How to Use Your HSA Account in Retirement?

[G-Man]

I keep my HSA funds in an account in Fidelity, solely invested in a covered call ETF (QYLD) and have the dividends deposited to the same account in a money market fund (FDRXX). The ETF currently has a yield over 11% and the money market has a yield of 4.90%. On a monthly basis, I take out a fixed amount that is less than the monthly dividend and use it for general expenses.

I pay all medical bills with a credit card that currently is returning 2.5% cash back that is deposited into a different Fidelity account with the same yield of 4.90%. Lastly, I store all significant medical invoices in a folder. Although, this will ultimately leave monies in the HSA, it is nice to know that the income provided will last my lifetime and provides a nice cushion for unexpected expenses.

Looks like the Dividend income has been steady. I have my HSA invested in FXIAX and FDRXX. May need to look at QYLD.

https://www.nasdaq.com/market-activity/etf/qyld/dividend-history

 

[jw72]

I keep my HSA funds in an account in Fidelity, solely invested in a covered call ETF (QYLD) and have the dividends deposited to the same account in a money market fund (FDRXX). The ETF currently has a yield over 11% and the money market has a yield of 4.90%. On a monthly basis, I take out a fixed amount that is less than the monthly dividend and use it for general expenses.

I pay all medical bills with a credit card that currently is returning 2.5% cash back that is deposited into a different Fidelity account with the same yield of 4.90%. Lastly, I store all significant medical invoices in a folder. Although, this will ultimately leave monies in the HSA, it is nice to know that the income provided will last my lifetime and provides a nice cushion for unexpected expenses.

Grow, grow, grow this is exactly how I do it. I love the there is no mandatory distribution. Went in tax free, grows tax free and comes out tax free, my favorite account.

 

[imnontrad]

My HSA payys for things not covered by insurance (including a vaccine for an upcoming trip), extra pair of glasses, and my Medicare Part B premium - all tax free.

One thing to watch is that this is the WORST type of account to inherit. There is no 10 year period or lifetime distribution to close out the account by heirs - all is liquidated immediately. This is also a reason why this account should be used first to pay any charitable contributions designated in your will.

 

[jw72]

My HSA payys for things not covered by insurance (including a vaccine for an upcoming trip), extra pair of glasses, and my Medicare Part B premium - all tax free.

One thing to watch is that this is the WORST type of account to inherit. There is no 10 year period or lifetime distribution to close out the account by heirs - all is liquidated immediately. This is also a reason why this account should be used first to pay any charitable contributions designated in your will.

Can’t someone keep receipts for allowable expenses in an envelope. Part B, D, dental and prescriptions for example, could be 10K+a year with irrma even more. When last spouse passes kids do their taxes and claim it all tax free? What ever was paid in part b and expenses for the last 20-30 years?

 

[audreyh1]

Can’t someone keep receipts for allowable expenses in an envelope. Part B, D, dental and prescriptions for example, could be 10K+a year with irrma even more. When last spouse passes kids do their taxes and claim it all tax free? What ever was paid in part b and expenses for the last 20-30 years?

There are restrictions on what and when expenses can be deducted from the account once the account owner dies. The kids can’t claim anything tax free once they inherit the HSA account.

 

[imnontrad]

Can’t someone keep receipts for allowable expenses in an envelope. Part B, D, dental and prescriptions for example, could be 10K+a year with irrma even more. When last spouse passes kids do their taxes and claim it all tax free? What ever was paid in part b and expenses for the last 20-30 years?

Yes, they can - sort of. I believe the receipts can only be reimbursed if that person is still covered by that HS. For example, keeping receipts for kids care is only if the kid is still covered. Once they age out, then they cannot get reimbursement, But if they die, or cannot handle their finances, their executor/designated representative will have to know that the folder exists and verify that the money can still be withdrawn by the estate into the general fund.

