A couple HSA questions...

[Cobra9777]

I have one very specific question that I can't seem to find an answer to. And then a more general HSA question that I've been wondering about:

Background
During my last 4 years at Megacorp, we had a HDHP and contributed the family maximum to an HSA. The policy covered myself and 2 kids, who were in college at the time. DW has separate HI thru her employer. Since ER, the kids are employed and off the policy, but I still have the same HDHP for myself via Megacorp and contribute the individual max to the HSA every year. I've saved all medical receipts/invoices since originally starting the HSA, but have never taken a distribution. The balance is currently about $25K, invested in an equity index ETF. I've got $18K in past receipts and will probably accumulate another $3-5K per year, going forward.

Questions
1. Many of the early receipts I saved were for the kid's medical expenses. They are no longer on the policy and are no longer dependents on our tax return. Can I still use those old invoices to support an HSA distribution today or in the future?

2. In general, is there a conventional strategy regarding when to start taking HSA distributions? It recently occurred to me that I don't have the HSA modeled anywhere in the retirement plan, either as an offset to future medical expenses or in the withdrawal strategy. Right now, it's just a kind of off-balance-sheet "medical emergency fund." The balance is rather small today, but could grow to about $100K by age 65 if no distributions, and possibly twice that by mid 70s. I'm beginning to think I need to incorporate the HSA in the overall withdrawal strategy.

For those that have an HSA, just curious what your strategy is for drawing it down, and why? Thanks.

 

[travelover]

I'm pretty sure that if you could validly have paid for an expense with the HSA in the past, then you can count it when you actually do the withdrawal. I also doubt that anyone from the IRS is going to sit down and go thorough your records, but wise to be ready.

My plan is to start withdrawing from the HSA when I start paying Medicare premiums.

 

[Animorph]

My plan is to use HSA funds the same as I would Roth IRA funds, with HSA withdrawals coming first to the extent of our saved receipts. As far as withdrawals, the HSA should be equivalent to a Roth except with the medical expense limitation.

I'll be using Roth withdrawals at about age 70 to fund expenses above what we can fit within the 15% tax bracket, if everything works out. Until then, it's Roth conversions and saving medical receipts.

 

[Mulligan]

I agree with Travelover on the children expense issue. I am late to HSA game and have similar amount in my account. I keep my receipts. I have all my money in safe higher yielding preferred stocks. In about 15 years my goal is a self perpetual annuity from it getting 6k-9k a year when I turn 65. At that point it should cover most my medical deductibles.... And maybe enough left over to fund a year in The Home while I plot my escape in my electric wheelchair to drive off a cliff.


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[Texas Proud]

I had a seminar on HSA's and the guy answered both of your question for him....

1. Like mentioned earlier, he said that as long as an expense was good it did not matter when it was withdrawn.... good is good forever....

2. He said he was going to treat it like a ROTH... but take from the HSA first for any ROTH withdrawals he needed.... from what I gleened, he was going to empty out this account first then go to his regular ROTHs...

 

[pb4uski]

+1 on those expenses being ok as long as they were ok when they were incurred.

I plan on using my HSA once I go on Medicare for deductibles and/or Medigap coverage and Part D and probably Part B before I start SS. I'll decide that later.

 

[Cobra9777]

Thanks for all the great responses. Sounds like I'm good to go on the kid's medical expenses. I got hung up on the IRS documentation that says HSA qualified medical expenses are those incurred by you, your spouse, or "dependents you claim on your tax return." I interpreted that to mean one's current tax return. But that's likely a narrow interpretation as it relates to deferred HSA claims. I agree with the comments here.

Regarding withdrawal strategy, sounds like the conventional wisdom is to treat the HSA same as Roth. I understand that and I've thought about that approach. But we have pensions and rentals that consume much of the 15% bracket. So, any Roth conversions we can squeeze in are insufficient to prevent RMDs from exceeding our spending needs. So we would never actually withdraw any converted Roth funds... nor HSA if we put them in the same withdrawal bucket. I'm OK with the Roth passing to the kids, but I think the HSA loses it's tax advantage.

