does contributing to HSA make sense once retired?

[jabbahop]

We have been contributing to HSA while working. Now that I am retired, does it still makes sense to continue to contribute?

Also, I am confused as to whether one should pay for health care expenses from the HSA or pay out of pocket and let the money accumulate tax free like an IRA. Lots of people on boggleheads seem to pay out of pocket but I am I don't understand the calculations on where it makes sense. Unfortunately if looks like we are going to be using a bunch of medical care again this year (deductible +).

This year we will still be in a high tax bracket due to option sales but next year will be in a lower bracket with retirement income only.

Thanks for advice.

 

[travelover]

Absolutely! I put the max into my HSA every year and leave it invested in Vanguard funds. Once I hit Medicare age, I will draw it down for premiums and never pay taxes on the money - it is truly a gift from Uncle Sam.

 

[jimbee]

I agree with Travelover, and am doing the same thing. I don't plan to use the money until I am old enough for Medicare. Tax free savings and growth is hard to beat.

 

[easysurfer]

Yes, on the makes sense to contribute part.

I'm one of the folks that uses the HSA to pay for medical expenses before medicare.

 

[athena53]

I'm 62 and am also planning to continue contributing till I reach Medicare age. What a deal- not taxable going in and not taxable going out, either, as long as it's spent on specified categories! The other thing I noticed (it helps to do your own taxes) is that contributions are taken off your Adjusted Gross Income. Almost NOTHING legitimately reduces your AGI. The AGI is the basis for a whole lot of calculations, including the % threshold for Medical expenses and our State taxes.


No idea when I'll be using it to actually pay expenses. It's in Vanguard Wellington so letting it grow is good, too.

 

[RunningBum]

The HSA deduction gives me another $3350 (double if you're married) I can convert from a tIRA to a Roth and stay under the next tax bracket. Unless you are paying 0 in taxes and will continue to pay 0 in taxes, it makes sense to contribute. Even if I was done converting, in most years I'm not going to be able to keep everything under the 15% bracket, especially when I start taking my pension and SS, so this is another $3350 that I can take dividends and cap gains at 0%.

I haven't decided yet when the best time to withdraw will be, but it will be either for medicare or used on documented expenses that I've already paid out of pocket and kept the receipts. Or both.

 

[audreyh1]

We have been contributing to HSA while working. Now that I am retired, does it still makes sense to continue to contribute?

Also, I am confused as to whether one should pay for health care expenses from the HSA or pay out of pocket and let the money accumulate tax free like an IRA. Lots of people on boggleheads seem to pay out of pocket but I am I don't understand the calculations on where it makes sense. Unfortunately if looks like we are going to be using a bunch of medical care again this year (deductible +).

This year we will still be in a high tax bracket due to option sales but next year will be in a lower bracket with retirement income only.

Thanks for advice.

It's a direct subtraction against your taxable income, and that is a great benefit even if retired.

If your taxes owed are 0, there is no benefit. But it could also be used to convert the equivalent amount from an IRA to a Roth in that case.

Whether you pay for expenses later or now is a separate issue. You get the tax benefit either way.

 

[pb4uski]

Yes, it still makes sense to contribute to a HSA. For this year, it will reduce your tax bill. For next year and beyond, it may reduce your tax bill depending on your tax situation and/or allow you to make bigger Roth conversions if you are doing Roth conversions.

I'm paying out of pocket and letting our HSAs grow tax-free like a Roth IRA. I'll tap into them later in life. It might be my self funded LTC insurance plan.

 

[hnzw_rui]

I have a question, do you guys all have high deductible health insurance plans or has the rules on HSAs relaxed? Because I remember checking it out a few years back and I wasn't eligible to contribute.

 

[jabbahop]

thanks to all for the advice. Now just need to send in a check to get my annual contribution up to my max.

 

[MBSC]

Also, I am confused as to whether one should pay for health care expenses from the HSA or pay out of pocket and let the money accumulate tax free like an IRA. Lots of people on boggleheads seem to pay out of pocket but I don't understand the calculations on where it makes sense.

As others have stated, the HSA contribution reduces my federal taxable income, but in my state the federal deductions carry over to the state tax return, so the HSA contribution also reduces my state income tax.

