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How to Categorize HSA?
Old 12-05-2017, 04:51 PM   #1
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How to Categorize HSA?

I will be using an HSA for the first time next year. For me the funding will be after tax dollars and itemized on my tax returns for 2018. As I am starting to think about next years budget though I am not sure how to categorize HSA funding.

Do you consider it a medical expense? Or do you consider it a specialized investment account like IRA, Roth, etc?


Bob D
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Old 12-05-2017, 05:06 PM   #2
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It's definitely not a medical expense.

If your HSA custodian allows you to invest your money, there are strategies that can be beneficial to you where you don't spend any money from this account until after you retire. Why? Because it's tax-free if you spend it on medical costs when you retire.

So effectively, it's the one investment vehicle the government provides you where you can put money in pre-tax, and take it out without paying tax, as long as you have enough medical expenses to apply them to (which many of us will have in old age).

With regular IRAs, you pay taxes when you withdraw, with Roth accounts, you pay taxes before you put the money in - so HSAs can be very beneficial.

The counterpoint to this is potentially limited investment options and high fees (but probably still not enough to offset the impact of taxes).

Edit: Just in case it isn't clear - the HSA is *not* linked to your health coverage or your employer. The account belongs to you and will stay yours even if you change health plans and/or employers. You will not be able to put money into it unless you have an HSA-compatible health plan, but otherwise, it's under your control.
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Old 12-05-2017, 05:10 PM   #3
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Depends on how you look at the "S" in HSA.

S can be savings, kinda like an IRA.

S can be spending, kinda like FSA.

For me, the S is more the latter.
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Old 12-05-2017, 05:10 PM   #4
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Quote:
Originally Posted by SoReady View Post
I will be using an HSA for the first time next year. For me the funding will be after tax dollars and itemized on my tax returns for 2018. As I am starting to think about next years budget though I am not sure how to categorize HSA funding.

Do you consider it a medical expense? Or do you consider it a specialized investment account like IRA, Roth, etc?


Bob D
It's not an expense. It's part of our net worth until we draw on it. We treat it as an investment account.
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Old 12-05-2017, 05:25 PM   #5
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It's not an expense. It's part of our net worth until we draw on it. We treat it as an investment account.
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This is what we do.
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Old 12-05-2017, 05:44 PM   #6
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I'm retired and still contribute to an HSA. Contributions are just a transfer from one account to another that generates a current year deduction. It's not an expense and it's not new savings. After 10 years, we've never taken a distribution and don't intend to for many more. The triple tax benefits can't be beat. So it's really just a hyper-tax-advantaged part of our retirement strategy.

OTOH, if I was working and just using the HSA as a tax-free mechanism to cover current year medical expenses, then I could possibly see treating the contributions as an expense at the time of cashflow, somewhat akin to accruing a liability. Then there would be no expense when you paid providers from the HSA. Even then, seems like a bit of accounting gymnastics. I'd be more inclined to treat the contributions as savings either way. And count expense when you pay the providers. Simpler and more meaningful, IMHO.
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Old 12-05-2017, 10:49 PM   #7
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Quote:
Originally Posted by SoReady View Post
I will be using an HSA for the first time next year. For me the funding will be after tax dollars and itemized on my tax returns for 2018. As I am starting to think about next years budget though I am not sure how to categorize HSA funding.

Do you consider it a medical expense? Or do you consider it a specialized investment account like IRA, Roth, etc?


Bob D
I considered my HSA similar to a Roth but better.... I could fund it with pre-tax money while I was working and after I stopped working take a deduction for contributions.... the growth was tax-free as long as I spent the money on qualified expenses.

I funded mine but paid any medical expenses from cash flow or savings and let it continue to grow tax-free just like a Roth.
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Old 12-06-2017, 01:38 AM   #8
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Originally Posted by SoReady View Post
I will be using an HSA for the first time next year. For me the funding will be after tax dollars and itemized on my tax returns for 2018. As I am starting to think about next years budget though I am not sure how to categorize HSA funding.

Do you consider it a medical expense? Or do you consider it a specialized investment account like IRA, Roth, etc?