My current thinking is to start using HSA funds now or in the next few years (instead of the taxable account) to cover our small spending gap above pensions+rentals+dividends. My model says the taxable account gets extremely low right before RMDs start filling it back up. That makes me a bit nervous. The HSA might be fairly large by then if no distributions. And I'm a little concerned the HSA might outgrow my pile of receipts. I also like the idea of starting distributions at 65 for medigap, etc. Still very much open to suggestions on this.

 

[Mulligan]

Cobra, I am in same boat as you. Retired Pensioner already in 25% tax bracket, close to 28%. I purposely signed up for an HSA in retirement for the nice tax deduction. I will keep my receipts and will not use them until on deaths doorstep. I plan on paying medicare out of HSA also. It makes for a great "mini long term care plan" also. I have a modest Roth amount also, but have no plans to ever withdraw it either. I want to get all tax free monies accumulating as long as possible.


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[gauss]

I plan on using my HSA once I go on Medicare for deductibles and/or Medigap coverage and Part D and probably Part B before I start SS. I'll decide that later.

Just to clarify HSA funds cannot be used to pay Medigap premiums (aka Medicare supplemental).

 

[pb4uski]

Just to clarify HSA funds cannot be used to pay Medigap premiums (aka Medicare supplemental).

Thanks. Good to know.

I wonder if it makes sense to then just skip Medigap if we continue to be healthy and use the HSA to pay deductibles and co-pays (~$600 last year for us).

Mother pays ~$200/month for Medigap so that would be $4,800 a year for two and I suspect that our combined deductibles would be much less than that based on your current health (conceding that things might change in 5 years).

 

[Mulligan]

Thanks. Good to know.

I wonder if it makes sense to then just skip Medigap if we continue to be healthy and use the HSA to pay deductibles and co-pays (~$600 last year for us).

Mother pays ~$200/month for Medigap so that would be $4,800 a year for two and I suspect that our combined deductibles would be much less than that based on your current health (conceding that things might change in 5 years).

I knew HSA would only cover the medicare premiums. But I am still going to pay for the Medigap or whatever the better coverage is. I intend to protect the HSA as long as possible. There are all sorts of things I can see falling apart that are expensive to fix such as teeth, eyes and hearing... If for some miracle none of this happens, well I guess my heirs can pay the taxes on it. Im sure they will love the opportunity to pay taxes on free money given to them.


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[sengsational]

I had a seminar on HSA's and the guy answered both of your question for him....

1. Like mentioned earlier, he said that as long as an expense was good it did not matter when it was withdrawn.... good is good forever....

2. He said he was going to treat it like a ROTH... but take from the HSA first for any ROTH withdrawals he needed.... from what I gleened, he was going to empty out this account first then go to his regular ROTHs...

I'm paying medical expenses with regular funds and treating HSA funds as a Roth. Thats where it goes in i-orp.

 

[Texas Proud]

I read that a bunch plan to use the money sometime in the future for premiums etc. etc....


Remember, if an expense qualifies, it will qualify years from now.... so you can take the money out tax free at any time... the only downside is that growth will not occur on those funds...


Also, it is not a ROTH... if you do not have qualifying expenses, IIRC it is all taxable like a tIRA.... I do not know if there are RMDs or not... as I do not have one I have not read about them much....

 

[bingybear]

I would have assumed that one could not use it for old expenses, but enough posters with good reputations for being spot in claim it can... may want to go with their answer.

I'll give you my approach to HSA spend down... and it is not paying old bills that I already paid (late reimbursement). The plan is to fund it and invest until medicare age. At that point I can use it for medicare premiums, detectable, etc if I choose. I can also let it grow and have this as part of my LTC strategy.
Worst case, I spend it for other things and pay tax (but no penalty) after 65. There are no RMDs.
Unless you need to money now, consider letting it grow for later expenses. After 65 you don't need an HDHP to use the money on health expenses from what I understand.
Is this a rule of thumb? heck if I know.

 

[gauss]

Thanks. Good to know.

I wonder if it makes sense to then just skip Medigap if we continue to be healthy and use the HSA to pay deductibles and co-pays (~$600 last year for us).

Mother pays ~$200/month for Medigap so that would be $4,800 a year for two and I suspect that our combined deductibles would be much less than that based on your current health (conceding that things might change in 5 years).

