Can an HSA be used like a Roth IRA?

[Gotadimple]

My plan was to accumulate health expense costs, including Medicare premiums equal to the balance in the account and then close it. Thus far I haven't hit the magic number, because itemizing seems to be more tax effective. Future changes in tax law may change my thinking.

- Rita

[kaneohe]

For those planning on compounding for decades in the HSA w/o withdrawals, here's an interesting post (about 5 posts down) Health Savings Accounts (HSAs) - Triple Tax Free Retirement Savings - Finance - Fragile Deal

It talks about record keeping requirements. Most of the discussion here has been about keeping receipts that show qualified medical expenses. You also need to show that the expenses have not been deducted (or used to provide the 10% of AGI floor for deductions). That means keeping decades of tax returns.

You also need to show that the expenses have not been reimbursed previously.
That means saving decades of EOBs.

[travelover]

Quote:

Originally Posted by kaneohe For those planning on compounding for decades in the HSA w/o withdrawals, here's an interesting post (about 5 posts down) Health Savings Accounts (HSAs) - Triple Tax Free Retirement Savings - Finance - Fragile Deal It talks about record keeping requirements. Most of the discussion here has been about keeping receipts that show qualified medical expenses. You also need to show that the expenses have not been deducted (or used to provide the 10% of AGI floor for deductions). That means keeping decades of tax returns. You also need to show that the expenses have not been reimbursed previously. That means saving decades of EOBs.

I don't see this as a big impediment. I just toss all eligible receipts in a big folder. As I never use HSA funds and never have enough medical expenses to take a deduction, if I'm ever audited, I'll just pull out receipts until I cover the withdrawal.

[kaneohe]

Quote:

Originally Posted by travelover I don't see this as a big impediment. I just toss all eligible receipts in a big folder. As I never use HSA funds and never have enough medical expenses to take a deduction, if I'm ever audited, I'll just pull out receipts until I cover the withdrawal.

How does IRS know you've never taken a deduction e.g. 20 yrs ago for that old expense...........you may know all those things are true: never have enough for deduction, etc.........but how does IRS know if they don't save all the old tax returns?

[MichaelB]

Quote:

Originally Posted by kaneohe How does IRS know you've never taken a deduction e.g. 20 yrs ago for that old expense...........you may know all those things are true: never have enough for deduction, etc.........but how does IRS know if they don't save all the old tax returns?

The same way they verify your medical deductions when you itemize. They audit your return, request supporting documentation, and disallow any item not properly documented.

[sengsational]

Quote:

Originally Posted by SkinsFan0521 I just wanted to jump in here real quick and mention another slightly different option for HSA use that hasn't been mentioned yet... One of my biggest areas of concern for my FIRE plan is bridging the gap between my retirement age and 59.5. So, if I end up coming up short with my brokerage account to bridge that gap, I'm planning on withdrawing my HSA funds to reimburse me for my past medical expenses to give me some additional (tax free) income during those years before I reach 59.5. Obviously, the ideal scenario is that I have plenty of money in my brokerage account to bridge that gap, but if not, the HSA is a nice tax-free way to get some additional cash flow. And if I do end up having enough in the brokerage account, then I would just leave the HSA money alone and use it after age 65.

Talking about filling in years to minimize impact on AGI, that brings up a decision point if you have to choose between pulling from HSA and Roth.

Given your Roth has been open for more than 5 years, the basis should be available tax and penalty free. And given you have past medical expenses, the HSA funds should be available tax and penalty free.

It seems like the two types of account are equivalent except for the higher restrictions on the HSA withdrawals. Would that mean that tapping the HSA over the Roth would be advisable?

[SkinsFan0521]

Quote:

Originally Posted by sengsational Talking about filling in years to minimize impact on AGI, that brings up a decision point if you have to choose between pulling from HSA and Roth. Given your Roth has been open for more than 5 years, the basis should be available tax and penalty free. And given you have past medical expenses, the HSA funds should be available tax and penalty free. It seems like the two types of account are equivalent except for the higher restrictions on the HSA withdrawals. Would that mean that tapping the HSA over the Roth would be advisable?

That's exactly my thoughts. If I have the option to withdraw from my HSA or Roth IRA contributions, I'd rather take it from HSA.

[travelover]

Quote:

Originally Posted by kaneohe How does IRS know you've never taken a deduction e.g. 20 yrs ago for that old expense...........you may know all those things are true: never have enough for deduction, etc.........but how does IRS know if they don't save all the old tax returns?

I think you are overthinking this. By the time I cash out my HSA, I'll have a lot more expenses than the withdrawal. And that is assuming I'm ever actually forced to prove it line by line. And I do save my old tax returns.

[pb4uski]

Just wondering out loud... if a potential strategy might be to use a HSA for Medicare deductible and co-pays to self insure rather than buy Medigap... especially if you could buy stop-loss coverage (say to cover any deductibles and co-pays that exceed $10k in a year) and self-insure for the first $10k. We are healthy and have little claims.

