Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

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CletusCaddy
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Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

This post makes three points:

1. For people who follow the Boglehead HSA strategy of save-the-receipts, it is highly unlikely that you will ever accumulate enough receipts to drawdown the HSA at retirement.
2. Therefore the only reasonable use of the HSA at retirement is as a “self-funded LTC insurance account”.
3. It is entirely possible then, that you can over-save in an HSA

My wife and I are 38 and we have $70k in our HSAs. Our health insurance has a OOP max of $7k per year. Let’s assume that until age 65:

1. We keep a high deductible plan
2. We spend our OOP max every year at $7k real
3. We max out our HSA contributions every year
4. We “save the receipts” and don’t spend down any HSA money
5. Our HSA investments grow at 6% real

With these assumptions, at age 65 our HSA would have grown to $866k (in real 2024 dollars)

However, over this time, we would have only spent $189k in HSA-eligible OOP max spending over the 27 years from age 38 to 65. And let’s add another $30k in spending prior to age 38 for good measure. That’s a total of $219k in saved receipts.

Which means by the time of Medicare eligibility, we would still have a HSA balance of $647k real.

Maybe a Medicare expert can correct me, but I don’t think there are any costs other than LTC that one can reasonably expect to incur that could make a significant dent in this balance.

And so if one is “lucky” and doesn’t have much in the way of LTC costs, this HSA balance will need to drawn down on non-healthcare costs, making it taxable at ordinary income rates (and potentially at very high rates if passed down to a non-spouse heir).

Edit: one can quibble that the health plan used in my example has an unusually low OOP max. But I just checked Covered California and the HSA-eligible plan there has a OOP max of only $14k per year, which doesn’t change the conclusion of my analysis. Also I would suggest that my assumption of maxing out the OOP every year for three decades is aggressive.
snowday2022
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by snowday2022 »

I don’t have any firsthand experience, but I have a lot of patients with Medicare who spend a lot of money OOP on premiums and copays etc, especially with MC Advantage plans. I am guessing HSA funds could be used for that.

Glad to see you back.
lessismore22
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by lessismore22 »

snowday2022 wrote: Tue Apr 02, 2024 5:41 pm I don’t have any firsthand experience, but I have a lot of patients with Medicare who spend a lot of money OOP on premiums and copays etc, especially with MC Advantage plans. I am guessing HSA funds could be used for that.

Glad to see you back.
Correct. Those copays and deductibles can add up if someone has health concerns. Advantage plans are basically pay as you play.
Topic Author
CletusCaddy
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

lessismore22 wrote: Tue Apr 02, 2024 5:45 pm
snowday2022 wrote: Tue Apr 02, 2024 5:41 pm I don’t have any firsthand experience, but I have a lot of patients with Medicare who spend a lot of money OOP on premiums and copays etc, especially with MC Advantage plans. I am guessing HSA funds could be used for that.

Glad to see you back.
Correct. Those copays and deductibles can add up if someone has health concerns. Advantage plans are basically pay as you play.
What is the OOP max on a typical Medicare Advantage plan?
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Artsdoctor
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by Artsdoctor »

I think you're pretty optimistic about your rate of return. And chances are, you won't have an HSA-eligible health insurance plan every single year of your life up until Medicare.

But let's say that you do have a successful investment strategy. At any given point, you can always shut off your future contributions to your HSAs. If you find that returns have been phenomenal, you can start draining the account to reimburse yourself for past expenditures.

Even in retirement, it would be nice to know that all of your medical premiums, co-pays, deductibles, and care will be paid in pretax dollars without any taxation on the way out. There are quite a few things that Medicare and supplement won't pay for (eye glasses, hearing aids, home renovations for medically-necessary care, etc.). And you'd have your pick of home health care and then skilled nursing care if needed.

If worse comes to worst, you can then start withdrawing money for non-medical issues but pay tax like you would from an IRA.

Your spouse will get the account and can continue to use it as a tax-free account.

If you're charitably inclined, you could then leave it to your favorite charity (or donor advised fund) once the last spouse has died.

Overall, I think that the only mistake you might make is saving money in your HSA which could have been saved better elsewhere (for example, I wouldn't save in an HSA and not take advantage of an employer-matching 401k). But if you're keeping up with all of your other accounts, I'd max out the HSAs as long as you can.
WestCoastPhan
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by WestCoastPhan »

CletusCaddy wrote: Tue Apr 02, 2024 5:34 pm This post makes three points:

1. For people who follow the Boglehead HSA strategy of save-the-receipts, it is highly unlikely that you will ever accumulate enough receipts to drawdown the HSA at retirement.
2. Therefore the only reasonable use of the HSA at retirement is as a “self-funded LTC insurance account”.
3. It is entirely possible then, that you can over-save in an HSA

My wife and I are 38 and we have $70k in our HSAs. Our health insurance has a OOP max of $7k per year. Let’s assume that until age 65:

1. We keep a high deductible plan
2. We spend our OOP max every year at $7k real
3. We max out our HSA contributions every year
4. We “save the receipts” and don’t spend down any HSA money
5. Our HSA investments grow at 6% real

With these assumptions, at age 65 our HSA would have grown to $866k (in real 2024 dollars)

However, over this time, we would have only spent $189k in HSA-eligible OOP max spending over the 27 years from age 38 to 65. And let’s add another $30k in spending prior to age 38 for good measure. That’s a total of $219k in saved receipts.

Which means by the time of Medicare eligibility, we would still have a HSA balance of $647k real.

Maybe a Medicare expert can correct me, but I don’t think there are any costs other than LTC that one can reasonably expect to incur that could make a significant dent in this balance.

And so if one is “lucky” and doesn’t have much in the way of LTC costs, this HSA balance will need to drawn down on non-healthcare costs, making it taxable at ordinary income rates (and potentially at very high rates if passed down to a non-spouse heir).

Edit: one can quibble that the health plan used in my example has an unusually low OOP max. But I just checked Covered California and the HSA-eligible plan there has a OOP max of only $14k per year, which doesn’t change the conclusion of my analysis. Also I would suggest that my assumption of maxing out the OOP every year for three decades is aggressive.
It is super-easy to spend more than the OOP max if you use doctors who are out of network. The OOP max is calculated at what the plan pays for a procedure, not what the doc charges. If you're fortunate, you'll be in the scenario you describe with lots of ordinary income (essentially like a traditional IRA).
lessismore22
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by lessismore22 »

CletusCaddy wrote: Tue Apr 02, 2024 6:21 pm
lessismore22 wrote: Tue Apr 02, 2024 5:45 pm
snowday2022 wrote: Tue Apr 02, 2024 5:41 pm I don’t have any firsthand experience, but I have a lot of patients with Medicare who spend a lot of money OOP on premiums and copays etc, especially with MC Advantage plans. I am guessing HSA funds could be used for that.

Glad to see you back.
Correct. Those copays and deductibles can add up if someone has health concerns. Advantage plans are basically pay as you play.
What is the OOP max on a typical Medicare Advantage plan?
I believe it varies by plan, but upwards of 9k/year on some.
Silverado
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by Silverado »

I sure hope #3 comes true. I can think of nothing better than healthcare expenses that appear low relative to our very low six figure HSA balance over the next 40 years. What a victory that would be.
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CletusCaddy
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

lessismore22 wrote: Tue Apr 02, 2024 6:38 pm
CletusCaddy wrote: Tue Apr 02, 2024 6:21 pm
lessismore22 wrote: Tue Apr 02, 2024 5:45 pm
snowday2022 wrote: Tue Apr 02, 2024 5:41 pm I don’t have any firsthand experience, but I have a lot of patients with Medicare who spend a lot of money OOP on premiums and copays etc, especially with MC Advantage plans. I am guessing HSA funds could be used for that.

