HSA as additional tax-deferred savings?

[Finance Dave]

I'm always looking at ways to save more tax-deferred since I'm in a relatively high bracket today.

I have an HSA through work, which allows both wife and I to save about $3,000/year in the account, then use it for medical expenses.

However, what most people do is use the money to pay their medical costs. What we do is pay the medical costs with after-tax dollars, and let the tax deferred HSA grow.

The rules say we can use them later in life...so I'm not worried about being able to use the amount at some point...we'll definitely need it.

We've been funding this for about 4 years now...and we can invest the money in various mutual funds, so we've invested $24,000 and it's now at about $25,000.

What do you think of this strategy?

Note this is an HSA, not an FSA...which has more restrictive rules.

 

[kyounge1956]

This is something I need to look into also, because when I retire it's possible I may be able to roll over a percentage of my unused sick leave balance into an HSA (it depends on a vote of everyone retiring that year whether unused sick leave will be a cash lump sum or HSA rollover).

I don't know much about the HSA. Can you suggest a good overview article or link?

 

[kaneohe]

I think HSAs are great.......the only things I know where you get triple tax exemption....
salary reduction (or the equivalent tax deduction) for the premiums, tax-deferral on the earnings, and then tax free withdrawal for qualified medical expenses. Things like TIRAs, Roths, etc only give you 2 of the 3. If you plan to just use them for a savings account, one thing to consider is the preservation of past medical expense records.
Over long periods of time, surprises can happen.........printed ink fades sometimes into oblivion, other media get updated so tapes, floppies, etc become unreadable by newer devices, things get lost, burned, flooded, etc. ....or are you thinking you will have such huge medical expenses, you don't need older records. You might want to do the math on that..........how much can you save and what will your future expenses be.

After age 65, you can use them for other type expenses , but you'll be taxed. If you die before all is used up, your heirs get taxed too.

Here's a link to some basic info:Bank of America | Please Select Your State
I'm sure there are more comprehensive articles.

here is another:http://www.bogleheads.org/wiki/Health_Savings_Account
and another:http://www.fatwallet.com/forums/finance/542257/
the thread itself may be tough-going because it is so long but there are some useful links and current rates.

 

[ziggy29]

Sure, why not? We've had an HSA for nearly two years and there's about $9,000 in it. Our plan is to set 2-3 years of maximum out of pocket medical costs (currently $4,000 a year) aside in the HSA in cash and invest the rest in a moderate allocation mutual fund (about 60/40). So before too long, probably some time next year, we're going to have the cash cushion we want and then start putting new contributions into the mutual fund.

We are withdrawing from the HSA for some, but not all, of our medical expenses. I don't plan to use it exclusively for retirement investing, but I do expect our contributions will significantly exceed the rate we tap into the account for medical costs.

 

[easysurfer]

I've had a HSA for almost two years and have only been using it for savings (haven't withdrawn any from it to reimburse myself) thus far, but have been tempted to.

There is the discussion, is the "S" is HSA best used for Savings, or Spending or a combination of both.

 

[FUEGO]

Finance Dave, we are following this exact strategy. Been doing it for a few years now, and we have about $16000 in the account. It is a nice way to tax defer $6000 of income each year. And for us, being in a low-ish bracket, we also get to completely avoid SS and medicare taxes as well since the HSA funding is done through the employer's cafeteria section 125 plan.

We have a receipt box where we throw all medical receipts. Usually around Jan 1, I'll summarize those receipts in a spreadsheet (takes maybe an hour). The spreadsheet is usually 1 page, so I'll print it and paperclip all the year's receipts to the summary. The electronic copy of the spreadsheet is backed up off site for posterity.

The one big risk is that the account holder kicks the bucket before you withdraw the money for previously incurred medical expenses more than 1 year old. Then I think you lose the tax advantage on withdrawals.

 

[teejayevans]

I'm always looking at ways to save more tax-deferred since I'm in a relatively high bracket today.

I have an HSA through work, which allows both wife and I to save about $3,000/year in the account, then use it for medical expenses.

However, what most people do is use the money to pay their medical costs. What we do is pay the medical costs with after-tax dollars, and let the tax deferred HSA grow.

The rules say we can use them later in life...so I'm not worried about being able to use the amount at some point...we'll definitely need it.

We've been funding this for about 4 years now...and we can invest the money in various mutual funds, so we've invested $24,000 and it's now at about $25,000.

What do you think of this strategy?

Note this is an HSA, not an FSA...which has more restrictive rules.

I think if you can use it today to pay medical costs you should, because
you will not pay taxes on that money. If you treat it as a IRA, it will be
taxed at normal rates, yes they may be lower in retirement, but unlikely
to be zero.
TJ

 

[jdw_fire]

I think if you can use it today to pay medical costs you should, because
you will not pay taxes on that money. If you treat it as a IRA, it will be
taxed at normal rates, yes they may be lower in retirement, but unlikely
to be zero.
TJ

if you save all your medical receipts (that you paid out of pocket, not from the HSA) since you started the HSA you can withdraw the money from the HSA tax free (up to the value of said receipts) any time in the future.