 

[jw72]

Yes, they can - sort of. I believe the receipts can only be reimbursed if that person is still covered by that HS. For example, keeping receipts for kids care is only if the kid is still covered. Once they age out, then they cannot get reimbursement, But if they die, or cannot handle their finances, their executor/designated representative will have to know that the folder exists and verify that the money can still be withdrawn by the estate into the general fund.

Thank you, thats my plan.

 

[jw72]

There are restrictions on what and when expenses can be deducted from the account once the account owner dies. The kids can’t claim anything tax free once they inherit the HSA account.

Thanks, I guess drain HSA account should be last step prior to death.

 

[SecondCor521]

But if they die, or cannot handle their finances, their executor/designated representative will have to know that the folder exists and verify that the money can still be withdrawn by the estate into the general fund.

If inherited by the surviving spouse, the HSA can become their HSA.

Otherwise, the beneficiaries have to take the FMV as of date of death and subtract medical expenses incurred by the decedent and paid in the year after death, and the remaining amount is taxed as ordinary income (but no 20% penalty).

See the IRS instructions for Form 8889 under Death of the Account Beneficiary for the exact rules (https://www.irs.gov/pub/irs-pdf/i8889.pdf).

 

[Montecfo]

HSA is great for spouse to inherit.

 

[pb4uski]

Can’t someone keep receipts for allowable expenses in an envelope. Part B, D, dental and prescriptions for example, could be 10K+a year with irrma even more. When last spouse passes kids do their taxes and claim it all tax free? What ever was paid in part b and expenses for the last 20-30 years?

Yes, but what it the spouse who knows this passes and the surviving spouse and/or kids don't get the message? Or forget or procrastinate and don't do the withdrawal in time? Then that entre amount becomes taxable.

So I did a big withdrawal for our 2010 to 2019 eligible expenses in 2020 and do annual withdrawals since then and have instructions on how to calculate and do the annual withdrawals in my "when I'm gone" document.

Pigs get fat, hogs get slaughtered... if you get too greedy or try to optimize too much then the entire tax-free benefit could be lost... not worth the risk for me, but you do you.

 

[G-Man]

Yes, but what it the spouse who knows this passes and the surviving spouse and/or kids don't get the message? Or forget or procrastinate and don't do the withdrawal in time? Then that entre amount becomes taxable.

So I did a big withdrawal for our 2010 to 2019 eligible expenses in 2020 and do annual withdrawals since then and have instructions on how to calculate and do the annual withdrawals in my "when I'm gone" document.

Pigs get fat, hogs get slaughtered... if you get too greedy or try to optimize too much then the entire tax-free benefit could be lost... not worth the risk for me, but you do you.

Great advice. That is what I plan to do as well. Just need to start keeping my receipts.

 

[Rianne]

We're saving our HSA for dental expenses. I have 11 old crowns. One crown is from when I was 12 and fell off my bike. DH has a tooth he'd like to get fixed, slightly crooked. My neighbor is looking into some major dental work she's put off. The estimate is $20K.

 

[Z3Dreamer]

If inherited by the surviving spouse, the HSA can become their HSA.

Otherwise, the beneficiaries have to take the FMV as of date of death and subtract medical expenses incurred by the decedent and paid in the year after death, and the remaining amount is taxed as ordinary income (but no 20% penalty).

See the IRS instructions for Form 8889 under Death of the Account Beneficiary for the exact rules (https://www.irs.gov/pub/irs-pdf/i8889.pdf).

Supposing someone names their estate as the beneficiary. I don't have RIA, CCH or PCH any more, but I found a few non-authoritative sites that said upon the death of the owner (where the estate is the beneficiary) the HSA ceases and is includable in the final tax return of the owner. I found no sources that say this, but if the person preparing that final return finds the envelope of receipts covering years of unreimbursed medical expenses (as some on this site have noted), they could use them to offset the income includable in that final return. I realize that pigs get fat and hogs get slaughtered (no one mentioned shoats) so this is just a mental exercise on a slow Wednesday morning. Your thoughts?

 

[audreyh1]

See post #34, it’s quite restricted what can still used, certainly not years of old receipts.