Glad to see you back.
Correct. Those copays and deductibles can add up if someone has health concerns. Advantage plans are basically pay as you play.
What is the OOP max on a typical Medicare Advantage plan?
I believe it varies by plan, but upwards of 9k/year on some.
Which doesn’t move the needle on the balance.
WestCoastPhan wrote: Tue Apr 02, 2024 6:29 pm If you're fortunate, you'll be in the scenario you describe with lots of ordinary income (essentially like a traditional IRA).
Which turns the decision making into taxable vs pre-tax 401k, which for a high earner with SS and RMDs is not so obvious in favor of the 401k.
lazynovice
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by lazynovice »

CletusCaddy wrote: Tue Apr 02, 2024 6:50 pm
lessismore22 wrote: Tue Apr 02, 2024 6:38 pm
CletusCaddy wrote: Tue Apr 02, 2024 6:21 pm
lessismore22 wrote: Tue Apr 02, 2024 5:45 pm
snowday2022 wrote: Tue Apr 02, 2024 5:41 pm I don’t have any firsthand experience, but I have a lot of patients with Medicare who spend a lot of money OOP on premiums and copays etc, especially with MC Advantage plans. I am guessing HSA funds could be used for that.

Glad to see you back.
Correct. Those copays and deductibles can add up if someone has health concerns. Advantage plans are basically pay as you play.
What is the OOP max on a typical Medicare Advantage plan?
I believe it varies by plan, but upwards of 9k/year on some.
Which doesn’t move the needle on the balance.
WestCoastPhan wrote: Tue Apr 02, 2024 6:29 pm If you're fortunate, you'll be in the scenario you describe with lots of ordinary income (essentially like a traditional IRA).
Which turns the decision making into taxable vs pre-tax 401k, which for a high earner with SS and RMDs is not so obvious in favor of the 401k.
We pretty much drew similar conclusions to you. We have never had issues with staying "in-network" on our plans. We rarely met our deductible (never mind the OOP maximum) even when the kids were on the plan- maybe three years. We were and continue to be very healthy.

As previous posters have pointed out, we did not have access to an HSA with every job.

If you choose to early retire and take COBRA, COBRA premiums can be paid out of the HSA. For two of us, our COBRA premiums were $1,500 per month.

I'm not sure what you mean about the choice between traditional 401(k) and taxable being difficult for high earners. It was never hard for us. We maxed out 401(k), did Back Door Roth and put the rest in taxable. Over time, what went to taxable was far and away more than we could get into 401(k).

We never had access to the Mega Back Door Roth and I suspect THAT would have been more of a calculation.
Roger2
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by Roger2 »

Artsdoctor wrote: Tue Apr 02, 2024 6:25 pm I think you're pretty optimistic about your rate of return. And chances are, you won't have an HSA-eligible health insurance plan every single year of your life up until Medicare.

But let's say that you do have a successful investment strategy. At any given point, you can always shut off your future contributions to your HSAs. If you find that returns have been phenomenal, you can start draining the account to reimburse yourself for past expenditures.

Even in retirement, it would be nice to know that all of your medical premiums, co-pays, deductibles, and care will be paid in pretax dollars without any taxation on the way out. There are quite a few things that Medicare and supplement won't pay for (eye glasses, hearing aids, home renovations for medically-necessary care, etc.). And you'd have your pick of home health care and then skilled nursing care if needed.

If worse comes to worst, you can then start withdrawing money for non-medical issues but pay tax like you would from an IRA.

Your spouse will get the account and can continue to use it as a tax-free account.

If you're charitably inclined, you could then leave it to your favorite charity (or donor advised fund) once the last spouse has died.

Overall, I think that the only mistake you might make is saving money in your HSA which could have been saved better elsewhere (for example, I wouldn't save in an HSA and not take advantage of an employer-matching 401k). But if you're keeping up with all of your other accounts, I'd max out the HSAs as long as you can.
Excellent description of the benefits of an HSA. I view my HSA very similar to this, however this explanation is much better than anything I could ever come up with.
marcopolo
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by marcopolo »

CletusCaddy wrote: Tue Apr 02, 2024 5:34 pm This post makes three points:

1. For people who follow the Boglehead HSA strategy of save-the-receipts, it is highly unlikely that you will ever accumulate enough receipts to drawdown the HSA at retirement.
2. Therefore the only reasonable use of the HSA at retirement is as a “self-funded LTC insurance account”.
3. It is entirely possible then, that you can over-save in an HSA

My wife and I are 38 and we have $70k in our HSAs. Our health insurance has a OOP max of $7k per year. Let’s assume that until age 65:

1. We keep a high deductible plan
2. We spend our OOP max every year at $7k real
3. We max out our HSA contributions every year
4. We “save the receipts” and don’t spend down any HSA money
5. Our HSA investments grow at 6% real

With these assumptions, at age 65 our HSA would have grown to $866k (in real 2024 dollars)

However, over this time, we would have only spent $189k in HSA-eligible OOP max spending over the 27 years from age 38 to 65. And let’s add another $30k in spending prior to age 38 for good measure. That’s a total of $219k in saved receipts.

Which means by the time of Medicare eligibility, we would still have a HSA balance of $647k real.

Maybe a Medicare expert can correct me, but I don’t think there are any costs other than LTC that one can reasonably expect to incur that could make a significant dent in this balance.

And so if one is “lucky” and doesn’t have much in the way of LTC costs, this HSA balance will need to drawn down on non-healthcare costs, making it taxable at ordinary income rates (and potentially at very high rates if passed down to a non-spouse heir).

Edit: one can quibble that the health plan used in my example has an unusually low OOP max. But I just checked Covered California and the HSA-eligible plan there has a OOP max of only $14k per year, which doesn’t change the conclusion of my analysis. Also I would suggest that my assumption of maxing out the OOP every year for three decades is aggressive.
It seems unlikely you will be employed till age 65.
In early retirement, you will probably be on ACA plan.
Expect higher OOP.
May not have HSA eligible plan available in your ACA area
ACA plans don't typically cover dental or vision.
Medicare does not cover dental or vision.
See recent thread about dental implant costs.

Save now while tax savings are most valuable at your high income. You can always pull back later if it seems you have too much in there.
Once in a while you get shown the light, in the strangest of places if you look at it right.
ChrisC
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by ChrisC »

And Medicare premiums, under IRMAA, can get out of hand easily for couples. Let's say you're permanently in Tier 3 (high pensions, high social security, and high tIRAs with RMDs (any combination of them) will land you there. And with an occasional high level capital gain in a taxable account, and you can be in and out of Tier 4 and 5. If you have Original Medicare with a Medigap plan and Part D for prescription coverage, for a couple, the annual premium hit could be $18K; while most of your medical expenses will be covered, a number won't be if you get sidelined with some illnesses where treatments are rapidly evolving and Medicare won't cover the experimental or development treatment that could be life-saving!

We started our HSAs in 2008, and Medical expenses, including Medicare premiums, out-of-pocket, dental and vision care, LTCi premiums, hover around $140K from the start of the HSAs. We've reimbursed ourselves around $70K from our HSAs (mainly my HSA -- my wife's HSA contributions were all catch-up contributions) and have around $120K in the tank. I think we can easily deplete our HSAs in 7 years with average medical expenses, including high IRMAA premiums (which my wife only pays because I'm not enrolled in Part B).
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CletusCaddy
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

ChrisC wrote: Wed Apr 03, 2024 11:08 pm And Medicare premiums, under IRMAA, can get out of hand easily for couples. Let's say you're permanently in Tier 3 (high pensions, high social security, and high tIRAs with RMDs (any combination of them) will land you there. And with an occasional high level capital gain in a taxable account, and you can be in and out of Tier 4 and 5. If you have Original Medicare with a Medigap plan and Part D for prescription coverage, for a couple, the annual premium hit could be $18K; while most of your medical expenses will be covered, a number won't be if you get sidelined with some illnesses where treatments are rapidly evolving and Medicare won't cover the experimental or development treatment that could be life-saving!

