Withdrawing from an HSA

[SecondCor521]

They can override federal law?

No, but they are in charge of state taxes. So HSAs in those two states are treated like HSAs at the federal level but taxable accounts at the state level.

 

[pb4uski]

I've never withdrawn any. Just kept records and receipts. We are no longer on a HDHP.

I'm sure we do not have enough receipts to drain it. It's a couple hundred thou but all the stats say we figure to spend that much and more on future medical. So I'm letting it ride.

"Tried, tried, tried, let it ride..."

If you get hit by a beer truck tomorrow, wlll your DW or whoever will look after your financial affairs after your passing know to take a withdrawal and know where all the documentation is?

Otherwise, HSA's inherited by a non-spouse are taxable income in the year inherited.

 

[Montecfo]

If you get hit by a beer truck tomorrow, wlll your DW or whoever will look after your financial affairs after your passing know to take a withdrawal and know where all the documentation is?

Otherwise, HSA's inherited by a non-spouse are taxable income in the year inherited.

Yeah. Remember I'm a tax guy. With work papers. And if you think my spouse will be doing our taxes, well, she won't. It will be an actual tax person.

But of course death throws a monkey wrench into most plans, not just HSA withdrawal plans. No need to.cherry-pick.

 

[RunningBum]

But of course death throws a monkey wrench into most plans, not just HSA withdrawal plans. No need to.cherry-pick.

Well, the topic is about HSA withdrawals so it's certainly appropriate to remind people that while an HSA plan is great for the owner, it loses it's advantages when passed down.

 

[Montecfo]

Well, the topic is about HSA withdrawals so it's certainly appropriate to remind people that while an HSA plan is great for the owner, it loses it's advantages when passed down.

Sure. But that was me under the beer truck so I answered the question.

And an HSA doesn't lose its advantage when passed down, exactly. It doesn't lose anything when passed to a spouse for example And even if passed to a non-spouse, if all appropriate medical claims are charged timely (you have a year to do so) then you get every tax benefit that was possible, an optimal result.

And any decent tax person would examine that issue, no different than basis in real property, IRA basis or anything similar.

It is not, in my opinion, a reason to pull tax deferred funds before you have to. That approach minimizes the benefit of the HSA account, making it a costly way to address the issue, in my view.

 

[RunningBum]

Sure. But that was me under the beer truck so I answered the question.

And an HSA doesn't lose its advantage when passed down, exactly. It doesn't lose anything when passed to a spouse for example And even if passed to a non-spouse, if all appropriate medical claims are charged timely (you have a year to do so) then you get every tax benefit that was possible, an optimal result.

And any decent tax person would examine that issue, no different than basis in real property, IRA basis or anything similar.

It is not, in my opinion, a reason to pull tax deferred funds before you have to. That approach minimizes the benefit of the HSA account, making it a costly way to address the issue, in my view.

Passing to a spouse isn't passing "down". I selected that word on purpose.

It's never been clear to me if a non-spouse heir can use past medical receipts that have not yet been applied to an HSA withdrawal, or can only use them to directly pay the deceased unpaid medical bills. I can't find any specific cases related to this. I suppose it probably is the former, and if true, then it's not such a big deal. Though you'd better be clear on those unpaid bills. I know my system, but that's more work for the heir.

I'll certainly pull from my HSA before my Roth, for the ease of record keeping alone, even if I am convinced my heir can use my saved receipts. I expect I'll pull what I have receipts for by age 70, so I can have a little more room for Roth conversions instead of pulled from another taxed account for living expenses.

 

[SecondCor521]

And even if passed to a non-spouse, if all appropriate medical claims are charged timely (you have a year to do so) then you get every tax benefit that was possible, an optimal result.

I'm not sure that follows exactly.

Yes, you'll be maximizing the tax usage of the HSA. But it's not optimal overall if the pretty lousy tax treatment of passing down an HSA means that the contributions made to the HSA would have been better off (i.e., taxed better) had they been left in their original account.

For example, I have an HSA. Since I'm retired, I essentially make my HSA contributions from my taxable account. If I die with money in my HSA account (without accompanying expenses), then those dollars gets taxed worse than if I had simply not bothered with the contribution and had left them in my taxable account. I haven't looked lately, but I think HSA left to a non-spouse is counted as ordinary income in the year of inheritance; of course taxable accounts are inherited not as income and get a basis step-up.

It makes sense while I have a decent life expectancy and probable future medical expenses and, in my case, additional Roth conversions I'd like to do. But it also makes sense for me to drain it prior to death.