 

[kyounge1956]

I haven't read all 32 pages of the fatwallet link, so this info may be in there, but I'm wondering if anyone can give me a quick answer to a few basic questions.
1) Does money going into an HSA have to be earned income, as for IRA contributions? Is there an upper age limit after which you can't contribute? What I am wondering about is, say I have to take RMD from my IRA, but don't need the money for immediate expenses. Can I roll any or all of it over into HSA for future health expenses?
2) My current medical insurance is with an HMO through my employer. I now have dental insurance but haven't had a cavity since I was in grade school and plan to pay out of pocket for dental expenses after retirement, since I think the premiums cost more than teeth cleaning + xrays. Does being non-insured for dental care make me eligible to contribute to HSA even though I might not have HDHP on medical? Alternatively is there any such thing as HDDI (High Deductible Dental Insurance) and if so would I be eligible to contribute to HSA if I get it?

 

[ziggy29]

I haven't read all 32 pages of the fatwallet link, so this info may be in there, but I'm wondering if anyone can give me a quick answer to a few basic questions.
1) Does money going into an HSA have to be earned income, as for IRA contributions? Is there an upper age limit after which you can't contribute? What I am wondering about is, say I have to take RMD from my IRA, but don't need the money for immediate expenses. Can I roll any or all of it over into HSA for future health expenses?

HSA contributions do not have to come from earned income.

The RMD rollover question is a non-issue because RMDs don't kick in until age 70.5 and you can only contribute to an HSA while you're under 65.

2) My current medical insurance is with an HMO through my employer. I now have dental insurance but haven't had a cavity since I was in grade school and plan to pay out of pocket for dental expenses after retirement, since I think the premiums cost more than teeth cleaning + xrays. Does being non-insured for dental care make me eligible to contribute to HSA even though I might not have HDHP on medical? Alternatively is there any such thing as HDDI (High Deductible Dental Insurance) and if so would I be eligible to contribute to HSA if I get it?

You have to have a qualifying high deductible health insurance plan (HDHP) to contribute to an HSA; while you can use the HSA to pay for dental expenses, having or not having a dental plan does not impact HSA contribution eligibility one way or the other.

 

[kyounge1956]

(snip) Does money going into an HSA have to be earned income, as for IRA contributions? Is there an upper age limit after which you can't contribute? What I am wondering about is, say I have to take RMD from my IRA, but don't need the money for immediate expenses. Can I roll any or all of it over into HSA for future health expenses? (snip)

HSA contributions do not have to come from earned income.

The RMD rollover question is a non-issue because RMDs don't kick in until age 70.5 and you can only contribute to an HSA while you're under 65.

Are you sure? If I correctly understand this IRS link from the fatwallet FAQ, to lose your ability to contribute to HSA, you have to be actually enrolled in Medicare, not just eligible—see Q2 & 3 specifically. Some over-65's who are still working stay on their employer's health plan rather than signing up for Medicare. I don't know if a retiree would ever find it advantageous to stay on other insurance even though eligible for Medicare, but is it mandatory to enroll at age 65 if not still working? Medicare is another topic I greatly need to study up on.

Anyway, here's a hypothetical situation: is there a way to take money out of an IRA and put it into an HSA without paying the taxes on it (assuming I'm HSA eligible in other respects), or is any such money just an ordinary, taxable distribution regardless of what I do with it?

 

[ziggy29]

Are you sure? If I correctly understand this IRS link from the fatwallet FAQ, to lose your ability to contribute to HSA, you have to be actually enrolled in Medicare, not just eligible—see Q2 & 3 specifically. Some over-65's who are still working stay on their employer's health plan rather than signing up for Medicare.

Well, true -- but this being a FIRE board, I was operating under the assumption that someone is no longer employed after age 65 and covered by employer health insurance...

 

[kyounge1956]

(snip)...you have to be actually enrolled in Medicare, not just eligible—see Q2 & 3 specifically. (snip)

Well, true -- but this being a FIRE board, I was operating under the assumption that someone is no longer employed after age 65 and covered by employer health insurance...

True. Some people, myself among them, should really refer to what we're planning as "downshifting" rather than retiring, IOW my goal is to stop working full time and start drawing my pension in a few years, but I will probably need to do at least a little part time work up to age 70, to supplement my pension & savings. I don't know if I would be eligible for an employer's plan in that situation; it probably depends on exactly which employer and how many hours, and since that is all so nebulous I also don't know whether it would ever be to my advantage to be on an employer's plan rather than Medicare, even if it's possible.

Anyway, it's at least theoretically possible I might simultaneously be working part time, Medicare eligible but not enrolled, and able to take IRA distributions, but in no particular need of the money. It would be nice if shifting money from IRA to FSA is possible without having to pay the tax, sort of like you can (I think) take money out of an IRA and donate it to a charity without paying the tax. If it is possible to do so, it would mean any money that went from paycheck to IRA to HSA to allowable health expense would never have been taxed and hence be perhaps an even more attractive than moving money from Trad to Roth IRA, which still has some tax due.

