HSA Tax Analysis

[TromboneAl]

Here's my first draft at answering the question:

How much do I benefit from leaving money in my HSA account for ten years, as opposed to using the funds immediately for medical expenses?

That is, how much benefit do I get from the tax free compounding?

To make it simple, I assume that the account makes x% gain each year, all of which is taxed at y%. There are some other complications that I've ignored. For example, if the money is never used for medical expenses, I have to pay tax on it.

So at this point, I figure I'll have about $4K more at the end of 10 years if I leave the money in the HSA account.

Let me know what mistakes I've made and I'll revise the spreadsheet.

 

[mn54]

Thanks for the info. t-al. I see your only putting in for one person. I assume if you were investing the max ( $5650 for 2007) this should more than double the amount you would have. Have we confirmed the fact that you can take out tax-free for medical bills incurred from previous years?

 

[KM]

Where/How are you paying for your medical expenses?

If you are investing $2850/year and you have $2000/year in medical expenses - how are you covering those expenses, if you are not using your HSA $$s? I think there is some "opportunity lost" that you also have to factor in for that- or am I missing something.

 

[twaddle]

He's just looking at the benefit of tax-free compounding. If you have the choice of paying bills from a taxable account or a tax-free account, use the taxable account.

Personally, I'm maxing out my HSA account and letting it compound forever. I think congress will eventually figure out that it's just a tax shelter.

 

[TromboneAl]

Have we confirmed the fact that you can take out tax-free for medical bills incurred from previous years?

Yes, on page 30 of this document:

http://www.treas.gov/offices/public-affairs/hsa/pdf/all-about-HSAs_051807.pdf

it says:

HSA Distributions can be used to
reimburse prior years’ expenses as long
as they were incurred on or after the date
the HSA was established.
– No time limit on when distribution must occur
– Individual must keep records sufficient to
prove that:
• the expenses were incurred,
• they were not paid for or reimbursed by another
source or taken as an itemized deduction

I see your only putting in for one person.

Right. Luckily my wife didn't qualify, and she's still on a non-hsa high deductible plan. I say "luckily" because if she were on the plan, our "family" deductible would have been $7,000 instead of $3.500, and my hernia repair and colonoscopy this year would have cost me $7K! Also I found out that I can use my HSA money for wife's expenses too (thanks, Martha). Wild huh? Sounds too good to be true.

Where/How are you paying for your medical expenses?

As most in this forum, I have enough after tax money for our usually modest medical expenses. There's no lost investment opportunity here; by paying with after tax funds, I have the opportunity to have my money compound tax free.