Then, if I have $1k in the bank and a $1k medical bill, I can pay the medical bill from the bank account, or pay it from the HSA and invest the $1k. The better choice for me is to have $1k grow tax-free in the HSA rather than in a taxable account.

 

[MBSC]

I have a question, do you guys all have high deductible health insurance plans or has the rules on HSAs relaxed? Because I remember checking it out a few years back and I wasn't eligible to contribute.

To my knowledge, the rules for HSAs have not changed. There are just fewer 'Cadillac' plans available and more HDHP plans being offered. For an HDHP to be HSA eligible, not only must it meet the deductible requirement it cannot offer first dollar coverage (ie. no copays) before the deductible is met.

 

[Mulligan]

I have a question, do you guys all have high deductible health insurance plans or has the rules on HSAs relaxed? Because I remember checking it out a few years back and I wasn't eligible to contribute.

There are (and to the best of my knowledge never) no income limits for HSA accounts. I assume your problem is that you have an insurance policy that is not HSA eligible? If you are locked into an employer based policy that does not offer one, I imagine you would still be ineligible. Many companies are offering more options, so you want to ask HR again if it has been awhile.


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[hnzw_rui]

To my knowledge, the rules for HSAs have not changed. There are just fewer 'Cadillac' plans available and more HDHP plans being offered. For an HDHP to be HSA eligible, not only must it meet the deductible requirement it cannot offer first dollar coverage (ie. no copays) before the deductible is met.

There are (and to the best of my knowledge never) no income limits for HSA accounts. I assume your problem is that you have an insurance policy that is not HSA eligible? If you are locked into an employer based policy that does not offer one, I imagine you would still be ineligible. Many companies are offering more options, so you want to ask HR again if it has been awhile.

Yeah, we have good health insurance at work (government) with no deductible. All available plans are ineligible for HSA. I was just thinking of contributing to HSA so I can use it as my long term care "insurance policy".

 

[ArkTinkerer]

While on the subject of HSAs--

I read that you can do a one time transfer from your 401K (or IRA?) of $10K to your HSA. Anyone have more info or actually done this? Looks good to me as a way to get access to my tax deferred funds as part of FIRE.

 

[sengsational]

While on the subject of HSAs--

I read that you can do a one time transfer from your 401K (or IRA?) of $10K to your HSA. Anyone have more info or actually done this? Looks good to me as a way to get access to my tax deferred funds as part of FIRE.

I never heard of that. They make you pay tax on the gains, I suppose. That would make it like a Roth conversion (transferring from tIRA to Roth). If you were up against the max Roth conversion number (is there one?), then this might be nice.

Edit, re: "make you pay tax on the gains"...I learned from posts below that they don't tax you on the gains, but you also don't get the HSA deduction. I guess that's the less complicated approach than taking it away and giving it back.

 

[RunningBum]

While on the subject of HSAs--

I read that you can do a one time transfer from your 401K (or IRA?) of $10K to your HSA. Anyone have more info or actually done this? Looks good to me as a way to get access to my tax deferred funds as part of FIRE.

I just did a search and found this: Rules for IRA to HSA Rollovers-Kiplinger

You an transfer from your IRA (and presumably your 401K) but it counts as your HSA contribution for the year and you can only do to that limit. It seems better to do an out of pocket contribution so that you are maximizing your tax protected accounts rather than taking out of one tax deferred pocket and putting it in the other. The article suggest you might want to do this if you need to make a tax free withdrawal from your IRA for HSA eligible medical expenses.

 

[hnzw_rui]

I never heard of that. They make you pay tax on the gains, I suppose. That would make it like a Roth conversion (transferring from tIRA to Roth). If you were up against the max Roth conversion number (is there one?), then this might be nice.

So far, I haven't seen any mention of such. Given Romney had $102 million in Roth IRA, I'm going to say there's no conversion or account size limit just yet although that may likely change in the future.

 

[ArkTinkerer]

Once in a lifetime tax free according to Kiplinger...

Rules for IRA to HSA Rollovers-Kiplinger

OOPS! Just saw someone else posted the same link!

