Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
HSA Tax Concern
Old 10-14-2007, 11:43 AM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
TromboneAl's Avatar
 
Join Date: Jun 2006
Posts: 11,196
HSA Tax Concern

Here's my one concern about my HSA...

My plan is to allow the HSA funds to compound tax-free. So, I am not taking out any HSA funds now for medical expenses. I will reimburse myself in 10-15 years, for all the medical costs.

From my understanding of the HSA rules, this should be fine. But I'm still a little worried that the IRS is not going to understand a sudden lump sum removal of big bucks for 15 years worth of medical expenses. Or that there will be something I didn't understand.

I am keeping careful track of all medical expenditures for DW and me. I keep all receipts, and also scan them in and back them up, with off site copies in the safe deposit box.

Need I be concerned?

Here's another question: I had considered that it would be smarter to use the HSA funds for medical expenses later, when in a higher tax bracket (due to IRA withdrawals), but I realized that this doesn't make any difference. Correct?

Thanks
__________________

__________________
Al
TromboneAl is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-14-2007, 11:50 AM   #2
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
This is a compliment, not a criticism Al, but you are so anal about record keeping that I can't believe you will have a problem with the IRS.

As far as your second question, it makes a difference if as a result you can withdraw less from your IRA because you are using HSA dollars. Also, you get the advantage of tax free compounding. But if you have enough money to pay medical expenses from your required minimum distributions it wouldn't make much of a difference. You have to take the minimum anyway.
__________________

__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Old 10-14-2007, 12:06 PM   #3
Thinks s/he gets paid by the post
frayne's Avatar
 
Join Date: Oct 2002
Location: 19th Hole
Posts: 2,528
My understanding and I may be wrong is when you turn 65 or thereafter you can withdraw from your HSA without penality and it is taxed as ordinary income.

Does this sound correct ?
__________________
frayne is offline   Reply With Quote
Old 10-14-2007, 12:10 PM   #4
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Yes, but if you use for health care expenses it isn't taxed at all.
__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Old 10-14-2007, 12:42 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Jan 2004
Posts: 2,049
Quote:
Originally Posted by TromboneAl View Post
From my understanding of the HSA rules, this should be fine. But I'm still a little worried that the IRS is not going to understand a sudden lump sum removal of big bucks for 15 years worth of medical expenses. Or that there will be something I didn't understand.
As long as you have the records...though that doesn't mean they won't send you a friendly letter.

Just don't withdraw it all at once. Spread it out over several years.
__________________
eridanus is offline   Reply With Quote
Old 10-14-2007, 12:46 PM   #6
Moderator
bssc's Avatar
 
Join Date: Dec 2005
Posts: 9,923
I liked our HR person's comment about just write yourself a check. I wonder how many abuse stories we are going to hear in the upcoming years.
__________________
Angels danced on the day that you were born.
bssc is offline   Reply With Quote
Old 10-19-2007, 03:51 PM   #7
Thinks s/he gets paid by the post
MooreBonds's Avatar
 
Join Date: Aug 2004
Location: St. Louis
Posts: 2,091
Quote:
Originally Posted by TromboneAl View Post
Here's my one concern about my HSA...

My plan is to allow the HSA funds to compound tax-free. So, I am not taking out any HSA funds now for medical expenses. I will reimburse myself in 10-15 years, for all the medical costs.

From my understanding of the HSA rules, this should be fine. But I'm still a little worried that the IRS is not going to understand a sudden lump sum removal of big bucks for 15 years worth of medical expenses. Or that there will be something I didn't understand.

I am keeping careful track of all medical expenditures for DW and me. I keep all receipts, and also scan them in and back them up, with off site copies in the safe deposit box.

