Just learned something about HSAs and independent children that I did not know

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Topic Author
markcoop
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Just learned something about HSAs and independent children that I did not know

Post by markcoop » Fri Nov 08, 2019 11:14 am

My daughter is 23 years old. Up to this year she has been a dependent on my tax return. Starting next year she will have a full time job and live on her own. Since she will be providing more than half her income, not in school, living on her own and making a real salary, she will no longer be a dependent (not exactly sure which of those points are relevant for her not to be a dependent). At least for 2020, she will still be on my health insurance. I learned a couple of important points about HSAs and this situation:

1) I cannot use my HSA to pay for her medical bills even though my insurance is covering her because she is not a dependent anymore.
2) She can open her own HSA in 2020 because she will be covered by a HDHP plan. She can contribute the max for a family because she is on a family plan. This is independent of what I can contribute to an HSA. In other words, we both can contribute the max for a family ($7,100). I was told this by people at my work and confirmed this at multiple websites.

I have always used an HSA with Fidelity through my work. Any suggestions on an HSA for my daughter? I don't believe we'll be fully funding her HSA, but am trying to figure it out. At the very least, we want to contribute to the point of her medical bills in 2020. I don't expect much in the way of medical bills.

Thanks for any thoughts
Mark

niceguy7376
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Re: Just learned something about HSAs and independent children that I did not know

Post by niceguy7376 » Fri Nov 08, 2019 11:31 am

markcoop wrote:
Fri Nov 08, 2019 11:14 am
In other words, we both can contribute the max for a family ($7,100). I was told this by people at my work and confirmed this at multiple websites.
If this is true then if there is a financial way, i would recommend that you both max.

fabdog
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Re: Just learned something about HSAs and independent children that I did not know

Post by fabdog » Fri Nov 08, 2019 11:33 am

Fidelity would be a great place for her to open the HSA and contribute, no fees, can invest with no minimums.

Yes, this is an attractive feature of the HSA rules

Mike

MiddleOfTheRoad
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Re: Just learned something about HSAs and independent children that I did not know

Post by MiddleOfTheRoad » Fri Nov 08, 2019 11:47 am

Will her medical expenses be counted towards the family deductible or does she have her own deductible? I assume that the insurance plan is considered separate from the HSA rules (so she is counted towards the family deductible) but curious to know.

Topic Author
markcoop
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Re: Just learned something about HSAs and independent children that I did not know

Post by markcoop » Fri Nov 08, 2019 11:53 am

MiddleOfTheRoad wrote:
Fri Nov 08, 2019 11:47 am
Will her medical expenses be counted towards the family deductible or does she have her own deductible? I assume that the insurance plan is considered separate from the HSA rules (so she is counted towards the family deductible) but curious to know.
Her medical expenses will be counted toward the family deducible (at least that is my understanding).

As for maxing out her HSA, I guess I will need to prioritize HSA contributions vs Roth contributions as she will be in the 12% bracket.
Mark

Big Dog
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Re: Just learned something about HSAs and independent children that I did not know

Post by Big Dog » Fri Nov 08, 2019 11:55 am

fabdog wrote:
Fri Nov 08, 2019 11:33 am
Fidelity would be a great place for her to open the HSA and contribute, no fees, can invest with no minimums.

Yes, this is an attractive feature of the HSA rules

Mike
Concur on both points.

Clarice
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Re: Just learned something about HSAs and independent children that I did not know

Post by Clarice » Fri Nov 08, 2019 12:00 pm

I don’t understand why you would both be eligible to contribute the family max, $14k, if you are 1 family.

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Nate79
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Re: Just learned something about HSAs and independent children that I did not know

Post by Nate79 » Fri Nov 08, 2019 12:11 pm

Clarice wrote:
Fri Nov 08, 2019 12:00 pm
I don’t understand why you would both be eligible to contribute the family max, $14k, if you are 1 family.
It's a very specific loophole.

HereToLearn
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Re: Just learned something about HSAs and independent children that I did not know

Post by HereToLearn » Fri Nov 08, 2019 12:15 pm

markcoop wrote:
Fri Nov 08, 2019 11:53 am
MiddleOfTheRoad wrote:
Fri Nov 08, 2019 11:47 am
Will her medical expenses be counted towards the family deductible or does she have her own deductible? I assume that the insurance plan is considered separate from the HSA rules (so she is counted towards the family deductible) but curious to know.
Her medical expenses will be counted toward the family deducible (at least that is my understanding).