We started our HSAs in 2008, and Medical expenses, including Medicare premiums, out-of-pocket, dental and vision care, LTCi premiums, hover around $140K from the start of the HSAs. We've reimbursed ourselves around $70K from our HSAs (mainly my HSA -- my wife's HSA contributions were all catch-up contributions) and have around $120K in the tank. I think we can easily deplete our HSAs in 7 years with average medical expenses, including high IRMAA premiums (which my wife only pays because I'm not enrolled in Part B).
Medigap premiums are not HSA-eligible expenses
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Artsdoctor
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by Artsdoctor »

CletusCaddy wrote: Wed Apr 03, 2024 11:13 pm
ChrisC wrote: Wed Apr 03, 2024 11:08 pm And Medicare premiums, under IRMAA, can get out of hand easily for couples. Let's say you're permanently in Tier 3 (high pensions, high social security, and high tIRAs with RMDs (any combination of them) will land you there. And with an occasional high level capital gain in a taxable account, and you can be in and out of Tier 4 and 5. If you have Original Medicare with a Medigap plan and Part D for prescription coverage, for a couple, the annual premium hit could be $18K; while most of your medical expenses will be covered, a number won't be if you get sidelined with some illnesses where treatments are rapidly evolving and Medicare won't cover the experimental or development treatment that could be life-saving!

We started our HSAs in 2008, and Medical expenses, including Medicare premiums, out-of-pocket, dental and vision care, LTCi premiums, hover around $140K from the start of the HSAs. We've reimbursed ourselves around $70K from our HSAs (mainly my HSA -- my wife's HSA contributions were all catch-up contributions) and have around $120K in the tank. I think we can easily deplete our HSAs in 7 years with average medical expenses, including high IRMAA premiums (which my wife only pays because I'm not enrolled in Part B).
Medigap premiums are not HSA-eligible expenses
That's true. However, you can certainly reimburse yourself for previous medical expenses in an amount which corresponds to your Medigap premiums. So essentially, all of your medical expenses would be paid for out of your HSA when you're a Medicare recipient.
ChrisC
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by ChrisC »

CletusCaddy wrote: Wed Apr 03, 2024 11:13 pm
ChrisC wrote: Wed Apr 03, 2024 11:08 pm And Medicare premiums, under IRMAA, can get out of hand easily for couples. Let's say you're permanently in Tier 3 (high pensions, high social security, and high tIRAs with RMDs (any combination of them) will land you there. And with an occasional high level capital gain in a taxable account, and you can be in and out of Tier 4 and 5. If you have Original Medicare with a Medigap plan and Part D for prescription coverage, for a couple, the annual premium hit could be $18K; while most of your medical expenses will be covered, a number won't be if you get sidelined with some illnesses where treatments are rapidly evolving and Medicare won't cover the experimental or development treatment that could be life-saving!

We started our HSAs in 2008, and Medical expenses, including Medicare premiums, out-of-pocket, dental and vision care, LTCi premiums, hover around $140K from the start of the HSAs. We've reimbursed ourselves around $70K from our HSAs (mainly my HSA -- my wife's HSA contributions were all catch-up contributions) and have around $120K in the tank. I think we can easily deplete our HSAs in 7 years with average medical expenses, including high IRMAA premiums (which my wife only pays because I'm not enrolled in Part B).
Medigap premiums are not HSA-eligible expenses
Correct. We don’t have Medigap premiums. We have retiree health insurance (FEHB) that acts like a supplemental plan for my wife’s Medicare Part B coverage and covers me for all my medical expenses subject to co-pays and deductibles. I will HSA pay/reimburse myself for premium coverage I incurred after 65 for my FEHB insurance.

But my point above was to share with you the level of medical expenses just tied to the cost of Medicare.

If you want to leverage HSAs for LTC, I think one should consider using the HSA for paying premiums for a “good” LTCi policy.
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CletusCaddy
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

ChrisC wrote: Thu Apr 04, 2024 8:24 am If you want to leverage HSAs for LTC, I think one should consider using the HSA for paying premiums for a “good” LTCi policy.
My conclusion is exactly the opposite of this. Which is that someone maxing out HSA for decades should avoid LTCi entirely because they are very likely to have enough to cover LTC self-funded; indeed it is the only use for that HSA balance in the hundreds of thousands.
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CletusCaddy
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

So across the course of this thread we’ve uncovered these HSA-eligible expenses at retirement:

- Vision
- Dental
- Medicare B-D premiums
- OOP max on Medicare Advantage plan
- Medically necessary home renovations
- Out of network / insurance coverage denied care
- Long term care costs / skilled nursing

For a couple turning 65 today with a $600k HSA balance (net of old receipts reimbursed) which is still invested and growing, what is the category that is most likely to drain the account?

The last one. That’s my point.
Last edited by CletusCaddy on Thu Apr 04, 2024 11:14 am, edited 1 time in total.
ekid
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by ekid »

CletusCaddy wrote: Thu Apr 04, 2024 10:48 am
ChrisC wrote: Thu Apr 04, 2024 8:24 am If you want to leverage HSAs for LTC, I think one should consider using the HSA for paying premiums for a “good” LTCi policy.
My conclusion is exactly the opposite of this. Which is that someone maxing out HSA for decades should avoid LTCi entirely because they are very likely to have enough to cover LTC self-funded; indeed it is the only use for that HSA balance in the hundreds of thousands.
"Which is that someone maxing out HSA for decades should avoid LTCi entirely because they are very likely to have enough to cover LTC self-funded; indeed it is the only use for that HSA balance in the hundreds of thousands."

That is my decision. Possibly realized as result of (maybe your?) earlier thread couple of years ago.
Trapper
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by Trapper »

I believe I can use my HSA to reimburse myself for the cost of Medicare B premiums when I begin paying them at age 65.
Please correct me if I am incorrect here.

On a second note, I have passed on LTC insurance as I suspect I can use what remains in the HSA to pay along with large IRA withdrawals that would be mostly a tax deductible medical expense for high priced nursing home care.
ekid
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by ekid »

You are correct. But part B is not a high dollar expense.
adam1712
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by adam1712 »

Artsdoctor wrote: Tue Apr 02, 2024 6:25 pm I think you're pretty optimistic about your rate of return. And chances are, you won't have an HSA-eligible health insurance plan every single year of your life up until Medicare.

But let's say that you do have a successful investment strategy. At any given point, you can always shut off your future contributions to your HSAs. If you find that returns have been phenomenal, you can start draining the account to reimburse yourself for past expenditures.

Even in retirement, it would be nice to know that all of your medical premiums, co-pays, deductibles, and care will be paid in pretax dollars without any taxation on the way out. There are quite a few things that Medicare and supplement won't pay for (eye glasses, hearing aids, home renovations for medically-necessary care, etc.). And you'd have your pick of home health care and then skilled nursing care if needed.

If worse comes to worst, you can then start withdrawing money for non-medical issues but pay tax like you would from an IRA.

Your spouse will get the account and can continue to use it as a tax-free account.

If you're charitably inclined, you could then leave it to your favorite charity (or donor advised fund) once the last spouse has died.