 

[jdw_fire]

It would be nice if shifting money from IRA to FSA is possible without having to pay the tax, sort of like you can (I think) take money out of an IRA and donate it to a charity without paying the tax. If it is possible to do so, it would mean any money that went from paycheck to IRA to HSA to allowable health expense would never have been taxed and hence be perhaps an even more attractive than moving money from Trad to Roth IRA, which still has some tax due.

if you take money from your IRA and legally contribute it to your HSA you in essence wont pay taxes on it because while the WD from your IRA is taxable, the contruibution to your HSA is tax deductable and hence they wash.

 

[kaneohe]

What I am wondering about is, say I have to take RMD from my IRA, but don't need the money for immediate expenses. Can I roll any or all of it over into HSA for future health expenses?

Check out question 6 here:U.S. Treasury - HSA Frequently Asked Questions

you'll have to read all the way to the end to see info about a 1 time transfer.

 

[jdw_fire]

Check out question 6 here:U.S. Treasury - HSA Frequently Asked Questions

you'll have to read all the way to the end to see info about a 1 time transfer.

sounds like the 1 time transfer amount is limited to the yearly contribution limit, or am i reading something into that?

 

[kaneohe]

jdw....I think you're right and sounds like something you'd do only if you didn't have other funds to pay the HSA with Roll Over an IRA to HSA? - Kiplinger.com

 

[haha]

I don't know if a retiree would ever find it advantageous to stay on other insurance even though eligible for Medicare, but is it mandatory to enroll at age 65 if not still working?

No, it is not. I know someone in this situation. He went to the SS office and asked the same question that you just asked. As long as he had other insurance, no problem. There might have been rules about "substantial equivalence or some such; I cannot remember about this.

Ha

 

[schucrew]

HSA as additional tax-free savings

What about using your current medical expenses as a tax deduction instead of getting reimbursed by your HSA? Even with a HDHP, we have pretty hefty premiums, and then alot of out of pocket expenses for medical since we have the high deductible. So we figure we would come out ahead by taking the deduction and letting the HSA balance grow. I think the money can be withdrawn tax free if used for qualifying medical expenses in the future, even qualified long-term care insurance. Just another vehicle in which to save, as others have suggested.

 

[jdw_fire]

What about using your current medical expenses as a tax deduction instead of getting reimbursed by your HSA? Even with a HDHP, we have pretty hefty premiums, and then alot of out of pocket expenses for medical since we have the high deductible. So we figure we would come out ahead by taking the deduction and letting the HSA balance grow. I think the money can be withdrawn tax free if used for qualifying medical expenses in the future, even qualified long-term care insurance. Just another vehicle in which to save, as others have suggested.

i think if you use your med expenses as a tax deduction you can not use them in the future to pull money tax free out of your HSA. so do what you think is more advantageous to you

 

[kyounge1956]

if you take money from your IRA and legally contribute it to your HSA you in essence wont pay taxes on it because while the WD from your IRA is taxable, the contruibution to your HSA is tax deductable and hence they wash.

Of course!

 

[kaneohe]

What about using your current medical expenses as a tax deduction instead of getting reimbursed by your HSA? Even with a HDHP, we have pretty hefty premiums, and then alot of out of pocket expenses for medical since we have the high deductible. So we figure we would come out ahead by taking the deduction and letting the HSA balance grow. .

Depends on your personal situation, of course, but because of the 7.5% rule,
unless your medical expenses are very high or AGI very low, it is often difficult to get significant deduction benefits from medical expenses.

from IRS Pub 502
How Much of the Expenses Can You Deduct?

You can deduct only the amount of your medical and dental expenses that is more than 7.5% of your adjusted gross income (Form 1040, line 38).

 

[teejayevans]

Depends on your personal situation, of course, but because of the 7.5% rule,
unless your medical expenses are very high or AGI very low, it is often difficult to get significant deduction benefits from medical expenses.

from IRS Pub 502
How Much of the Expenses Can You Deduct?

You can deduct only the amount of your medical and dental expenses that is more than 7.5% of your adjusted gross income (Form 1040, line 38).

Which is another reason to use HSA today if needed, and not save it for later when you are in a lower tax bracket and the 7.5% bracket may be broken.
TJ

 

[kaneohe]

TJE...... there are at least 3 different options being discussed:
1) Use HSA for current medical expenses (I think this is your proposal)....w/d tax free
2) Use HSA for future expenses....if medical expenses not large enough, use for other
expenses........w/d for other expenses will be taxed & if before age 65, penalized
3) Use HSA in the future but save all your medical receipts from day 1 of HSA...
w/d tax free for both current and older medical expenses............some of the posts (including mine) weren't very clear but the
reference to issues about saving receipts over long periods of time pertained to this
This option gives you more tax-advantaged space for longer periods of time but has
its own issues but is preferred by ? many

 

[TromboneAl]

Over long periods of time, surprises can happen.........printed ink fades sometimes into oblivion, other media get updated so tapes, floppies, etc become unreadable by newer devices, things get lost, burned, flooded, etc. ...

This has been my concern, but I scan all the records, and they are backed up on my general weekly DVD backups, some of which go to the safe deposit box at the bank. Probably sufficient.