As for maxing out her HSA, I guess I will need to prioritize HSA contributions vs Roth contributions as she will be in the 12% bracket.
Why would she prioritize Roth over HSA? Won't the HSA reduce her federal taxable income? I am asking because I am wondering if there is something I am missing? The ability to tap her Roth contributions for any purpose?

Agree with you that she is eligible to contribute up the family max. What I do not know is if a parent is 55+, can the dependent contribute $8K or $7K?

She can easily open her own HSA at Fidelity. No fees, simple to open.

I think, but am not 100% certain, that she is no longer your dependent b/c she has been out of school for more than a year. If she had graduated May 2019, she would still be a dependent this year, but not in 2020.

inbox788
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Re: Just learned something about HSAs and independent children that I did not know

Post by inbox788 » Fri Nov 08, 2019 12:39 pm

Nate79 wrote:
Fri Nov 08, 2019 12:11 pm
Clarice wrote:
Fri Nov 08, 2019 12:00 pm
I don’t understand why you would both be eligible to contribute the family max, $14k, if you are 1 family.
It's a very specific loophole.
Nice loophole if it's correct. I'd try to max out the tax advantage space, too.
Young Adult Coverage
Under current law, if your plan covers children, you can now add or keep your children on your health insurance policy until they turn 26 years old.

When Someone Turns 26
Under-26 coverage ends on a child’s 26th birthday. When a child loses coverage on their 26th birthday, they qualify for a Special Enrollment Period. This lets them enroll in a health plan outside Open Enrollment.
https://www.hhs.gov/healthcare/about-th ... index.html

Topic Author
markcoop
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Re: Just learned something about HSAs and independent children that I did not know

Post by markcoop » Fri Nov 08, 2019 12:42 pm

HereToLearn wrote:
Fri Nov 08, 2019 12:15 pm
markcoop wrote:
Fri Nov 08, 2019 11:53 am
MiddleOfTheRoad wrote:
Fri Nov 08, 2019 11:47 am
Will her medical expenses be counted towards the family deductible or does she have her own deductible? I assume that the insurance plan is considered separate from the HSA rules (so she is counted towards the family deductible) but curious to know.
Her medical expenses will be counted toward the family deducible (at least that is my understanding).

As for maxing out her HSA, I guess I will need to prioritize HSA contributions vs Roth contributions as she will be in the 12% bracket.
Why would she prioritize Roth over HSA? Won't the HSA reduce her federal taxable income? I am asking because I am wondering if there is something I am missing? The ability to tap her Roth contributions for any purpose?

Agree with you that she is eligible to contribute up the family max. What I do not know is if a parent is 55+, can the dependent contribute $8K or $7K?

She can easily open her own HSA at Fidelity. No fees, simple to open.

I think, but am not 100% certain, that she is no longer your dependent b/c she has been out of school for more than a year. If she had graduated May 2019, she would still be a dependent this year, but not in 2020.
I agree that the HSA is better financially. However, the Roth will potentially grow for much longer while still maintaining flexibility to withdraw contributions. Sure, she could keep the HSA till retirement, but I imagine she wouldn't.

She graduated in Dec 2018. She has lived at home since working small jobs. I have certainly paid more than 50% of her living expenses. I was guessing she will still be a dependent for 2019, but perhaps not. Meaning I may be in this situation now.
Mark

MiddleOfTheRoad
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Re: Just learned something about HSAs and independent children that I did not know

Post by MiddleOfTheRoad » Fri Nov 08, 2019 12:43 pm

Clarice wrote:
Fri Nov 08, 2019 12:00 pm
I don’t understand why you would both be eligible to contribute the family max, $14k, if you are 1 family.
Because in this situation, you are a family to the health insurance company but to the IRS you are not.

MotoTrojan
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Re: Just learned something about HSAs and independent children that I did not know

Post by MotoTrojan » Fri Nov 08, 2019 12:53 pm

markcoop wrote:
Fri Nov 08, 2019 12:42 pm
HereToLearn wrote:
Fri Nov 08, 2019 12:15 pm
markcoop wrote:
Fri Nov 08, 2019 11:53 am
MiddleOfTheRoad wrote:
Fri Nov 08, 2019 11:47 am
Will her medical expenses be counted towards the family deductible or does she have her own deductible? I assume that the insurance plan is considered separate from the HSA rules (so she is counted towards the family deductible) but curious to know.
Her medical expenses will be counted toward the family deducible (at least that is my understanding).

As for maxing out her HSA, I guess I will need to prioritize HSA contributions vs Roth contributions as she will be in the 12% bracket.
Why would she prioritize Roth over HSA? Won't the HSA reduce her federal taxable income? I am asking because I am wondering if there is something I am missing? The ability to tap her Roth contributions for any purpose?