Overall, I think that the only mistake you might make is saving money in your HSA which could have been saved better elsewhere (for example, I wouldn't save in an HSA and not take advantage of an employer-matching 401k). But if you're keeping up with all of your other accounts, I'd max out the HSAs as long as you can.
I think it's important to make a distinction between contributing money in your HSA versus keeping receipts and deferring withdrawals. If you have an HSA-eligible health plan, I believe almost everyone should max out contributions to an HSA every year.

But many of us have the opportunity to make HSA withdrawals to either increase our Roth accounts by increasing Roth conversions in a given tax bracket or double dip with another retirement account contribution if we're not maxing out all of our accounts. HSA's are great to utilize but I'd rather have the money in a Roth or other retirement account than an HSA during retirement with the increased flexibility.
DesertGator
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by DesertGator »

CletusCaddy wrote: Tue Apr 02, 2024 5:34 pm This post makes three points:

1. For people who follow the Boglehead HSA strategy of save-the-receipts, it is highly unlikely that you will ever accumulate enough receipts to drawdown the HSA at retirement.
2. Therefore the only reasonable use of the HSA at retirement is as a “self-funded LTC insurance account”.
3. It is entirely possible then, that you can over-save in an HSA

My wife and I are 38 and we have $70k in our HSAs. Our health insurance has a OOP max of $7k per year. Let’s assume that until age 65:

1. We keep a high deductible plan
2. We spend our OOP max every year at $7k real
3. We max out our HSA contributions every year
4. We “save the receipts” and don’t spend down any HSA money
5. Our HSA investments grow at 6% real

With these assumptions, at age 65 our HSA would have grown to $866k (in real 2024 dollars)

However, over this time, we would have only spent $189k in HSA-eligible OOP max spending over the 27 years from age 38 to 65. And let’s add another $30k in spending prior to age 38 for good measure. That’s a total of $219k in saved receipts.

Which means by the time of Medicare eligibility, we would still have a HSA balance of $647k real.

Maybe a Medicare expert can correct me, but I don’t think there are any costs other than LTC that one can reasonably expect to incur that could make a significant dent in this balance.

And so if one is “lucky” and doesn’t have much in the way of LTC costs, this HSA balance will need to drawn down on non-healthcare costs, making it taxable at ordinary income rates (and potentially at very high rates if passed down to a non-spouse heir).

Edit: one can quibble that the health plan used in my example has an unusually low OOP max. But I just checked Covered California and the HSA-eligible plan there has a OOP max of only $14k per year, which doesn’t change the conclusion of my analysis. Also I would suggest that my assumption of maxing out the OOP every year for three decades is aggressive.
This is a nice discussion, but isn't your situation a bit of an edge case? Having an HSA for most of your entire working career, optimal rate of return, low OOP/healthcare expenses? This is a legit argument, but I don't think it represents the median group of HSA enrollees.

HSA funds can be withdrawn and used without penalty at age 65 (merely taxed); isn't the worst case that the HSA funds amounted to just an expansion of your deferred space, not really different than a deductible TIRA or traditional 401k if you didn't need it for healthcare before age 65?
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by Lee_WSP »

Seems more like an over saving issue. If you’ve won the healthcare saving game, why keep playing?
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by Artsdoctor »

I think that financial planning using an HSA can be individualized. The OP is not obligated to maximize HSA contributions, and it sounds as if he doesn't want to anyway. So for him, it might be possible to over-save in an HSA. I think that there are other types of accounts that might be better suited to his needs.

For me, maximizing HSA contributions over two decades has been a nice part of our financial plan (and we live in CA where it's not even recognized). First, it's deducted from our income each year so there's federal tax-savings up front. Second, it's not taking away from any other investment account so there's no opportunity cost. Third, our family has had health-related expenses that have not been insignificant so hefty reimbursement amounts have already accumulated. Fourth, we'll probably be subjected to IRMAA for several years after going on Medicare so we may as well have the government subsidize their surcharges which they're charging us. Fifth, we'd like to stay in our house as long as possible and we've already widened many of the doors (a bona fide health-related expense certainly not covered by insurance), which was not cheap. Sixth, no one can really rule out long-term care expenses and I'd rather take the expenses from an HSA than deduct from Schedule A since out AGI is certain to be high for a while. But lastly, if there's money left in the account, it'll go to our DAF where our philanthropic plans are outlined--thereby leaving more money in the taxable accounts for personal beneficiaries who will benefit more from a stepped up basis rather than a taxable bolus of money from an HSA.

There are many ways to use an HSA. For us, the ways to use that money have become clearer as we've aged.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

DesertGator wrote: Thu Apr 04, 2024 11:26 am
CletusCaddy wrote: Tue Apr 02, 2024 5:34 pm This post makes three points:

1. For people who follow the Boglehead HSA strategy of save-the-receipts, it is highly unlikely that you will ever accumulate enough receipts to drawdown the HSA at retirement.
2. Therefore the only reasonable use of the HSA at retirement is as a “self-funded LTC insurance account”.
3. It is entirely possible then, that you can over-save in an HSA

My wife and I are 38 and we have $70k in our HSAs. Our health insurance has a OOP max of $7k per year. Let’s assume that until age 65:

1. We keep a high deductible plan
2. We spend our OOP max every year at $7k real
3. We max out our HSA contributions every year
4. We “save the receipts” and don’t spend down any HSA money
5. Our HSA investments grow at 6% real

With these assumptions, at age 65 our HSA would have grown to $866k (in real 2024 dollars)

However, over this time, we would have only spent $189k in HSA-eligible OOP max spending over the 27 years from age 38 to 65. And let’s add another $30k in spending prior to age 38 for good measure. That’s a total of $219k in saved receipts.

Which means by the time of Medicare eligibility, we would still have a HSA balance of $647k real.

Maybe a Medicare expert can correct me, but I don’t think there are any costs other than LTC that one can reasonably expect to incur that could make a significant dent in this balance.

And so if one is “lucky” and doesn’t have much in the way of LTC costs, this HSA balance will need to drawn down on non-healthcare costs, making it taxable at ordinary income rates (and potentially at very high rates if passed down to a non-spouse heir).

Edit: one can quibble that the health plan used in my example has an unusually low OOP max. But I just checked Covered California and the HSA-eligible plan there has a OOP max of only $14k per year, which doesn’t change the conclusion of my analysis. Also I would suggest that my assumption of maxing out the OOP every year for three decades is aggressive.
This is a nice discussion, but isn't your situation a bit of an edge case? Having an HSA for most of your entire working career, optimal rate of return, low OOP/healthcare expenses? This is a legit argument, but I don't think it represents the median group of HSA enrollees.

HSA funds can be withdrawn and used without penalty at age 65 (merely taxed); isn't the worst case that the HSA funds amounted to just an expansion of your deferred space, not really different than a deductible TIRA or traditional 401k if you didn't need it for healthcare before age 65?
The median HSA user is not saving receipts. They are drawing down the HSA as they go.

The median Boglehead HSA user is the one I am writing this post for.

In the worst case scenario where equities return 0% real for decades and I get diagnosed with a long term condition that only an out of network specialist can treat, sure, this discussion becomes irrelevant .

But I don’t plan for the worst case; I plan for the most likely case.

Global equities have returned 5% real for over 100 years.

I am likely to FIRE, when I do I am likely to go on a HSA eligible ACA plan, because those are cheaper and with the higher OOP and my much lower income I am likely to take advantage of the unreimbursed medical expense tax deduction.