Bob D
If at all possible, it is better to fund an HSA with a payroll deduction. If
you fund with after tax dollars and itemize, you are paying FICA and FUTA
taxes. If you have it deducted from payroll, it avoids those taxes. That is
part of what makes an HSA a super retirement account, better than a tIRA
or Roth. The other half of what makes it a super retirement account is the
ability to save and bank medical expenses as a future offset against
withdrawals. Most people will likely incur enough out of pocket medical
expenses during their lifetime that their HSA funds will be entirely tax free
if managed correctly.

I vote that an HSA is a specialized investment account *better* than an IRA
or Roth. If your personal situation doesn't allow for payroll deduction contributions,
I think it is still a super investment account, just not quite as super.
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Old 12-06-2017, 09:17 AM   #9
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Thanks everyone.

I like the concept of considering it a "saving" account until money is spent from it and then accrue that as an expense. I'm probably over thinking it all, but it was something that popped into my head the other day.

In my case, I am already retired at 61 (so no paycheck) and will deduct the contributions at tax time. I do have Long Term Care insurance and it is my understanding that I can pay those premiums, with limitations, with HSA money. So I am considering that. There would still be money left over for future medical bills.

I know some say to just let the money stay in the HSA for years and pay medical bills with other money. I come from the world of HRA so it was spend it or lose it type mentality. I understand the tax benefits for an HSA contribution, but I'm not sure why I wouldn't spend the money from an HSA over an after tax account.

Bob D
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Old 12-06-2017, 09:25 AM   #10
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Because it grows tax free forever, and you can withdraw tax free later for any past qualified medical expense. Throw any "spend it or lose it" notions out the window, they don't apply.
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Old 12-06-2017, 09:31 AM   #11
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One thing you can do if you pay for your LTC insurance and medical bills from after-tax accounts is to keep a file of all those expense from since the date that you established your HSA that you did not include as itemized deductions.... which is most expenses for most people given the 7.5%/10% of AGI hurdle) ... then at any time in the future you can write yourself a check from the HSA to reimburse yourself for those expenses with no tax implications.

https://www.bogleheads.org/forum/viewtopic.php?t=107058

Quote:
Put every medical related receipt in a big folder and let them accumulate over the years. Then any time you want to tap into your HSA for any reason you can spend it without penalty up to the amount of receipts you have saved. Even if it's 10 years from now and you are spending the HSA for a Caribbean cruise.
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Old 12-06-2017, 09:32 AM   #12
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Originally Posted by SoReady View Post
Thanks everyone.

I like the concept of considering it a "saving" account until money is spent from it and then accrue that as an expense. I'm probably over thinking it all, but it was something that popped into my head the other day.

In my case, I am already retired at 61 (so no paycheck) and will deduct the contributions at tax time. I do have Long Term Care insurance and it is my understanding that I can pay those premiums, with limitations, with HSA money. So I am considering that. There would still be money left over for future medical bills.

I know some say to just let the money stay in the HSA for years and pay medical bills with other money. I come from the world of HRA so it was spend it or lose it type mentality. I understand the tax benefits for an HSA contribution, but I'm not sure why I wouldn't spend the money from an HSA over an after tax account.

Bob D
With a HSA, keep really good records. I use my HSA kinda like a FSA in that I reimburse myself for qualified medical expenses in Jan for the year prior. But unlike a FSA where I had to fax receipts to show what expenses I had, with an HSA, that is more an honor system (of course, you gotta keep accurate in case you ever get questioned by the IRS). Instead of sending in receipts, I just request how much I spent to get reimbursed and have the money deposited from HSA to my checking.
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Old 12-06-2017, 10:35 AM   #13
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Originally Posted by pb4uski View Post
One thing you can do if you pay for your LTC insurance and medical bills from after-tax accounts is to keep a file of all those expense from tince the date that you established your HSA that you did not include as itemized deductions.... which is most expenses for most people given the 7.5%/10% of AGI hurdle) ... then at any time in the future you can write yourself a check from the HSA to reimburse yourself for those expenses with no tax implications.

https://www.bogleheads.org/forum/viewtopic.php?t=107058
Thanks for the link to the boglehead forum. Good discussion and useful information in their wiki pages.
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