Draw from HSA rather than Roth?

[qwerty3656]

I understand value of funding an HSA and the idea of keeping receipts and delaying withdrawal of HSA to let it grow tax free. However, if I need/want to draw some tax free money, then I should probably draw from HSA instead of the Roth, right? This would be situations where, for example, I want to control my taxable income and/or where I'm not yet 59 1/2 and can draw down the "principal" of the Roth (or HSA with qualifying expenses) w/o penalty.

My thinking is the HSA is more valuable to fund, but once you've taken the tax deduction, the Roth money has less restrictions on it.

[RunningBum]

Yes, assuming you have receipts to match the HSA withdrawal so that it is tax free. The Roth is better to inherit too. If you die with an HSA balance, the heir must fully withdraw it that same year, and it is taxable.

[Gotadimple]

As you say drawing from either HSA or Roth can be a penalty-free tax free event. If you have the receipts to back up your draw amount, the HSA may be the better choice if you are not in an HSA where you have $ invested with a broker. (that incurs transaction fees reducing your overall balance).

My thinking is to keep as much in the Roth as possible so it can continue to grow - especially if you are not yet 59-1/2.

[sengsational]

That's my plan (to preferentially pull HSA over Roth subject to total medical spending total).

My after tax bucket was 'dry' for some years until an inheritance, so I was starting with tIRA kinds of funds up until it would impact ACA, then going with HSA. Now my after tax bucket has some in it, so doing Roth conversions instead of tIRA pulls. But as the after tax bucket dries-up, the HSA money is handy for paying taxes on the larger Roth conversions.

[Montecfo]

Quote:

Originally Posted by RunningBum Yes, assuming you have receipts to match the HSA withdrawal so that it is tax free. The Roth is better to inherit too. If you die with an HSA balance, the heir must fully withdraw it that same year, and it is taxable.

Agree. The HSA would be taxable to the extent not covered by receipts.

[ownyourfuture]

Quote:

Originally Posted by RunningBum If you die with an HSA balance, the heir must fully withdraw it that same year, and it is taxable.

Wasn't aware of that.
Thanks.

[RunningBum]

Quote:

If you die with an HSA balance, the heir must fully withdraw it that same year, and it is taxable.

Quote:

Originally Posted by ownyourfuture Wasn't aware of that. Thanks.

There's some disagreement here on the interpretation of that. At least one poster here believes that your heirs could use your saved receipts to withdraw that much tax free in the year you die, even after your death. My more conservative reading has been that they can only use your HSA to pay your final outstanding medical bills.

Looking at this again, I think the other poster is right. I found this at https://www.fiphysician.com/dont-die-with-your-hsa/

Quote:

After the HSA owner’s death, you [beneficiary] can still use the HSA owners’ receipts for medical care (either in the final year, or if they have a file folder full of past qualified expenses, you can use those) to access the HSA tax-free. This is reported on the final year’s tax return. Thus, if the HSA owner has a file folder full of receipts for qualifying medical care, it is worth your time to get a distribution from the HSA to reimburse those expenses.

To simplify things for my son, I still hope to spend my HSA down in my lifetime, but if I get hit by a bus he still can get some of it tax free, if he figures it out. I will leave a note in my instructions, but it still could be missed.

[Phroig]

For those of you that saved receipts, how did you decide when to start cashing them? I'm still working, but starting this year, I've started taking current contributions out as distributions. I don't need the cash, but I don't want too much in the HSA (is there such a thing?). I'll take the growth in my taxable account instead.

[RunningBum]

Quote:

Originally Posted by Phroig For those of you that saved receipts, how did you decide when to start cashing them? I'm still working, but starting this year, I've started taking current contributions out as distributions. I don't need the cash, but I don't want too much in the HSA (is there such a thing?). I'll take the growth in my taxable account instead.

I feel like between 60-65 is a good time to use them if you are ER'd and trying for an ACA subsidy. Hopefully the account has taken advantage of tax free growth, and at this point it's a way to get money for expenses without increasing MAGI. Maybe this is justification for my reasons, and doesn't apply to others.

If you aren't taking the ACA subsidy, perhaps you can use withdrawals to keep you from an IRMAA cliff, so from 63 on is good.

If you have a larger HSA than you can ever see being able to use, then you might as well stop contributing to an HSA since it's basically going to be a tIRA unless your actual medical bills are higher.

I'd rather have the growth tax free in my HSA over taxable, but I like the tactical use of an HSA as I described above.

I'm interested in hearing other reasons for when to start drawing from an HSA.

[audreyh1]

We’ve been using our HSAs to cover Medicare part B and D premiums. We will eventually draw them down for that, and maybe the occasional dental bill. Trying to mostly have them drawn down by early 70s, then two less accounts and related tax filings to deal with.

[SecondCor521]

Quote:

Originally Posted by Phroig For those of you that saved receipts, how did you decide when to start cashing them? I'm still working, but starting this year, I've started taking current contributions out as distributions. I don't need the cash, but I don't want too much in the HSA (is there such a thing?). I'll take the growth in my taxable account instead.

Like some others here, I'd like to aim on the conservative side of not dying with an HSA balance. So I have a spreadsheet that projects forward balances, growth, contributions, and withdrawals.