This analysis leads to two actionable ideas that I think are relevant for others in my position:

1. I was actively considering LTC insurance but with this analysis I am now firmly decided against it.
2. If I can reasonably expect most of my HSA to be withdrawn at 40%+ marginal rates post-retirement, then should I seriously consider redirecting some of our current pre-tax 401k contributions to Roth 401k?
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by billaster »

CletusCaddy wrote: Thu Apr 04, 2024 1:14 pm The median Boglehead HSA user is the one I am writing this post for.
I'm not sure what you think the median Boglehead HSA user is, but Bank of American says that the average HSA balance is about $4,400. That's a far cry from the $70,000 today and more than $800,000 you project for your HSA.

It seems you are talking about an extreme case that very few will achieve or have to worry about.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by sciliz »

CletusCaddy wrote: Tue Apr 02, 2024 5:34 pm This post makes three points:

1. For people who follow the Boglehead HSA strategy of save-the-receipts, it is highly unlikely that you will ever accumulate enough receipts to drawdown the HSA at retirement.
2. Therefore the only reasonable use of the HSA at retirement is as a “self-funded LTC insurance account”.
3. It is entirely possible then, that you can over-save in an HSA

My wife and I are 38 and we have $70k in our HSAs. Our health insurance has a OOP max of $7k per year. Let’s assume that until age 65:

1. We keep a high deductible plan
2. We spend our OOP max every year at $7k real
3. We max out our HSA contributions every year
4. We “save the receipts” and don’t spend down any HSA money
5. Our HSA investments grow at 6% real

With these assumptions, at age 65 our HSA would have grown to $866k (in real 2024 dollars)

However, over this time, we would have only spent $189k in HSA-eligible OOP max spending over the 27 years from age 38 to 65. And let’s add another $30k in spending prior to age 38 for good measure. That’s a total of $219k in saved receipts.

Which means by the time of Medicare eligibility, we would still have a HSA balance of $647k real.

Maybe a Medicare expert can correct me, but I don’t think there are any costs other than LTC that one can reasonably expect to incur that could make a significant dent in this balance.

And so if one is “lucky” and doesn’t have much in the way of LTC costs, this HSA balance will need to drawn down on non-healthcare costs, making it taxable at ordinary income rates (and potentially at very high rates if passed down to a non-spouse heir).

Edit: one can quibble that the health plan used in my example has an unusually low OOP max. But I just checked Covered California and the HSA-eligible plan there has a OOP max of only $14k per year, which doesn’t change the conclusion of my analysis. Also I would suggest that my assumption of maxing out the OOP every year for three decades is aggressive.
It's cancer and Alzheimer's insurance.
Cancer, if you get it while working age and lose your job and insurance due to needing 2 million in chemo. You'll spend down the HSA on the way to bankruptcy.
Alzheimer's, if you get it after retirement and need $144k in longterm care *per year* for 10- 20 years.

Medical expenses are *usually* less than you can accumulate in HSAs. But those outliers are insanely brutal. I don't worry about oversaving.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by ChrisC »

CletusCaddy wrote: Thu Apr 04, 2024 10:48 am
ChrisC wrote: Thu Apr 04, 2024 8:24 am If you want to leverage HSAs for LTC, I think one should consider using the HSA for paying premiums for a “good” LTCi policy.
My conclusion is exactly the opposite of this. Which is that someone maxing out HSA for decades should avoid LTCi entirely because they are very likely to have enough to cover LTC self-funded; indeed it is the only use for that HSA balance in the hundreds of thousands.
I don’t know about that though I continue to evaluate whether I should drop my good LTCi policies, with sunk in premiums of $60k over 22 years of buying my wife and me 5 years of LTC coverage at maximum benefits of $613k each, inflation adjusted. The issue here isn’t whether I can self-fund, surely we can do that with existing funds and the HSAs are minor resources for this expensive potential exposure of LTC. The issue for us is whether transactionally it’s wise to ring fence some of the exposure by transferring some of the exposure to an insurer.

I am very risk adverse to long goodbyes and financially scrambling funds to pay for LTC (based on personal experiences with these situations for family members.) For now, LTCi brings me peace and some off-loading of long goodbye exposure.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by deltaneutral83 »

sciliz wrote: Thu Apr 04, 2024 1:35 pm It's cancer and Alzheimer's insurance.
Cancer, if you get it while working age and lose your job and insurance due to needing 2 million in chemo. You'll spend down the HSA on the way to bankruptcy.
Alzheimer's, if you get it after retirement and need $144k in longterm care *per year* for 10- 20 years.

Medical expenses are *usually* less than you can accumulate in HSAs. But those outliers are insanely brutal. I don't worry about oversaving.
I agree. There's not much 98-99% of the populace is going to be able to do if they need a non covered cancer drug/series of treatments, you simply do what you have to to live, and that might wipe you out, the bottom 98-99% of us are forced to take that risk every day IMO. If you're in IRMAA territory, and have a bad year or two and spend $40k on healthcare, sure most consider that significant, but being in an IRMAA tier sort of flags you as not being impacted by "a bad year" from a long term perspective.

Now of course, if you need some aforementioned rare non covered treatment or chronic condition, then it won't matter what you have done up until that point for planning purposes. I view it as I can't have enough in my HSA. I also don't expect 6% real, because if equities (and I assume the OP meant 100% equities to get 6% real) most BH will have mitigated the controllable financial risks in life but we can't help what we can't control, I can get a cancer, become permanently disabled, through no choice(s) of my own and be out of luck just as easily.

It will be interesting to see the crop of folks around 35-40ish who started at 22/23 years old with an HDHP/HSA and were able to, and prudent enough to max out their HSA and invest it until Medicare. I know HSA's started around 2006 but I'm not sure when the investing arm of the vehicle was approved. I didn't even hear about HSA's mainstream probably until 2015. Now each of my financially savvy peers have one if they have an HDHP offering.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by ChrisC »

deltaneutral83 wrote: Thu Apr 04, 2024 2:03 pm
sciliz wrote: Thu Apr 04, 2024 1:35 pm It's cancer and Alzheimer's insurance.
Cancer, if you get it while working age and lose your job and insurance due to needing 2 million in chemo. You'll spend down the HSA on the way to bankruptcy.
Alzheimer's, if you get it after retirement and need $144k in longterm care *per year* for 10- 20 years.

Medical expenses are *usually* less than you can accumulate in HSAs. But those outliers are insanely brutal. I don't worry about oversaving.
I agree. There's not much 98-99% of the populace is going to be able to do if they need a non covered cancer drug/series of treatments, you simply do what you have to to live, and that might wipe you out, the bottom 98-99% of us are forced to take that risk every day IMO. If you're in IRMAA territory, and have a bad year or two and spend $40k on healthcare, sure most consider that significant, but being in an IRMAA tier sort of flags you as not being impacted by "a bad year" from a long term perspective.

Now of course, if you need some aforementioned rare non covered treatment or chronic condition, then it won't matter what you have done up until that point for planning purposes. I view it as I can't have enough in my HSA. I also don't expect 6% real, because if equities (and I assume the OP meant 100% equities to get 6% real) most BH will have mitigated the controllable financial risks in life but we can't help what we can't control, I can get a cancer, become permanently disabled, through no choice(s) of my own and be out of luck just as easily.