Agree with you that she is eligible to contribute up the family max. What I do not know is if a parent is 55+, can the dependent contribute $8K or $7K?

She can easily open her own HSA at Fidelity. No fees, simple to open.

I think, but am not 100% certain, that she is no longer your dependent b/c she has been out of school for more than a year. If she had graduated May 2019, she would still be a dependent this year, but not in 2020.
I agree that the HSA is better financially. However, the Roth will potentially grow for much longer while still maintaining flexibility to withdraw contributions. Sure, she could keep the HSA till retirement, but I imagine she wouldn't.

She graduated in Dec 2018. She has lived at home since working small jobs. I have certainly paid more than 50% of her living expenses. I was guessing she will still be a dependent for 2019, but perhaps not. Meaning I may be in this situation now.
I would suggest she cash flow medical expenses and invest the HSA as if it were her Roth.

willyd123
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Re: Just learned something about HSAs and independent children that I did not know

Post by willyd123 » Fri Nov 08, 2019 1:06 pm

It is definitely a planning opportunity I would consider. The only unfortunate thing is that presumably she will be in a pretty low tax bracket and thus the contribution she makes will not have a huge tax benefit at least initially. The good news is that if she continues contributing and investing over many years and saves that assets rather than spend them than the tax benefit will be very significant.

Spirit Rider
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Re: Just learned something about HSAs and independent children that I did not know

Post by Spirit Rider » Fri Nov 08, 2019 2:23 pm

She can have her cake and eat it so to speak. Or rather the tax deduction of the HSA contributions and make Roth contributions from any tax-free distributions for qualified medical expenses. Cash flowing HSA medical expenses on;y makes sense if you are maximizing all tax-advantaged contribution space. This is extremely difficult for an average college graduate.

However, she should first prioritize an HSA over a Roth IRA. She gets an income tax deduction on the HSA contribution and tax-free HSA distributions for qualified medical expenses. Even in a 12% marginal tax bracket, 12% is better than 0%. She can then effectively make tax-free rather than after-tax Roth contributions of those distributions.

She should continue to HSA tax-free distributions for qualified medical expenses, until such time as she is maximizing all tax-advantaged accounts. Not fully funding this unique opportunity with a family HSA contribution limit has a lost opportunity cost.

Clarice
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Re: Just learned something about HSAs and independent children that I did not know

Post by Clarice » Fri Nov 08, 2019 3:47 pm

MiddleOfTheRoad wrote:
Fri Nov 08, 2019 12:43 pm
Clarice wrote:
Fri Nov 08, 2019 12:00 pm
I don’t understand why you would both be eligible to contribute the family max, $14k, if you are 1 family.
Because in this situation, you are a family to the health insurance company but to the IRS you are not.
So how do I make this happen with no dependents? Have some kids and call them independent at age 0?

Topic Author
markcoop
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Re: Just learned something about HSAs and independent children that I did not know

Post by markcoop » Fri Nov 08, 2019 5:07 pm

Spirit Rider wrote:
Fri Nov 08, 2019 2:23 pm
She can have her cake and eat it so to speak. Or rather the tax deduction of the HSA contributions and make Roth contributions from any tax-free distributions for qualified medical expenses. Cash flowing HSA medical expenses on;y makes sense if you are maximizing all tax-advantaged contribution space. This is extremely difficult for an average college graduate.

However, she should first prioritize an HSA over a Roth IRA. She gets an income tax deduction on the HSA contribution and tax-free HSA distributions for qualified medical expenses. Even in a 12% marginal tax bracket, 12% is better than 0%. She can then effectively make tax-free rather than after-tax Roth contributions of those distributions.

She should continue to HSA tax-free distributions for qualified medical expenses, until such time as she is maximizing all tax-advantaged accounts. Not fully funding this unique opportunity with a family HSA contribution limit has a lost opportunity cost.
Yes, I agree (I think). As an example to make sure I understand, if I know she will have $1K in medical expenses and wants to contribute $1K to a Roth, it would make sense to fund the HSA for $1K. She can then withdraw the $1K after the medical expenses and then put it into the Roth. That $1K got the deduction and essentially ended up in the Roth. She could just leave it in the HSA, but I think it has more power in the Roth. Of course, if she could, it would be best to max out the Roth, the HSA and pay medical expenses out of pocket. But looking at it in an incremental way, the $1K I described would be best way to do it till she can afford to fill up the Roth.
Mark

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MP123
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Re: Just learned something about HSAs and independent children that I did not know

Post by MP123 » Fri Nov 08, 2019 9:41 pm

Clarice wrote:
Fri Nov 08, 2019 3:47 pm
MiddleOfTheRoad wrote:
Fri Nov 08, 2019 12:43 pm
Clarice wrote:
Fri Nov 08, 2019 12:00 pm
I don’t understand why you would both be eligible to contribute the family max, $14k, if you are 1 family.
Because in this situation, you are a family to the health insurance company but to the IRS you are not.
So how do I make this happen with no dependents? Have some kids and call them independent at age 0?
Non-dependent children that are still on the family health insurance (HSA qualified) is one way.