 

[sengsational]

We have been contributing to HSA while working. Now that I am retired, does it still makes sense to continue to contribute?

Two questions: 1) Do you contribute? and 2) Do you spend from it.

Question 1 is yes, if you have an HDHP and you have (or can generate) any income. By generate, I mean tIRA to Roth conversions. If you don't have income, it won't help, but it won't hurt.

Question 2 is no in most cases. But if you have a small amount of after-tax money (meaning that your living expenses would need to be pulled from a tIRA or 401k), the question becomes more complicated. If you pull everything you need to live out of a tIRA or 401k, that could put you into a higher tax bracket or cause you to give up the PPACA subsidy. In that case, the answer might be "yes".

Once the money is in there, you can use the withdrawal rules of a Roth, which is usually to leave it alone as long as possible, but use it sparingly if pulling your pre-tax money would cause a big tax impact.

 

[Mulligan]

While on the subject of HSAs--

I read that you can do a one time transfer from your 401K (or IRA?) of $10K to your HSA. Anyone have more info or actually done this? Looks good to me as a way to get access to my tax deferred funds as part of FIRE.

Yes, I did that last year, when I had a very small $2K ish orphaned IRA from many moons ago. You may want to check the numbers though.... But I am fairly sure the transfer cannot exceed the one time annual yearly contribution limit. Plus you are ineligible to contribute that amount for the year. Taking myself as an example... (Individual HSA).... I had the IRA rolled over to my HSA and it was around $2100. The annual contribution limit last year I believe was $3300. So for the 2014 tax year I was only able to contribute about $1200 to my HSA.
I hate paperwork and delay doing these type of minor things, but actually it was fairly painless process. I called my HSA provider and they mailed me the paperwork. I sent it back to them and they transferred the money from Fido to them within about 2 weeks.


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[Mulligan]

Yeah, we have good health insurance at work (government) with no deductible. All available plans are ineligible for HSA. I was just thinking of contributing to HSA so I can use it as my long term care "insurance policy".

To ensure your safe passage while walking the streets, Hnzw, I suggest you make no more mention of this insurance policy. You may find yourself mugged with your insurance card missing while all your cash was left in the wallet.


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[ArkTinkerer]

Yes, I did that last year, when I had a very small $2K ish orphaned IRA from many moons ago. You may want to check the numbers though.... But I am fairly sure the transfer cannot exceed the one time annual yearly contribution limit. Plus you are ineligible to contribute that amount for the year. Taking myself as an example... (Individual HSA).... I had the IRA rolled over to my HSA and it was around $2100. The annual contribution limit last year I believe was $3300. So for the 2014 tax year I was only able to contribute about $1200 to my HSA.
I hate paperwork and delay doing these type of minor things, but actually it was fairly painless process. I called my HSA provider and they mailed me the paperwork. I sent it back to them and they transferred the money from Fido to them within about 2 weeks.


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Does it have to be done by Dec. 31st or do you have until April 15th of the next year? This looks like one of those things that might be good to keep in mind at year end to optimize accounts and taxes at the end of the year.

 

[Fermion]

OP, you do realize you can take money out of your HSA tax free for previous medical payments, even years ago, and you do not have to be of Medicare age. If you paid $500 for a ultrasound in 2012 (if you were under the HSA then) you can in 2015 or 2022 or whenever take out the $500 tax free, even though that $500 may have had $200 in gains since then.

Because of this feature, paying for medical expenses from your HSA while you have other non-Roth funds available makes no sense. You can even think of the HSA as your tax deductible, tax exempt growth emergency fund if you like, and spend down your normal emergency fund on medical procedures as you let your HSA grow.

 

[Mulligan]

Does it have to be done by Dec. 31st or do you have until April 15th of the next year? This looks like one of those things that might be good to keep in mind at year end to optimize accounts and taxes at the end of the year.

Ark, I transferred back in the summer so I didn't face that problem. It would seem reasonable you could before April deadline for previous year since it is a contribution. But even if it is, do not assume they will check the correct box. I would double check their handiwork if it is legal, because you could get into needless problems over contributing for a year if they screw it up.


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