Since I don't know exactly when I'm going to die and how much I'll have in medical expenses, I have to guess somewhat. I'm aiming to zero mine out by age 75, which means stopping contributions at age 57 and starting reimbursements at age 65.

 

[Montecfo]

There is no way to know in advance the level of qualified medical expenses one will incur in the future. If it were everyone would simply contribute that amount to their HSA and I would agree with you.

As it is, I think my statement holds.

You also can't know when you will pass. So some.good record keeping practice is essential in any case.

 

[bingybear]

I just keep medical expenses with my tax documents after I started the HSA.I don't need to use the HSA $ during the year the medical expenses occur

 

[audreyh1]

We’ve done withdrawals to cover medical expenses from our Fidelity HSA to our Fidelity Cash Management account. This is easy to do as a transfer, and the following year you get a tax form showing all your withdrawals for the prior year.

 

[audreyh1]

We are mainly using it to pay the CMS Medicare premiums which we do by billpay from the Fidelity HSA account. This makes the documentation simple. Once SS is paying for the premiums directly from SS check we will reimburse to cover those. SS provides a tax form annually showing your Medicare premiums paid.

We have collected a huge number of old medical receipts, but I don’t intend to actually use them.

 

[captain3d]

My DD went to Texas for Thanksgiving to visit family on her husbands side. They spent the day with a cousin who sold their 1000 sq ft home somewhere in Los Angeles earlier this year for 1.2 million dollars and moved to the Woodlands neighborhood to a magnificent 3500 sq ft home for right around half a mill. I looked it up on Zillow, absolutely gorgeous. So if you want to leave Cali and have a house for sale, now is the time.
She said they did drive into Houston and they have the same issues with homeless people everywhere but the area that they were staying was very Hoity Toity as the kids call it.

I have been considering all options. Luckily at this point we do not have CA tax issues but at future selling rental property time we may not want to be here

 

[teejayevans]

I do it this way as well. Seems easier to keep documentation if requested. It was convenient using my HSA debit card to pay for those expensive dental crowns.

Ditto, I see no reason not to pay medical bills with HSA funds today instead of paying with post tax money and later reimbursed myself, unless I didn’t have enough money in my HSA to pay the bill.

 

[Montecfo]

Ditto, I see no reason not to pay medical bills with HSA funds today instead of paying with post tax money and later reimbursed myself, unless I didn’t have enough money in my HSA to pay the bill.

The reason people let HSA funds run is to maximize tax savings.

 

[JoeWras]

One would guess that HSA withdrawal tax enforcement will be more robust if BBB passes and increased funding to the IRS is available.

 

[GreenER]

Since you are just reimbursing yourself for qualified medical expenses, the easiest way is a single transfer online from your HSA to another (non-retirement) account. Here are other ways. Your total distributions for the year will be reported on Form 1099-SA, and then you will file Form 8889 with your tax return. I can’t comment on your chances for being audited, but if it happens, you’ll need to produce receipts for all of those expenses.

Thanks, this is helpful and it sounds like it will be easier than I anticipated!

 

[GreenER]

In 2020 I did a withdrawal for all of our eligible medical expenses from 2010-2019 as a single lump sum withdrawal. I have a bound file of the withdrawal, a spreadsheet printout of the expenses (dates, payee, descripition, amounts, etc.) and receipts (chronoogical) in case the IRS ever asks about it. So far they haven't said boo.

Great, it will be easier to do one lump sum for the 5 years and while I do have all the documentation it would be a pain to be audited and have to provide it all. I'm glad to hear that you've managed to fly under the radar and it sounds like only a few folks have had to provide documentation. Fingers crossed!

 

[GreenER]

I have my bank account hooked up to my HSA for ACH withdrawals, but most will send a check if you don't have that. I keep receipts, but withdraw in whatever amount I feel/need as long as I know I can support it.

Okay, this will be easy since I already have a bank account hooked to Fidelity.

 

[GreenER]

Thanks everyone for all of the helpful info. It is much appreciated.

 

[sengsational]

One would guess that HSA withdrawal tax enforcement will be more robust if BBB passes and increased funding to the IRS is available.

Even if you provide optimal documentation, it's got to take a real person a very long time to go through the receipts. And I'm sure not everyone has optimal documentation (everything is legible, sorted in order with a list, etc). I pulled a few dollars in the first year (2014), just so I had an example of the form, but pulled none since. The juice is the time between depositing and withdrawal for medical expenses. This year I'm pulling the whole of 2014. I was good at record keeping in those early days. As the years went by, I just have a receipt file that's not bound and not reconciled to a list; just reports from my accounting system and a pile of receipts. A PITA if I'm required to produce documentation, but I could do it.