It will be interesting to see the crop of folks around 35-40ish who started at 22/23 years old with an HDHP/HSA and were able to, and prudent enough to max out their HSA and invest it until Medicare. I know HSA's started around 2006 but I'm not sure when the investing arm of the vehicle was approved. I didn't even hear about HSA's mainstream probably until 2015. Now each of my financially savvy peers have one if they have an HDHP offering.
I agree as well. Perhaps, Cletus (the OP) foreshadows new, financially savvy and enterprising denizens of the HSA landscape. But even with savvy investment returns for the HSA, an exposure to major illnesses like cancer, MS, Parkinsons, Alzheimer's, Dementia, etc will likely dwarf HSA balances, if there's a long goodbye or the treatment is cutting edge, developmental and not currently supported by insurance coverage.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by Retired in CA »

Artsdoctor wrote: Tue Apr 02, 2024 6:25 pm
If you're charitably inclined, you could then leave it to your favorite charity (or donor advised fund) once the last spouse has died.
This is my plan. The beneficiary of my HSA is my DAF. If I don't withdraw all of the funds to cover medical expenses while I'm alive, the remainder is an easy way to increase tax-free charitable donations (albeit after I'm dead). Reduces the work required of my executor as well.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by dodecahedron »

Artsdoctor wrote: Thu Apr 04, 2024 1:10 pm I think that financial planning using an HSA can be individualized. The OP is not obligated to maximize HSA contributions, and it sounds as if he doesn't want to anyway. So for him, it might be possible to over-save in an HSA. I think that there are other types of accounts that might be better suited to his needs.

For me, maximizing HSA contributions over two decades has been a nice part of our financial plan (and we live in CA where it's not even recognized). First, it's deducted from our income each year so there's federal tax-savings up front. Second, it's not taking away from any other investment account so there's no opportunity cost. Third, our family has had health-related expenses that have not been insignificant so hefty reimbursement amounts have already accumulated. Fourth, we'll probably be subjected to IRMAA for several years after going on Medicare so we may as well have the government subsidize their surcharges which they're charging us. Fifth, we'd like to stay in our house as long as possible and we've already widened many of the doors (a bona fide health-related expense certainly not covered by insurance), which was not cheap. Sixth, no one can really rule out long-term care expenses and I'd rather take the expenses from an HSA than deduct from Schedule A since out AGI is certain to be high for a while. But lastly, if there's money left in the account, it'll go to our DAF where our philanthropic plans are outlined--thereby leaving more money in the taxable accounts for personal beneficiaries who will benefit more from a stepped up basis rather than a taxable bolus of money from an HSA.

There are many ways to use an HSA. For us, the ways to use that money have become clearer as we've aged.
Agree with above and have also set my beneficiary to be my DAF. Would be happy and grateful not to need much from my HSA during my lifetime and if anything remains in my HSA at death, I feel confident my daughters (DAF successor advisors) will direct funds to charities that will use the funds in alignment with our shared values.

Artsdoc mention expanding doorways. Other ways to use an HSA that have not yet been mentioned include cost of other home modifications with a letter of medical necessity written by a physician, such as ramps, stairlifts, home elevators, converting a bathtub or shower to walk-in, grab bars, modifying counter heights, etc. These may be medically needed even for those who do not yet need LTC.

In wake of recent air quality issues from wildfires, folks with respiratory challenges may be able to get a letter of medical necessity to improve HVAC. (My husband and his father had severe asthma in highly polluted area of NJ in the 1960s and they were able to deduct the cost of Installing and operating a central AC system recommended by their family physician.)

Gym membership and personal trainer expenses MAY qualify for HSA tax free distribution if prescribed by a physician for specific medical condition (rather than just to promote overall fitness/prevention.) Also massage therapy prescribed by a physician for specific medical condition.

Also travel costs (airfare, train, taxi, parking) to obtain medical care, which can add up if using an out of town specialty provider. Travel is covered for a companion as well as the person needing care. If needed for out of town care, up to $50 per person per night lodging is also allowable. So if traveling with a companion for outpatient in remote location, that’s $100 per night which can help defray hotel bills at least somewhat, more in some places than others.

Extra costs of high quality cataract lenses beyond the standard ones Medicare will pay for, drugs not on your Part D formulary, eyeglasses, contacts, dental implants, hearing aids, etc. The list goes on.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by AnEngineer »

CletusCaddy wrote: Tue Apr 02, 2024 5:34 pm 3. It is entirely possible then, that you can over-save in an HSA
For this to be true, marginal tax rate when withdrawing non medical expenses must be higher than when contributions were made. Otherwise, it's effectively a traditional IRA and it may have given you more tax advantaged contribution space.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by dodecahedron »

Retired in CA wrote: Thu Apr 04, 2024 2:44 pm
Artsdoctor wrote: Tue Apr 02, 2024 6:25 pm
If you're charitably inclined, you could then leave it to your favorite charity (or donor advised fund) once the last spouse has died.
This is my plan. The beneficiary of my HSA is my DAF. If I don't withdraw all of the funds to cover medical expenses while I'm alive, the remainder is an easy way to increase tax-free charitable donations (albeit after I'm dead). Reduces the work required of my executor as well.
Boldface added by me.

Totally agree that DAF as HSA or TIRA beneficiary greatly reduces burden on executor.

Charitable bequests in a will, the alternative, can be a lot of trouble for executor (tracking down charities which may have changed their names, addresses, or missions, proving appropriate distributions were made, etc.). Difficulty meeting deadlines for timely closing the estate. Attorney general of our state has to satisfied that the interests of nonprofit beneficiaries were protected.

HSA or TIRA Beneficiary designation to DAF so much better than in a will.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by dodecahedron »

AnEngineer wrote: Thu Apr 04, 2024 2:51 pm
CletusCaddy wrote: Tue Apr 02, 2024 5:34 pm 3. It is entirely possible then, that you can over-save in an HSA
For this to be true, marginal tax rate when withdrawing non medical expenses must be higher than when contributions were made. Otherwise, it's effectively a traditional IRA and it may have given you more tax advantaged contribution space.
Also far more flexibility than a tIRA in timing distributions since no RMDs on your HSA during your lifetime.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

dodecahedron wrote: Thu Apr 04, 2024 3:00 pm
AnEngineer wrote: Thu Apr 04, 2024 2:51 pm
CletusCaddy wrote: Tue Apr 02, 2024 5:34 pm 3. It is entirely possible then, that you can over-save in an HSA
For this to be true, marginal tax rate when withdrawing non medical expenses must be higher than when contributions were made. Otherwise, it's effectively a traditional IRA and it may have given you more tax advantaged contribution space.
Also far more flexibility than a tIRA in timing distributions since no RMDs on your HSA during your lifetime.
The fact that HSA withdrawals do not count against RMD is a negative, as it means that those withdrawals stack on top of RMDs and are potential taxed at even higher rates.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

ChrisC wrote: Thu Apr 04, 2024 2:24 pm
deltaneutral83 wrote: Thu Apr 04, 2024 2:03 pm
sciliz wrote: Thu Apr 04, 2024 1:35 pm It's cancer and Alzheimer's insurance.
Cancer, if you get it while working age and lose your job and insurance due to needing 2 million in chemo. You'll spend down the HSA on the way to bankruptcy.
Alzheimer's, if you get it after retirement and need $144k in longterm care *per year* for 10- 20 years.

Medical expenses are *usually* less than you can accumulate in HSAs. But those outliers are insanely brutal. I don't worry about oversaving.
I agree. There's not much 98-99% of the populace is going to be able to do if they need a non covered cancer drug/series of treatments, you simply do what you have to to live, and that might wipe you out, the bottom 98-99% of us are forced to take that risk every day IMO. If you're in IRMAA territory, and have a bad year or two and spend $40k on healthcare, sure most consider that significant, but being in an IRMAA tier sort of flags you as not being impacted by "a bad year" from a long term perspective.

