accounts I was hoping to use mutual funds and let this grow, but seeing how little I can contribute going forward, these have become nuisance accounts that I will close for simplification.

Had I started when HSA first became available, I would have saved and invested rather than use as a checking acct.
The years of contributions and compounding would have been nice, but this was not available when I started working and when it started,
I was a bit unsure of it's benefits.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by LadyGeek » Thu Mar 28, 2019 3:23 pm

I removed an off-topic post. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

...At all times we must conduct ourselves in a respectful manner to other posters.
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by JBTX » Thu Mar 28, 2019 8:10 pm

I look at an HSA as a combination of a super charged traditional IRA at the time of contribution, and then a Roth IRA for medical expenses after that. The post contribution Roth piece somewhat resembles a 529, but with a bit more flexibility.

When eligible, I always fully contributed to HSAs to get the up front deduction. Not just income tax but also FICA and Medicare (although effectively no fica if income exceeds FICA cap). But I went ahead and used the HSA for medical expenses because I had plenty of other Roth and traditional opportunities. Also at the time HSAs tended to be riddled with fees and poor investment choices. They have gotten better since then.

At the time I had no idea you could save your medical receipts and reimburse yourself 30 years down the road. But that wouldn't have changed my thinking.

Now if I had an HSA and could max out all other tax deferred I would let the HSA accumulate until some point where I thought it was optimal to deplete it, which may or may not be reitrement.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by MandyT » Sat Mar 30, 2019 11:04 am

BL wrote:
Wed Mar 27, 2019 10:32 pm
If you make a pretax contribution to your HSA,, it is not subject to federal income tax, Medicare tax or Social Security tax. If you pay on an after-tax basis, your contributions are subject to all of those taxes.
from
https://budgeting.thenest.com/can-hsa-r ... 24716.html
Note that the next sentence says
However, when you file your tax return, you avoid paying federal income tax, but you are still responsible for Medicare or Social Security taxes.
I object to the usage "subject to all of those taxes". I think what they meant to say is that contributions made on an after-tax basis have federal income tax, Medicare tax, and Social Security tax withheld, but the contribution can then be deducted on Form 8889 and you essentially get your federal withholding back (but not Medicare or SS).

Even the extra statement is wrong: the last "or" should be "and". Perhaps that is not the best site to trust as an authority on tax matters.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by TropikThunder » Sat Mar 30, 2019 1:04 pm

StellaRose wrote:
Thu Mar 28, 2019 12:45 pm
I spoke with the rep from GEHA's plan today and she said that I only have until December 31st of the following year to submit receipts for reimbursement. Can anyone confirm or discredit that? I'm not sure that she was entirely sure since "no one ever asks about that plan."
If it’s an HSA and not an FSA, then there is no deadline for “submitting receipts”. In fact, one does not ever have to “submit receipts” to the HSA custodian since it’s not the the custodian’s job to determine whether an expense was qualified or not. To request reimbursement from my Lively HSA, I have the option of submitting a receipt but one only needs to keep them in case of an audit.

Unsurprisingly, your rep is incorrect.

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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by grabiner » Sun Mar 31, 2019 10:42 am

jeffyscott wrote:
Thu Mar 28, 2019 6:33 am
It is true that the $5000 HSA money becomes equivalent to Roth, by paying out of pocket and saving receipts. But if, like about 80% of taxpayers, someone is in the 0% cap gains tax bracket and pays the $5000 from the HSA, then invests $5000 in a Vanguard US stock fund that will distribute only qualified dividends and long term capital gains, there will be no taxes on the taxable investment either. In this case there will be no difference. Paying as you go from the HSA is simpler and heirs will be happier inheriting a taxable account, rather than an HSA and 30 years of medical receipts.
And the people in this situation are likely to be better off using the HSA for current expenses anyway. If you are in the 12% federal tax bracket, it is unlikely that you can max out your retirement plans. Therefore, you are better off withdrawing from the HSA for your medical expenses, rather than paying out of pocket and contributing less to your IRA or 401(k).

If you can max out your retirement accounts, then you can use the HSA for additional tax-deferred space.

But you still need to use the HSA before your death, as it becomes taxable upon death; I do not believe your estate can reimburse past medical expenses from the HSA. (One solution is to make a charity the beneficiary of the HSA.)
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by jeffyscott » Sun Mar 31, 2019 1:10 pm

grabiner wrote:
Sun Mar 31, 2019 10:42 am
jeffyscott wrote:
Thu Mar 28, 2019 6:33 am
It is true that the $5000 HSA money becomes equivalent to Roth, by paying out of pocket and saving receipts. But if, like about 80% of taxpayers, someone is in the 0% cap gains tax bracket and pays the $5000 from the HSA, then invests $5000 in a Vanguard US stock fund that will distribute only qualified dividends and long term capital gains, there will be no taxes on the taxable investment either. In this case there will be no difference. Paying as you go from the HSA is simpler and heirs will be happier inheriting a taxable account, rather than an HSA and 30 years of medical receipts.
And the people in this situation are likely to be better off using the HSA for current expenses anyway. If you are in the 12% federal tax bracket, it is unlikely that you can max out your retirement plans. Therefore, you are better off withdrawing from the HSA for your medical expenses, rather than paying out of pocket and contributing less to your IRA or 401(k).

If you can max out your retirement accounts, then you can use the HSA for additional tax-deferred space.

But you still need to use the HSA before your death, as it becomes taxable upon death; I do not believe your estate can reimburse past medical expenses from the HSA. (One solution is to make a charity the beneficiary of the HSA.)
When working we were in the then 15% bracket because we maxed out retirement accounts. :)
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Re: Deferring HSA by paying medical Out-of-Pocket: Overblown?

Post by Portfolio7 » Sun Mar 31, 2019 2:10 pm

JustinR wrote:
Wed Mar 27, 2019 11:54 pm
Hanksmoney wrote:
Wed Mar 27, 2019 11:42 am
My thoughts are:
3)During retirement, Roth IRA distributions and 401k would be more valuable because they can be used for ANY expenses. That's why it would make more sense to max those out before building up an HSA nest egg since HSA is limited to medical expenses not covered by medicare.

4)Spending post tax money for medical expenses and being reimbursed with pre-tax money is a loss equivalent to the taxes paid. It requires more income to pay post-tax.

5)The limitations on the money make it less attractive and a risk in and of itself.
You're looking at it absolutely incorrectly. You're conflating a bunch of things that don't matter. It's much simpler than that.

Let's say you owe $5,000 for a medical procedure. You have $5,000 in your bank account, and $5,000 cash in your HSA.

You can either:

A) Pay it from your HSA, and let your $5,000 grow in a taxable account.
B) Pay it from your bank account, and let your $5,000 grow in a tax-free account.

The financially correct answer is obvious: B


By paying out of pocket you get to invest the $5,000 and let it grow tax free forever. And you can withdraw it at any time for any expense since when you pay out of pocket, you're "credited" that amount to withdraw from your HSA later tax free.

Where the money came from or how it was taxed in the past is irrelevant. Literally nothing else matters other than how the $5,000 grows going forward.
I'd just note: I agree that B is the correct answer IF you have the cash flow to justify it. As we've been in something of a cash crunch due to a rolling series of financial surprises, primarily driven by a host of unexpected medical bills, the HSA has instead been a big help to current cash flow, essentially providing a break on taxes equal to our marginal rate on the entire amount funded, while allowing us to contribute at least 5% still to retirement savings (which nets to over 11% after employer contributions; we have some good plans.) I think the answer to item 4 from the OP is largely a matter of whether you have the free cash flow and emergency fund (or equivalent) to justify it.
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