But got off on a tangent. I meant to address the complexity the IRS faces. Say you submit stuff over several years, no CP letter. Then you get a letter and provide receipts. Then, in a later year, another CP letter, you send in more receipts. To be thorough, the IRS would have to pull the prior list, and make sure you didn't use any of the same receipts. What a nightmare for the IRS.

 

[bobandsherry]

Even if you provide optimal documentation, it's got to take a real person a very long time to go through the receipts. And I'm sure not everyone has optimal documentation (everything is legible, sorted in order with a list, etc). I pulled a few dollars in the first year (2014), just so I had an example of the form, but pulled none since. The juice is the time between depositing and withdrawal for medical expenses. This year I'm pulling the whole of 2014. I was good at record keeping in those early days. As the years went by, I just have a receipt file that's not bound and not reconciled to a list; just reports from my accounting system and a pile of receipts. A PITA if I'm required to produce documentation, but I could do it.


But got off on a tangent. I meant to address the complexity the IRS faces. Say you submit stuff over several years, no CP letter. Then you get a letter and provide receipts. Then, in a later year, another CP letter, you send in more receipts. To be thorough, the IRS would have to pull the prior list, and make sure you didn't use any of the same receipts. What a nightmare for the IRS.

Agree with ya. My thought is IRS will spend resources to chase the big nuggets. I'd guess more recoveries to be made by looking at crypto than HSA account details.

The gap you mentioned for providing proof for HSA expenses existed previously for capital gains, and they plugged that hole. If/when HSA become a possible source of abuse then IRS may do some additional requirements.

My first year with HSA and I just did a full year review. All my expenses tracked in Quicken. Did a recon between what I had for medical expenses and what's in my HSA Reimbursement account. Found a few gaps but now 100% documented once again. [emoji41]

 

[Time2]

I wonder what proper record keeping is?
I have receipts for 7 years. I have each year in a separate envelope. That's all I have. I suppose if I got an IRS letter about my 7 yrs of withdrawal in one year, I would copy them by date. Most are prescriptions, doctor fees and dental fees, nothing I'm stretching with.
What else would I be expected to have?

 

[SecondCor521]

I wonder what proper record keeping is?
I have receipts for 7 years. I have each year in a separate envelope. That's all I have. I suppose if I got an IRS letter about my 7 yrs of withdrawal in one year, I would copy them by date. Most are prescriptions, doctor fees and dental fees, nothing I'm stretching with.
What else would I be expected to have?

The IRS just says that you have to show that the money was used for qualifying medical expenses, had not been reimbursed from another source, and were not used for an itemized deduction. The first thing is easy to satisfy but myself and others are puzzled how one would prove the other two. I suppose not taking a medical itemized deduction in any of the relevant years would help for the third.

Personally I save receipts, statements, or EOBs showing the date, dollar amount, and description. I also keep a summary spreadsheet indicating what the expense was for (in case the receipt description is shortened to something unintelligible).

I haven't reimbursed myself yet, but when I do I'll just shift the receipts from my HSA folder to my "tax year 20xx" folder.

I suspect that if they ask for everything, I'll just give them all the receipts. If they find one or two that isn't quite up to snuff, I suspect a reasonable auditor would let it go. And if not, the penalty arising from a single item being nonqualified has to be small enough for me not to worry about it.

 

[Time2]

The IRS just says that you have to show that the money was used for qualifying medical expenses, had not been reimbursed from another source, and were not used for an itemized deduction. The first thing is easy to satisfy but myself and others are puzzled how one would prove the other two. I suppose not taking a medical itemized deduction in any of the relevant years would help for the third.

Personally I save receipts, statements, or EOBs showing the date, dollar amount, and description. I also keep a summary spreadsheet indicating what the expense was for (in case the receipt description is shortened to something unintelligible).

I haven't reimbursed myself yet, but when I do I'll just shift the receipts from my HSA folder to my "tax year 20xx" folder.

I suspect that if they ask for everything, I'll just give them all the receipts. If they find one or two that isn't quite up to snuff, I suspect a reasonable auditor would let it go. And if not, the penalty arising from a single item being nonqualified has to be small enough for me not to worry about it.

We can hope that is the case, I'm using $20,000 of built up receipts this year.

 

[Montecfo]

-Receipts, EOBs or Payment records- "Good"
-Receipts and EOBs or Payment record- "Better"
-Receipts, EOBs and payment records-"Best"

These records should be tied to whatever amount you withdrew.

You also want to be able to show you did not take a tax deduction for these expenses or use them to support previous HSA withdrawals.