Talk:Emergency fund

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I don't think that adding a controversial perspective, then linking to a controversial wiki page is appropriate - at least without discussing this first.

Added by Nisiprius, 12:38, 2 July 2013‎:

Controversially, some argue that an emergency fund can also provide security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets); those advocating this approach generally recommend larger emergency funds than those who define emergencies solely in terms of unanticipated expenses. Thus, for example, a U.S. News writer, in an article entitled "Increase Cash Reserves in Retirement", suggests "3 to 6 months" living expenses for workers, but "at least a year" for retirees, because "the average length of a bear market is around a year and a half, so two years worth of cash reserves is likely to be a prudent amount." This approach is related to the "buckets" withdrawal strategies, also debated.

--LadyGeek 15:58, 2 July 2013 (CDT)

Reader feedback: Use of an HSA as an emergency fund

LinusP posted this comment on 10 June 2019 (view all feedback).

I was looking for a section on using an HSA as a "later tier" emergency fund - specifically, the amount that could be reimbursed due to qualified medical expenses paid out-of-pocket. This is along the same lines as the existing section for Roth IRAs, and I'm particularly curious about which (Roth or HSA) should be withdrawn from first if "earlier tier" emergency funds are used up.

An HSA is not a true emergency fund because the money must be used solely for medical expenses. A Roth IRA is cash that can be used for any unanticipated need.

If there is an unanticipated need for medical expenses, the decision of ("HSA" or "Roth IRA") to use first may depend on the investor's individual situation.

It may be appropriate to mention that an HSA can be considered as a source for unanticipated medical expenses. I'm not sure if / how this could be added to the page and will defer to the experts. LadyGeek 00:08, 11 June 2019 (UTC)

My understanding is that funds for qualified medical expenses that have been paid out of pocket can be reimbursed years after the fact, as long as there's appropriate documentation. So as long as you have the documentation, and don't withdraw more from the HSA than the total of those previously un-reimbursed expenses, it doesn't matter what the source of the emergency is - you can use the reimbursed funds for whatever you want. But I can defer to the experts on this as well. LinusP 05:29, 11 June 2019 (UTC)
Found it. The reimbursed funds must be used for qualified medical expenses - regardless if you have a receipt to cover the amount. Cash reimbursement for an emergency source (other than a qualified medical expense) becomes taxable income with a 20% penalty. If you are over age 65, it's still taxable income, but you don't pay the 20% penalty. This restriction is also mentioned here: Health savings account#Withdrawals, last sentence.
Publication 969 (2018), Health Savings Accounts and Other Tax-Favored Health Plans
You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax. You don’t have to make withdrawals from your HSA each year.

Additional tax.
There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR.

Exceptions. There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.

I added a note to the page. --LadyGeek 01:23, 12 June 2019 (UTC)
Sorry to harp on this, but I don't think your interpretation is quite right. If I understand you correctly, your stance is that, in the case of, say, a job loss, you couldn't ever use HSA funds without paying the additional 20% tax. I believe that, as long as the medical expenses were qualified, incurred since the establishment of the HSA, paid out-of-pocket, and appropriately documented, that amount of funds could be reimbursed (even in future years) without penalty. There are many Bogleheads threads about this, but I believe the relevant IRS documentation is Q39 in IRS Notice 2004-50, as noted in the first paragraph under Health_savings_account#Withdrawals.

────────────────────────────────────────────────────────────────────────────────────────────────────You are right, I totally missed that. From:

Internal Revenue Bulletin: 2004-33
Q-39. When must a distribution from an HSA be taken to pay or reimburse, on a tax-free basis, qualified medical expenses incurred in the current year?

A-39. An account beneficiary may defer to later taxable years distributions from HSAs to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established. Similarly, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary’s gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year. See Notice 2004-2, Q&A 31 and also Notice 2004-25, for transition relief in calendar year 2004 for reimbursement of medical expenses incurred before opening an HSA.

Example. An eligible individual contributes $1,000 to an HSA in 2004. On December 1, 2004, the individual incurs a $1,500 qualified medical expense and has a balance in his HSA of $1,025. On January 3, 2005, the individual contributes another $1,000 to the HSA, bringing the balance in the HSA to $2,025. In June, 2005, the individual receives a distribution of $1,500 to reimburse him for the $1,500 medical expense incurred in 2004. The individual can show that the $1,500 HSA distribution in 2005 is a reimbursement for a qualified medical expense that has not been previously paid or otherwise reimbursed and has not been taken as an itemized deduction. The distribution is excludable from the account beneficiary’s gross income.

I have removed the note from the page, as I think a new section should be added. Since neither of us are experts, this probably should be discussed in the forum to get a consensus. --LadyGeek 21:00, 12 June 2019 (UTC)