Now of course, if you need some aforementioned rare non covered treatment or chronic condition, then it won't matter what you have done up until that point for planning purposes. I view it as I can't have enough in my HSA. I also don't expect 6% real, because if equities (and I assume the OP meant 100% equities to get 6% real) most BH will have mitigated the controllable financial risks in life but we can't help what we can't control, I can get a cancer, become permanently disabled, through no choice(s) of my own and be out of luck just as easily.

It will be interesting to see the crop of folks around 35-40ish who started at 22/23 years old with an HDHP/HSA and were able to, and prudent enough to max out their HSA and invest it until Medicare. I know HSA's started around 2006 but I'm not sure when the investing arm of the vehicle was approved. I didn't even hear about HSA's mainstream probably until 2015. Now each of my financially savvy peers have one if they have an HDHP offering.
I agree as well. Perhaps, Cletus (the OP) foreshadows new, financially savvy and enterprising denizens of the HSA landscape. But even with savvy investment returns for the HSA, an exposure to major illnesses like cancer, MS, Parkinsons, Alzheimer's, Dementia, etc will likely dwarf HSA balances, if there's a long goodbye or the treatment is cutting edge, developmental and not currently supported by insurance coverage.
Again, I am planning for the most likely case, not the rare case. Developing a rare cancer that incurs millions in costs not covered by insurance is by definition not the most likely case.

As far as the “new denizens” comment, I think you’ve hit on something instructive. When HSAs were created there was no ACA, so insurers could impose maximum benefit caps, pre existing condition exclusions, drop you when you get sick, etc.

Nowadays medical bankruptcy is rare. But based on the consensus on this thread, it appears common wisdom hasn’t caught up.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by AnEngineer »

CletusCaddy wrote: Thu Apr 04, 2024 3:04 pm
dodecahedron wrote: Thu Apr 04, 2024 3:00 pm
AnEngineer wrote: Thu Apr 04, 2024 2:51 pm
CletusCaddy wrote: Tue Apr 02, 2024 5:34 pm 3. It is entirely possible then, that you can over-save in an HSA
For this to be true, marginal tax rate when withdrawing non medical expenses must be higher than when contributions were made. Otherwise, it's effectively a traditional IRA and it may have given you more tax advantaged contribution space.
Also far more flexibility than a tIRA in timing distributions since no RMDs on your HSA during your lifetime.
The fact that HSA withdrawals do not count against RMD is a negative, as it means that those withdrawals stack on top of RMDs and are potential taxed at even higher rates.
How is it a negative when the balance doesn't count towards the size of RMD you need to take?

I also don't see where the higher rate comes from. You withdraw what you need (maybe with constraints of RMDs). IRA vs HSA above 65 for non medical get taxed the same.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

AnEngineer wrote: Thu Apr 04, 2024 3:21 pm
CletusCaddy wrote: Thu Apr 04, 2024 3:04 pm
dodecahedron wrote: Thu Apr 04, 2024 3:00 pm
AnEngineer wrote: Thu Apr 04, 2024 2:51 pm
CletusCaddy wrote: Tue Apr 02, 2024 5:34 pm 3. It is entirely possible then, that you can over-save in an HSA
For this to be true, marginal tax rate when withdrawing non medical expenses must be higher than when contributions were made. Otherwise, it's effectively a traditional IRA and it may have given you more tax advantaged contribution space.
Also far more flexibility than a tIRA in timing distributions since no RMDs on your HSA during your lifetime.
The fact that HSA withdrawals do not count against RMD is a negative, as it means that those withdrawals stack on top of RMDs and are potential taxed at even higher rates.
How is it a negative when the balance doesn't count towards the size of RMD you need to take?

I also don't see where the higher rate comes from. You withdraw what you need (maybe with constraints of RMDs). IRA vs HSA above 65 for non medical get taxed the same.
By the time you realize you have overfunded your HSA, you are in your mid 70s with $200-300k in annual RMDs. Any withdrawals of HSA at this point are stacked on top.

You kick yourself for not funding more Roth IRA 30 years prior when you read CletusCaddy’s post.
AnEngineer
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by AnEngineer »

CletusCaddy wrote: Thu Apr 04, 2024 3:30 pm
AnEngineer wrote: Thu Apr 04, 2024 3:21 pm
CletusCaddy wrote: Thu Apr 04, 2024 3:04 pm
dodecahedron wrote: Thu Apr 04, 2024 3:00 pm
AnEngineer wrote: Thu Apr 04, 2024 2:51 pm

For this to be true, marginal tax rate when withdrawing non medical expenses must be higher than when contributions were made. Otherwise, it's effectively a traditional IRA and it may have given you more tax advantaged contribution space.
Also far more flexibility than a tIRA in timing distributions since no RMDs on your HSA during your lifetime.
The fact that HSA withdrawals do not count against RMD is a negative, as it means that those withdrawals stack on top of RMDs and are potential taxed at even higher rates.
How is it a negative when the balance doesn't count towards the size of RMD you need to take?

I also don't see where the higher rate comes from. You withdraw what you need (maybe with constraints of RMDs). IRA vs HSA above 65 for non medical get taxed the same.
By the time you realize you have overfunded your HSA, you are in your mid 70s with $200-300k in annual RMDs. Any withdrawals of HSA at this point are stacked on top.
How is the situation worse than having that money in an IRA?

(BTW, if you have $200k RMD at age 75, your IRA balance is over $8M.)
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Lee_WSP
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by Lee_WSP »

CletusCaddy wrote: Thu Apr 04, 2024 3:30 pm
AnEngineer wrote: Thu Apr 04, 2024 3:21 pm
CletusCaddy wrote: Thu Apr 04, 2024 3:04 pm
dodecahedron wrote: Thu Apr 04, 2024 3:00 pm
AnEngineer wrote: Thu Apr 04, 2024 2:51 pm

For this to be true, marginal tax rate when withdrawing non medical expenses must be higher than when contributions were made. Otherwise, it's effectively a traditional IRA and it may have given you more tax advantaged contribution space.
Also far more flexibility than a tIRA in timing distributions since no RMDs on your HSA during your lifetime.
The fact that HSA withdrawals do not count against RMD is a negative, as it means that those withdrawals stack on top of RMDs and are potential taxed at even higher rates.
How is it a negative when the balance doesn't count towards the size of RMD you need to take?

I also don't see where the higher rate comes from. You withdraw what you need (maybe with constraints of RMDs). IRA vs HSA above 65 for non medical get taxed the same.
By the time you realize you have overfunded your HSA, you are in your mid 70s with $200-300k in annual RMDs. Any withdrawals of HSA at this point are stacked on top.

You kick yourself for not funding more Roth IRA 30 years prior when you read CletusCaddy’s post.
What!? No one who is over funding an HSA is voluntarily declining to fund their Roth.
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CletusCaddy
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

AnEngineer wrote: Thu Apr 04, 2024 3:36 pm
CletusCaddy wrote: Thu Apr 04, 2024 3:30 pm
AnEngineer wrote: Thu Apr 04, 2024 3:21 pm
CletusCaddy wrote: Thu Apr 04, 2024 3:04 pm
dodecahedron wrote: Thu Apr 04, 2024 3:00 pm

Also far more flexibility than a tIRA in timing distributions since no RMDs on your HSA during your lifetime.
The fact that HSA withdrawals do not count against RMD is a negative, as it means that those withdrawals stack on top of RMDs and are potential taxed at even higher rates.
How is it a negative when the balance doesn't count towards the size of RMD you need to take?