T-Al, it was my understanding that you are allowed to withdraw funds from an HSA for medical expenses incurred in the year you withdraw the money.
I wasn't aware that you can incur $10,000 in expenses in 2008, then withdraw $10,000 in 2020 and say it was for 2008. Do you have a reference in the HSA legislation that gives you that impression?
__________________
Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Old 10-19-2007, 04:34 PM   #8
Recycles dryer sheets
bots2019's Avatar
 
Join Date: May 2007
Posts: 128
Quote:
Originally Posted by MooreBonds View Post
T-Al, it was my understanding that you are allowed to withdraw funds from an HSA for medical expenses incurred in the year you withdraw the money.
I wasn't aware that you can incur $10,000 in expenses in 2008, then withdraw $10,000 in 2020 and say it was for 2008. Do you have a reference in the HSA legislation that gives you that impression?
I've wondered about the 'delay' strategy too... but what if you have late-December expenses - you'll have no choice but to submit the bills the following year.
__________________
bots2019 is offline   Reply With Quote
Old 10-19-2007, 07:36 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,925
What happens if you die before claiming HSA withdrawals? Can your spouse use your accumulated medical expenses to drain the HSA account or is she restricted to only her own expenses once you are gone?
__________________
kaneohe is offline   Reply With Quote
Old 10-19-2007, 07:50 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
TromboneAl's Avatar
 
Join Date: Jun 2006
Posts: 11,196
Quote:
Do you have a reference in the HSA legislation that gives you that impression?
Someone posted the reference here a while ago. It's very clearcut.

I guess my problem is that I don't trust the IRS, and they don't do well with unexpected situations.
__________________
Al
TromboneAl is offline   Reply With Quote
Old 10-23-2007, 10:44 PM   #11
Recycles dryer sheets
bamsphd's Avatar
 
Join Date: Nov 2005
Posts: 337
My problem is I don't trust congress not to change
the rules of the game. A quick little "fix" disallowing
expenses more than a year old seems likely over a
multi-decade time span, if they don't entirely abolish
the HSA concept.
__________________
bamsphd is offline   Reply With Quote
Old 10-24-2007, 12:33 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
Quote:
Originally Posted by bamsphd View Post
My problem is I don't trust congress not to change
the rules of the game. A quick little "fix" disallowing
expenses more than a year old seems likely over a
multi-decade time span, if they don't entirely abolish
the HSA concept.
Ditto for me.

If I ever get to sign up for a HSA, I intend to take reimbursements the year I incur the expenses. The relatively small advantage of tax free compounded, I think are negated by having to keep good records (I don't) and the distinct,hell certain chance the Congress will change the rules.

BTW, doesn't anybody understand insurance speak. I have been under evaluation by the underwriters for a month now. I am healthy, no history of anything, borderline high cholesteral...
__________________
clifp is offline   Reply With Quote
Old 10-24-2007, 06:54 AM   #13
Thinks s/he gets paid by the post
teejayevans's Avatar
 
Join Date: Sep 2006
Posts: 1,219
Quote:
Originally Posted by clifp View Post
Ditto for me.

If I ever get to sign up for a HSA, I intend to take reimbursements the year I incur the expenses. The relatively small advantage of tax free compounded, I think are negated by having to keep good records (I don't) and the distinct,hell certain chance the Congress will change the rules.

BTW, doesn't anybody understand insurance speak. I have been under evaluation by the underwriters for a month now. I am healthy, no history of anything, borderline high cholesteral...
May depend on the underwriter, I just went through the process with
UHC via ehealthinsurance.com and it took 2 weeks.

I completely agree, with my HSA credit card, I just charge it, no ATM
transactions that I will have to explain later.
TJ
__________________
teejayevans is offline   Reply With Quote
Old 10-24-2007, 07:23 AM   #14
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
No surprise to anyone that laws change. In health care, I'd guess they're going to change in major ways over the next 5-10 years. If it were me, I'd take my deduction as soon as I could, year to year.

True, you may eke out a few extra basis points in your HSA with the proposed strategy, but deferral also has risk. Maybe it will all be folded into some universal care plan; maybe means testing will be applied; maybe the services you received won't be considered "covered" in a few years -- possibilities are almost endless.

Just food for thought.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Old 10-24-2007, 10:55 AM   #15
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Quote:
Originally Posted by kaneohe View Post
What happens if you die before claiming HSA withdrawals? Can your spouse use your accumulated medical expenses to drain the HSA account or is she restricted to only her own expenses once you are gone?
If you die before you withdraw from the HSA for previously incurred expenses older than ~1 year, then you lose the ability to reimburse for those expenses older than ~1 year. Not sure that 1 year is the correct time period, but it's something like that.