If something like that was available it might be worth considering... and then if you run into health issues buy conventional Medigap coverage?

[kaneohe]

Quote:

Originally Posted by pb4uski Just wondering out loud... if a potential strategy might be to use a HSA for Medicare deductible and co-pays to self insure rather than buy Medigap... especially if you could buy stop-loss coverage (say to cover any deductibles and co-pays that exceed $10k in a year) and self-insure for the first $10k. We are healthy and have little claims. If something like that was available it might be worth considering... and then if you run into health issues buy conventional Medigap coverage?

Potential problem w/ this strategy: you get a free ride into Medigap if you enroll when you are first eligible. If you don't, you might have to undergo underwriting to get into a Medigap plan and if you have health issues , you might not pass.

[pb4uski]

Yes, that would be a problem.

[kaneohe]

Quote:

Originally Posted by Gotadimple My plan was to accumulate health expense costs, including Medicare premiums equal to the balance in the account and then close it. Thus far I haven't hit the magic number, because itemizing seems to be more tax effective. Future changes in tax law may change my thinking. - Rita

Not sure how this works.....you have to fulfill the 10% of AGI requirement for the floor before you can start deducting medical expenses so that amount is not being useful except to enable the amount above that to be deducted.

[Gotadimple]

Quote:

Originally Posted by kaneohe Not sure how this works.....you have to fulfill the 10% of AGI requirement for the floor before you can start deducting medical expenses so that amount is not being useful except to enable the amount above that to be deducted.

True, you have to make a decision about whether the deductible amount (after the floor) is significant enough to make a difference in tax payments.

If income is low enough, the premiums for Medicare Part B, Part D, and/or Medicare Advantage/Medigap can put you in a spot where you exceed the 10% floor and it does make a difference in taxes due. If it has no tax impact, then, I'd take the receipts/EOBs and stuff them in my HSA folder - no medical deduction that year on Schedule A.

YMMV.

Rita

[PaddyMac]

We saved our HSA over quite a few years and have built up a nice cushion ($45K or so) for medical expenses, paying all of our expenses from cash flow. Although I have kept receipts, I'm not looking at using old receipts. Our ACA premiums are going up $300 a month next year (no subsidy) so I plan to use the HSA for larger medical expenses (surgeries, expensive glasses, etc) to smooth out the next nine years until we get Medicare. It would be nice not to drain the account, but the idea is medical expense smoothing for us.

[ncbill]

Quote:

Originally Posted by MichaelB The same way they verify your medical deductions when you itemize. They audit your return, request supporting documentation, and disallow any item not properly documented.

IF you ever get audited.

Mom wrote off five figures in medical expenses on her taxes for several years.

I wondered about such high deductions, but the CPA we used (30+ years experience) noted he'd never seen medical deductions questioned.

[43210]

Actually an HSA is more like a traditional IRA (not Roth), but with the special rule that withdrawals are tax/penalty free for qualified medical expenses.

[sengsational]

Quote:

Originally Posted by kaneohe For those planning on compounding for decades in the HSA w/o withdrawals, here's an interesting post (about 5 posts down) Health Savings Accounts (HSAs) - Triple Tax Free Retirement Savings - Finance - Fragile Deal It talks about record keeping requirements. Most of the discussion here has been about keeping receipts that show qualified medical expenses. You also need to show that the expenses have not been deducted (or used to provide the 10% of AGI floor for deductions). That means keeping decades of tax returns. You also need to show that the expenses have not been reimbursed previously. That means saving decades of EOBs.

There is a suggestion at the end

Quote:

If you are deferring HSA reimbursements and have unused IRA space at some point, there is no reason not to take HSA reimbursements up to the amount of your unused IRA space and contribute the funds to a Roth IRA. The earnings will be tax-free upon retirement, the contribution can be withdrawn without penalty, and you avoid the long-term recordkeeping burden for those medical expenses. Reimburse the oldest medical expenses first.

What does it mean "unused IRA space". To contribute to a Roth, you must have earned income, so if you don't work, you have "no unused IRA space", right? So that strategy isn't useful for those that are not getting earned income?

It would seem that if I had unused IRA space, rather than pull from one tax free account and put it into another tax free account, I could just put "regular money" into the tax free account, and have even more money that will grow tax-free.

[kaneohe]

Quote:

Originally Posted by sengsational There is a suggestion at the end What does it mean "unused IRA space". To contribute to a Roth, you must have earned income, so if you don't work, you have "no unused IRA space", right? So that strategy isn't useful for those that are not getting earned income? It would seem that if I had unused IRA space, rather than pull from one tax free account and put it into another tax free account, I could just put "regular money" into the tax free account, and have even more money that will grow tax-free.

Agree w/ you last paragraph.........just guessing that writer was thinking that unused space meant there were not enough available funds to fund the Roth....seems like you could only pull amounts supported by qualified medical expenses.