I also don't see where the higher rate comes from. You withdraw what you need (maybe with constraints of RMDs). IRA vs HSA above 65 for non medical get taxed the same.
By the time you realize you have overfunded your HSA, you are in your mid 70s with $200-300k in annual RMDs. Any withdrawals of HSA at this point are stacked on top.
How is the situation worse than having that money in an IRA?
There is no such thing as an inherited stretch HSA
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CletusCaddy
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by CletusCaddy »

Lee_WSP wrote: Thu Apr 04, 2024 3:37 pm
CletusCaddy wrote: Thu Apr 04, 2024 3:30 pm
AnEngineer wrote: Thu Apr 04, 2024 3:21 pm
CletusCaddy wrote: Thu Apr 04, 2024 3:04 pm
dodecahedron wrote: Thu Apr 04, 2024 3:00 pm

Also far more flexibility than a tIRA in timing distributions since no RMDs on your HSA during your lifetime.
The fact that HSA withdrawals do not count against RMD is a negative, as it means that those withdrawals stack on top of RMDs and are potential taxed at even higher rates.
How is it a negative when the balance doesn't count towards the size of RMD you need to take?

I also don't see where the higher rate comes from. You withdraw what you need (maybe with constraints of RMDs). IRA vs HSA above 65 for non medical get taxed the same.
By the time you realize you have overfunded your HSA, you are in your mid 70s with $200-300k in annual RMDs. Any withdrawals of HSA at this point are stacked on top.

You kick yourself for not funding more Roth IRA 30 years prior when you read CletusCaddy’s post.
What!? No one who is over funding an HSA is voluntarily declining to fund their Roth.
I meant Roth 401k
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Lee_WSP
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by Lee_WSP »

CletusCaddy wrote: Thu Apr 04, 2024 3:49 pm
Lee_WSP wrote: Thu Apr 04, 2024 3:37 pm
CletusCaddy wrote: Thu Apr 04, 2024 3:30 pm
AnEngineer wrote: Thu Apr 04, 2024 3:21 pm
CletusCaddy wrote: Thu Apr 04, 2024 3:04 pm

The fact that HSA withdrawals do not count against RMD is a negative, as it means that those withdrawals stack on top of RMDs and are potential taxed at even higher rates.
How is it a negative when the balance doesn't count towards the size of RMD you need to take?

I also don't see where the higher rate comes from. You withdraw what you need (maybe with constraints of RMDs). IRA vs HSA above 65 for non medical get taxed the same.
By the time you realize you have overfunded your HSA, you are in your mid 70s with $200-300k in annual RMDs. Any withdrawals of HSA at this point are stacked on top.

You kick yourself for not funding more Roth IRA 30 years prior when you read CletusCaddy’s post.
What!? No one who is over funding an HSA is voluntarily declining to fund their Roth.
I meant Roth 401k
Okay, but most people don’t actually have that as an option and it then reverts to Roth vs trad.
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dodecahedron
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by dodecahedron »

CletusCaddy wrote: Thu Apr 04, 2024 3:30 pm
AnEngineer wrote: Thu Apr 04, 2024 3:21 pm
CletusCaddy wrote: Thu Apr 04, 2024 3:04 pm
dodecahedron wrote: Thu Apr 04, 2024 3:00 pm
AnEngineer wrote: Thu Apr 04, 2024 2:51 pm

For this to be true, marginal tax rate when withdrawing non medical expenses must be higher than when contributions were made. Otherwise, it's effectively a traditional IRA and it may have given you more tax advantaged contribution space.
Also far more flexibility than a tIRA in timing distributions since no RMDs on your HSA during your lifetime.
The fact that HSA withdrawals do not count against RMD is a negative, as it means that those withdrawals stack on top of RMDs and are potential taxed at even higher rates.
How is it a negative when the balance doesn't count towards the size of RMD you need to take?

I also don't see where the higher rate comes from. You withdraw what you need (maybe with constraints of RMDs). IRA vs HSA above 65 for non medical get taxed the same.
By the time you realize you have overfunded your HSA, you are in your mid 70s with $200-300k in annual RMDs. Any withdrawals of HSA at this point are stacked on top.

You kick yourself for not funding more Roth IRA 30 years prior when you read CletusCaddy’s post.
I will not be kicking myself. My late husband and I have opportunistically converted well over half our tax advantaged into Roth. Since his death 11 years ago, I have contributed everything possible to Roth 403b and Roth IRA, no further tax-deferred contributions and I continued some conversions. My HSA contributions was not funded at expense of giving up Roth space.

I expect very manageable RMDs, much less than 200K, and since charitable giving is the biggest line item in my budget, I can use QCDs to reduce their AGI impact. I don’t foresee any urgent need to distribute from my HSA unless and until I run into substantial unreimbursed medical expenses, such as home renovations for aging in place or medically prescribed personal training or medically prescribed therapeutic massages for medical conditions I have reason to expect.

But of course neither Roth nor HSA were available to me 30 years prior to my RMD age. I was well into my 50s before Roth conversions were a possibility due to the fact that there used to be income limits on conversions. I was 61 when I first had access to an HDHP, so only a short window to contribute before I lost access when I turn 65.

Hard to foresee the future without a crystal ball, but I do think it plausible that future OOP maxes may be much higher. And who knows how long HSAs will be available. Not under our control.

I regret not being to contribute more than I was able to.
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dodecahedron
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by dodecahedron »

Another use for a large HSA:

Even if you don’t have big LTC expenses for yourself or your spouse, if you expect to have caregiving responsibilities for an elderly parent or aunt, uncle, grandparent, etc who needs LTC or even just expensive home modifications, then you can make qualifying tax-free distributions from your HSA for THEIR medical expenses, including, e.g., home health aides, as long as they qualify either as your dependent or your medical dependent. (Rules for claiming a medical dependent are much easier to satisfy than regular dependent rules!)

Your future medical dependent could also be a boomerang child who develops a medical problem and needs to come back and live with you for an extended period while they recover from a disabling condition. Their COBRA premiums could be qualified HSA expenses for you if they are your medical dependent.
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by madbrain »

billaster wrote: Thu Apr 04, 2024 1:31 pm I'm not sure what you think the median Boglehead HSA user is, but Bank of American says that the average HSA balance is about $4,400. That's a far cry from the $70,000 today and more than $800,000 you project for your HSA.

It seems you are talking about an extreme case that very few will achieve or have to worry about.
+1
Most people with chronic conditions would not have HSAs because HDHPs tend to be more expensive for them, so they use more appropriate HMO and PPOs with low ot no deductible. These are the same people who are most likely to need LTC later on, but are not eligible to buy LTCi for health reasons . I don't know how many Bogleheads are in this case, but surely I'm not the only one. My LTC funding plan is Medicaid.
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Artsdoctor
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by Artsdoctor »

I think that people from several different generations have offered examples to the OP, but some of this is something you just have to grow into. I've spent a career educating people on what's medically indicated and what insurance will/won't cover (partially or fully); it's almost always a surprise when potentially large expenses come up for people and decisions are very often made for financial reasons--and not medical.

At 38, just make sure that you're contributing everything you can to your various plans and try to leave some room for account-type variability. As you reach retirement, it's generally beneficial to have several accounts to choose from: taxable, tax-deferred, Roths, and HSAs. If you feel that it's possible to over-contribute to your HSA, contribute now up to a point and then stop at a later date to re-assess.
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ichee_marone
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Re: Why the save-the-receipts HSA strategy is really a self-funded LTC strategy

Post by ichee_marone »

Live below your means. Save in Roth 401k to the maximum; fund Roth IRA to max; choose a high-deductible health plan and fund the HSA to the maximum. Cash-flow your current medical bills. Save your receipts. Take the HSA deduction. Invest in index funds. Retire in your 50s. Convert any traditional monies to Roth. Don't leave your spouse with large RMDs.

You'll have need for your HSA in your long retirement and as suggested above name a DAF as the beneficiary.
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