I somewhat arbitrarily chose to empty my HSA around age 75, which means that I stop contributions after about two more years, and start draining it at 65. I plan to casually monitor the situation and adjust going forward, of course.

But I also assume withdrawals only for expenses I've already incurred or know I will incur such as Medicare premiums at 65 onward. Some here prefer to have more with the expectation that they'll have more expenses than can be counted on, which is reasonable but not my preference.

[RunningBum]

You know, that's a really good point that you really have to look at whether you will spend all of the HSA. For the first time that's setting in with me. Maybe it is better to take it out earlier and let it grow in taxable.

Looking at my balance above the receipts I've saved so far, I'll spend that much over the rest of my life, barring an early departure. But with 5 more years of contribution, and more importantly, growth, it's a big question. Is it worth letting it run in case I do need memory or other assisted care, or should I make sure I drain it, which probably means starting to pull what I can out soon.

When I said 60-65 in my last post (I'm 60 now), I really thought I meant 64 or 65, but maybe it should be 60. I need to do some projections on growth of the HSA along with reasonable expense estimates. Oh boy, a new spreadsheet! I love my spreadsheets.

[audreyh1]

Depending on how much someone has accumulated in an HSA may drive different approaches.

I collected receipts just in case, but I think we’ll easily use it up paying Medicare premiums - certainly bridging 65-70 before SS starts deducting for Medicare premiums, and if some left over just withdraw annually to cover additional payments after 70.

Others with well over $100K in their HSAs often look to covering long-term care expenses with it.

[Montecfo]

I have all the supporting records but have not drawn a penny from my HSA, though the balance is in the $200k range. I hope it ends up being sufficient to cover future medical costs. These are estimated to average $300K + per couple in retirement by a number of authorities. That excludes LTC.

Now, I do not rule out a drawdown if needed to avoid a tax bracket. But I saved it for future costs. And I have invested for growth, since medical cost inflation has exceeded the overall rate. That has worked. If it ends up being more than I need that's great news. It means I have an IRA post 65 that I can use for anything.

I would be more concerned with it being too little than being too much.

And of course I can pass it to my wife with no tax consequences, or to our son with the part not covered by our qualified medical expenses being taxed, a great result as I see it.

[foxfirev5]

Due to it's almost limitless possibilities the Roths are last. The HSA is next in line after various RMSA and RHSA are depleted. The latter two have employer contributions which my ex employer could claw back if they desired. Therefore we're hitting them hard with all annual Medicare Part B, Part D as well as Medigap plan G premiums withdrawn monthly. Throw in a few dental bills and prescriptions and I anticipate these will be depleted by the time RMDs are required. Also this plan frees up an additional 10k per year for Roth conversions. Lowering future RMD's a tad.

[FLSUnFIRE]

I think this has been covered before... just a bit of thread drift but not irrelevant. If I were to die today, could the estate claim the reimbursement (calendar year of death) for those items with receipt? Probably not but I could see an argument that I was alive during the year and they were valid withdrawals. What about using the HSA to pay final care in year of death after death... to me the same thing (expense incurred while alive) but hard to pay that last medical bill after expiration! If so, I'd want to put that instruction in my "death binder."


I have a lot of time but eventually might need to consider drawing down as I have about 25% of my balance covered by receipts and that ratio will continue to decline (I hope!)

[SecondCor521]

Quote:

Originally Posted by FLSUnFIRE I think this has been covered before... just a bit of thread drift but not irrelevant. If I were to die today, could the estate claim the reimbursement (calendar year of death) for those items with receipt? Probably not but I could see an argument that I was alive during the year and they were valid withdrawals. What about using the HSA to pay final care in year of death after death... to me the same thing (expense incurred while alive) but hard to pay that last medical bill after expiration! If so, I'd want to put that instruction in my "death binder."

From the IRS, where it talks about non-spousal HSA beneficiaries:

"The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death."

-- https://www.irs.gov/publications/p96...link1000204098

[MichaelB]

Quote:

Originally Posted by FLSUnFIRE I think this has been covered before... just a bit of thread drift but not irrelevant. If I were to die today, could the estate claim the reimbursement (calendar year of death) for those items with receipt? Probably not but I could see an argument that I was alive during the year and they were valid withdrawals. What about using the HSA to pay final care in year of death after death... to me the same thing (expense incurred while alive) but hard to pay that last medical bill after expiration! If so, I'd want to put that instruction in my "death binder."

My tax advisor said that after one dies, only unpaid medical expenses are now eligible for tax free reimbursement from the HSA. Previously eligible, paid but not reimbursed expenses, are no longer eligible.

[FLSUnFIRE]

Quote:

Originally Posted by MichaelB My tax advisor said that after one dies, only unpaid medical expenses are now eligible for tax free reimbursement from the HSA. Previously eligible but not reimbursed expenses are no longer eligible.

Yeah, IRS site states paid for "by the beneficiary." Speaking of which, I think I may need to designate one as I recently transferred my HSA.(DONE) Guess my last words will be me reimbursing myself before I kick the bucket.

[Time2]

For 2021 I used medical receipts from 2015 to 2021 and withdrew $23k from my HSA. I did this because I needed income and also wanted to maximize the amount of Roth Conversion I could do. This allowed my to maximize my Roth Conversion in the 22% bracket.