This is a significant risk to the deferral strategy that T Al is talking about (and that I am planning on employing).
__________________
justin is offline   Reply With Quote
Old 10-24-2007, 12:04 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
TromboneAl's Avatar
 
Join Date: Jun 2006
Posts: 11,196
Well, those are good points (law changes and death), I will have to think about this some more.

Quote:
and that I am planning on employing
Are you saying that despite the risk, you plan to let it compound?
__________________
Al
TromboneAl is offline   Reply With Quote
Old 10-24-2007, 01:03 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Quote:
Originally Posted by TromboneAl View Post
Are you saying that despite the risk, you plan to let it compound?
Yes, that is I plan to keep a shoebox full of receipts and not withdraw from my HSA initially. I'll allow the HSA to compound year after year and might use it for tax planning purposes should the need arise. I haven't nailed down the exact exit strategy. Maybe I'll try to withdraw essentially all of it by the time mortality rates start to creep up (in my 50's or 60's?). That, or hedge the tax benefits with some term life, depending on the costs. Or just self-insure the risk. Don't know yet. FYI, me and DW are around age 30, so current mortality rates for our age group are very small.

I think the risk of tax laws changing is relatively small. I'll hopefully have enough time after the new laws go into effect to withdraw tax-free all expenses previously incurred. I've seen retroactive tax laws when the taxpayer benefits, but I think it'd be a hard sell to retroactively change the tax laws to the detriment of taxpayers who had relied on the status quo. The tax laws could always change to make the HSA more favorable. For example, the law could change to allow previously incurred expenses to be reimbursed completely after the demise of the HSA owner regardless of when the expense was incurred.

I'll also have at least 5-6 years of needing a low income for FAFSA's when my kids are going through college (starting in 15 more years ). Non-income income from HSA's could significantly help out.
__________________
justin is offline   Reply With Quote
Old 10-24-2007, 02:19 PM   #18
Full time employment: Posting here.
bow-tie's Avatar
 
Join Date: Mar 2004
Posts: 687
Quote:
Originally Posted by justin View Post
...not withdraw from my HSA initially. I'll allow the HSA to compound year after year...

Ditto. We'll see how it works out. I can forsee me taking it the shorts...


edited to add - Justin, do you plan to max out your HSA contribution - i.e. $5600-ish for a family HSA plan? Just curious...
__________________
Diggin' my way to financial freedom, one buck-at-a-time
bow-tie is offline   Reply With Quote
Old 10-24-2007, 02:33 PM   #19
Recycles dryer sheets
bamsphd's Avatar
 
Join Date: Nov 2005
Posts: 337
Despite my fear of congressional action, I will admit, just thinking of an HSA as another flavor of IRA without that pesky earned income requirement makes considerable sense to me.

If I do that, I would also file my receipts in the hope of getting Roth like tax treatment on the eventual withdrawals at some distant future time.
__________________
bamsphd is offline   Reply With Quote
Old 10-24-2007, 02:39 PM   #20
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Quote:
Originally Posted by bow-tie View Post
edited to add - Justin, do you plan to max out your HSA contribution - i.e. $5600-ish for a family HSA plan? Just curious...
I'm maxing it out this year $5650 I think? And $5800 for next year. DW's employer is allowing the full $5800 to be payroll deducted, meaning we'll save another 7.65% on the $5800 by not paying SS/Medicare taxes.
__________________

__________________
justin is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
HSA after you ER teejayevans Health and Early Retirement 15 04-17-2007 02:06 PM
HSA plans included in new tax legislation shiny FIRE and Money 11 02-20-2007 07:10 AM
HSA? Fireup2020 Health and Early Retirement 8 02-09-2007 01:53 PM
HSA or other Pre-tax to pay for Health Care whitestick Health and Early Retirement 7 12-28-2006 11:13 AM
Concern re: Job Loss Craig Young Dreamers 15 02-28-2005 11:34 AM

 

 
All times are GMT -6. The time now is 07:33 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.