Another is domestic partners (in states that recognize them) and allow them to share a family health plan but since they aren't spouses to the IRS they can both contribute the maximum family contribution to their respective HSAs.

Saving$
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Re: Just learned something about HSAs and independent children that I did not know

Post by Saving$ » Fri Nov 08, 2019 10:46 pm

markcoop wrote:
Fri Nov 08, 2019 5:07 pm
Yes, I agree (I think). As an example to make sure I understand, if I know she will have $1K in medical expenses and wants to contribute $1K to a Roth, it would make sense to fund the HSA for $1K. She can then withdraw the $1K after the medical expenses and then put it into the Roth. That $1K got the deduction and essentially ended up in the Roth. She could just leave it in the HSA, but I think it has more power in the Roth. Of course, if she could, it would be best to max out the Roth, the HSA and pay medical expenses out of pocket. But looking at it in an incremental way, the $1K I described would be best way to do it till she can afford to fill up the Roth.
Your $1k example works because the original $1k goes into the HSA pre-tax, and comes right back out to go to the Roth. So for all intents and purposes she is self funding the medical expenses and getting pretax money into a Roth.

Let's continue with your example, with the understanding that her 2020 medical expenses are maxed at $1k, but she has a total of $3k to invest.
a. For the first $1k, I like your idea
b. For the next $2k, she also puts that, pretax, into the HSA. but since she does not have any more medical expenses to get that out, this next $2k stays in the HSA. It can be invested just like the Roth money can be invested.

The advantage to "saving for retirement" in an HSA is the money goes in pretax. So if her tax rate is 15%, she would have to earn $2300 to have $2000 after taxes to invest in a Roth. But with the HSA, she earns $2k and can put it all in the HSA (or even better - since she would have to earn $2300 to put $2k into a Roth, put $2300 into an HSA)

The disadvantage to "saving for retirement" in an HSA is that you must have medical expenses in order to get your principal out early without penalty. However, as time goes on and you just shovel money in an HSA without ever taking any out, you can save those medical expense invoices and use them years later if you need to get money out of the HSA in an emergency. Or in the case of not fully funding the HSA, putting the equivalent of what you take out in a Roth, and then using the Roth as the backup emergency fund.

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teen persuasion
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Re: Just learned something about HSAs and independent children that I did not know

Post by teen persuasion » Fri Nov 08, 2019 11:21 pm

Just make sure she opens the HSA before she incurs any medical expenses. She can't reimburse herself for expenses incurred before the HSA was opened.

I had to convince DS2 of the need to open his own HSA, given his history of quidditch injuries.

Topic Author
markcoop
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Re: Just learned something about HSAs and independent children that I did not know

Post by markcoop » Sat Nov 09, 2019 9:44 am

Saving$ wrote:
Fri Nov 08, 2019 10:46 pm
The disadvantage to "saving for retirement" in an HSA is that you must have medical expenses in order to get your principal out early without penalty.
This is a key point for a healthy 23 year old who may want to have access to some of that money (note we already opened a Roth IRA for her a few years ago, so that 5-year clock is almost done).

She will definitely open an HSA Jan 1, 2020 with at least a token amount given this discussion.

I am still not sure of one point above. Can I claim my daughter as a dependent in 2019? I think the answer is no, because she is over 19 and wasn't a student even though she lived at home most of the year and I provided more than half her financial support. If the answer is no, then I can open an HSA for her right now and fund it to the 2019 family max. At the very least, she should open an HSA right now with the minimum contribution.

Thanks
Mark

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Re: Just learned something about HSAs and independent children that I did not know

Post by Spirit Rider » Sat Nov 09, 2019 10:57 am

If she attended college < 5 months and was 23.

She was not a dependent for 2019, none of her medical expenses during 2019 can be reimbursed from your HSA account, she can open an HSA account with the family contribution limit, but none of her 2019 medical expenses before the date she opens and funds the account can be reimbursed.

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