 

[sengsational]

Yes, but what it the spouse who knows this passes and the surviving spouse and/or kids don't get the message? ....

I figure they'll have enough on their plate than to have to fiddle with my tax files and piles of old receipts. So I'm also working to take advantage of my built-up HSA receipts now. As long as I'm kicking, I'll wash current spending through the HSA. My last year receipts aren't that big of a deal. They're going to be fresh and any halfway decent tax preparer would get those. But even if they don't, it's small potatoes.

 

[Z3Dreamer]

See post #34, it’s quite restricted what can still used, certainly not years of old receipts.

Yes and that wording is right out of code section 223. So expenses paid from regular cash (not HSA) 2 days before death are not allowed, but those same expenses paid 2 days after death would be allowed. Planning tip, if you get really sick, pay no medical expenses. Obviously, I am just joking, folks.

So, based on this, tank that account well before you get sick or name a spouse.

 

[jollystomper]

I am still pondering how to use our HSA. We were not eligible until 2017 to open one, but it has grown to about twice the reimbursable expenses we have. I have reimbursed our 2017 eligible expenses but that is it. For now I am continuing to let it grow, and evaluate our situation annually. I might withdraw our eligible expenses from 2018-2020 just to reduce the length of tracking, to set aside those receipts with the other yearly records I save.

 

[Time2]

I had one year where I used a little over $20k of receipts I'd built up over the years and pulled the money from the HSA. This allowed us living expenses and more room for Roth conversions in a lower tax bracket.

 

[RunningBum]

I'm 61. At a rough level I've mapped out how I'm going to generate cash through age 70, the age I plan to start SS. This is part of that flow. For now I've got taxable dividend and interest, plus CDs and treasuries maturing on a schedule to generate the cash I need, but if I ever do find myself short I won't hesitate to tap the HSA. I fully expect to use what I have receipts for by age 70, and if I still have a balance I will use it as I incur new expenses, including Medicare premiums.

The HSA has been and continues to be useful for me, but I'm not going to get greedy and risk holding it too long. The link to the IRS Form 8889 instructions provided in post #34 pretty clearly says your beneficiaries can't use your saved receipts. They can only use it for expenses that I incurred and that they paid after my death.

 

[SecondCor521]

Supposing someone names their estate as the beneficiary. I don't have RIA, CCH or PCH any more, but I found a few non-authoritative sites that said upon the death of the owner (where the estate is the beneficiary) the HSA ceases and is includable in the final tax return of the owner. I found no sources that say this, but if the person preparing that final return finds the envelope of receipts covering years of unreimbursed medical expenses (as some on this site have noted), they could use them to offset the income includable in that final return. I realize that pigs get fat and hogs get slaughtered (no one mentioned shoats) so this is just a mental exercise on a slow Wednesday morning. Your thoughts?

The instructions for Form 8889 include the answer to your question as well. From the same link:

"If the account beneficiary's estate is the beneficiary, the value of the HSA as of the date of death is included on the account beneficiary's final income tax return. Complete Form 8889 as described above, except you should complete Part I, if applicable."

It's not clear to me as worded if the estate would be able to pay any still unreimbursed but eligible HSA expenses in that scenario after death to reduce the taxation of the HSA balance in the way you suggest. From my reading on this topic, I believe most knowledgeable people think not. I personally have my HSA beneficiaries as my three children, in part probably to avoid that question. My plan is to drain my HSA by my early 80's and hope to not have my kids have to hassle with it.

 

[Montecfo]

I am still pondering how to use our HSA. We were not eligible until 2017 to open one, but it has grown to about twice the reimbursable expenses we have. I have reimbursed our 2017 eligible expenses but that is it. For now I am continuing to let it grow, and evaluate our situation annually. I might withdraw our eligible expenses from 2018-2020 just to reduce the length of tracking, to set aside those receipts with the other yearly records I save.

I tend to take the advice of Randy Bachman and Fred Turner on this one and "Let it Ride".