The 20% co-insurance that falls to the patient under traditional (part A/B) Medicare would probably keep me up at night. The way I understand it is that this liability is unbounded with no Out of Pocket maximum.

I guess that I would have to have a personal analysis of how many of my assets were collectible vs non-collectible to establish an implicit, bankruptcy based, out of pocket maximum before I would consider going this route.

-gauss

 

[Texas Proud]

I would have assumed that one could not use it for old expenses, but enough posters with good reputations for being spot in claim it can... may want to go with their answer.

I'll give you my approach to HSA spend down... and it is not paying old bills that I already paid (late reimbursement). The plan is to fund it and invest until medicare age. At that point I can use it for medicare premiums, detectable, etc if I choose. I can also let it grow and have this as part of my LTC strategy.
Worst case, I spend it for other things and pay tax (but no penalty) after 65. There are no RMDs.
Unless you need to money now, consider letting it grow for later expenses. After 65 you don't need an HDHP to use the money on health expenses from what I understand.
Is this a rule of thumb? heck if I know.

Why not keep all your prior payment info when you had the account.... you do not have to take the money out.... but if you want to take some out and do not have a current expense, it prevents you from paying taxes on that money...

 

[kaneohe]

The 20% co-insurance that falls to the patient under traditional (part A/B) Medicare would probably keep me up at night. The way I understand it is that this liability is unbounded with no Out of Pocket maximum.

-gauss

Totally agree w/ this. You can go from completely healthy to something else in a day........at least in official diagnostics and when you find out it may be very expensive or impossible to add the medigap. 20% of a very big number is still a big number. A small side benefit is that you don't have to deal so much (or at all) with the details of the bill......it should be paid by either SS or medigap except for perhaps the deductible so you can let SS and medigap duke it out w/ the provider.

 

[sengsational]

Also, it is not a ROTH... if you do not have qualifying expenses, IIRC it is all taxable like a tIRA.... I do not know if there are RMDs or not... as I do not have one I have not read about them much....

If one presumes that there will be plenty of qualifying medical bills between now and "end of plan", then it's pretty close to a Roth.

It's better than a Roth in some ways, unlike a Roth, you get a nice tax write-off when you make the deposit!

It's the same as a Roth in that all your gains can be removed without paying income tax (given the restrictions, see below). That's why you don't spend it now, since the advantage is the amount of gains you get to remove tax-free.

It's worse than a Roth in that you must keep records of your medical spending. It's also worse than a Roth in that you may have "too little" medical spending to get it out tax-free. That would be a GREAT problem to have!

 

[MichaelB]

Eligible HSA withdrawals mean the medical expenses aren't itemized. This is more for people in higher income tax rate brackets. For people that can itemize medical each year, it probably makes sense to plan HSA withdrawals carefully, unless leaving the money to heirs is part of the plan.

The "sweet spot" is when the projected expense after Medicare starts are too low to itemize. Even with the low deductible MediGap F the part B premium is still eligible for HSA, as are expenses not covered by Medicare, such as dental, eyeglasses, hearing aids, etc.

 

[Cobra9777]

If one presumes that there will be plenty of qualifying medical bills between now and "end of plan", then it's pretty close to a Roth.

It's better than a Roth in some ways, unlike a Roth, you get a nice tax write-off when you make the deposit!

It's the same as a Roth in that all your gains can be removed without paying income tax (given the restrictions, see below). That's why you don't spend it now, since the advantage is the amount of gains you get to remove tax-free.

It's worse than a Roth in that you must keep records of your medical spending. It's also worse than a Roth in that you may have "too little" medical spending to get it out tax-free. That would be a GREAT problem to have!

Nice summary. It's also worse than Roth in that the tax advantage does not pass to your heirs if it goes unspent.

I'm warming up to the idea of holding on and letting the gains grow tax free as long as possible. After some more extensive analysis, I now think the pile of medical receipts will easily exceed the HSA balance at some point in my mid 60s. I liked the suggestion of using it as part of a mini LTC strategy. The balance could be close to $0.5M by our late 80s. I just want to make sure the tax advantage is actually realized by someone. And that has me leaning toward using it prior to 70, at which point SS and RMDs put us well over our spending needs.