HSA Tax Concern

[TromboneAl]

Here's my one concern about my HSA...

My plan is to allow the HSA funds to compound tax-free. So, I am not taking out any HSA funds now for medical expenses. I will reimburse myself in 10-15 years, for all the medical costs.

From my understanding of the HSA rules, this should be fine. But I'm still a little worried that the IRS is not going to understand a sudden lump sum removal of big bucks for 15 years worth of medical expenses. Or that there will be something I didn't understand.

I am keeping careful track of all medical expenditures for DW and me. I keep all receipts, and also scan them in and back them up, with off site copies in the safe deposit box.

Need I be concerned?

Here's another question: I had considered that it would be smarter to use the HSA funds for medical expenses later, when in a higher tax bracket (due to IRA withdrawals), but I realized that this doesn't make any difference. Correct?

Thanks

 

[Martha]

This is a compliment, not a criticism Al, but you are so anal about record keeping that I can't believe you will have a problem with the IRS.

As far as your second question, it makes a difference if as a result you can withdraw less from your IRA because you are using HSA dollars. Also, you get the advantage of tax free compounding. But if you have enough money to pay medical expenses from your required minimum distributions it wouldn't make much of a difference. You have to take the minimum anyway.

 

[frayne]

My understanding and I may be wrong is when you turn 65 or thereafter you can withdraw from your HSA without penality and it is taxed as ordinary income.

Does this sound correct ?

 

[Martha]

Yes, but if you use for health care expenses it isn't taxed at all.

 

[eridanus]

From my understanding of the HSA rules, this should be fine. But I'm still a little worried that the IRS is not going to understand a sudden lump sum removal of big bucks for 15 years worth of medical expenses. Or that there will be something I didn't understand.

As long as you have the records...though that doesn't mean they won't send you a friendly letter.

Just don't withdraw it all at once. Spread it out over several years.

 

[bssc]

I liked our HR person's comment about just write yourself a check. I wonder how many abuse stories we are going to hear in the upcoming years.

 

[MooreBonds]

Here's my one concern about my HSA...

My plan is to allow the HSA funds to compound tax-free. So, I am not taking out any HSA funds now for medical expenses. I will reimburse myself in 10-15 years, for all the medical costs.

From my understanding of the HSA rules, this should be fine. But I'm still a little worried that the IRS is not going to understand a sudden lump sum removal of big bucks for 15 years worth of medical expenses. Or that there will be something I didn't understand.

I am keeping careful track of all medical expenditures for DW and me. I keep all receipts, and also scan them in and back them up, with off site copies in the safe deposit box.

T-Al, it was my understanding that you are allowed to withdraw funds from an HSA for medical expenses incurred in the year you withdraw the money.
I wasn't aware that you can incur $10,000 in expenses in 2008, then withdraw $10,000 in 2020 and say it was for 2008. Do you have a reference in the HSA legislation that gives you that impression?

 

[bots2019]

T-Al, it was my understanding that you are allowed to withdraw funds from an HSA for medical expenses incurred in the year you withdraw the money.
I wasn't aware that you can incur $10,000 in expenses in 2008, then withdraw $10,000 in 2020 and say it was for 2008. Do you have a reference in the HSA legislation that gives you that impression?

I've wondered about the 'delay' strategy too... but what if you have late-December expenses - you'll have no choice but to submit the bills the following year.

 

[kaneohe]

What happens if you die before claiming HSA withdrawals? Can your spouse use your accumulated medical expenses to drain the HSA account or is she restricted to only her own expenses once you are gone?

 

[TromboneAl]

Do you have a reference in the HSA legislation that gives you that impression?

Someone posted the reference here a while ago. It's very clearcut.

I guess my problem is that I don't trust the IRS, and they don't do well with unexpected situations.

 

[bamsphd]

My problem is I don't trust congress not to change
the rules of the game. A quick little "fix" disallowing
expenses more than a year old seems likely over a
multi-decade time span, if they don't entirely abolish
the HSA concept.

 

[clifp]

My problem is I don't trust congress not to change
the rules of the game. A quick little "fix" disallowing
expenses more than a year old seems likely over a
multi-decade time span, if they don't entirely abolish
the HSA concept.

Ditto for me.

If I ever get to sign up for a HSA, I intend to take reimbursements the year I incur the expenses. The relatively small advantage of tax free compounded, I think are negated by having to keep good records (I don't) and the distinct,[-]hell certain[/-] chance the Congress will change the rules.

BTW, doesn't anybody understand insurance speak. I have been under evaluation by the underwriters for a month now. I am healthy, no history of anything, borderline high cholesteral...

 

[teejayevans]

Ditto for me.

If I ever get to sign up for a HSA, I intend to take reimbursements the year I incur the expenses. The relatively small advantage of tax free compounded, I think are negated by having to keep good records (I don't) and the distinct,[-]hell certain[/-] chance the Congress will change the rules.

BTW, doesn't anybody understand insurance speak. I have been under evaluation by the underwriters for a month now. I am healthy, no history of anything, borderline high cholesteral...

May depend on the underwriter, I just went through the process with
UHC via ehealthinsurance.com and it took 2 weeks.

I completely agree, with my HSA credit card, I just charge it, no ATM
transactions that I will have to explain later.
TJ

 

[Rich_by_the_Bay]

No surprise to anyone that laws change. In health care, I'd guess they're going to change in major ways over the next 5-10 years. If it were me, I'd take my deduction as soon as I could, year to year.

True, you may eke out a few extra basis points in your HSA with the proposed strategy, but deferral also has risk. Maybe it will all be folded into some universal care plan; maybe means testing will be applied; maybe the services you received won't be considered "covered" in a few years -- possibilities are almost endless.

Just food for thought.

 

[justin]

What happens if you die before claiming HSA withdrawals? Can your spouse use your accumulated medical expenses to drain the HSA account or is she restricted to only her own expenses once you are gone?

If you die before you withdraw from the HSA for previously incurred expenses older than ~1 year, then you lose the ability to reimburse for those expenses older than ~1 year. Not sure that 1 year is the correct time period, but it's something like that.

This is a significant risk to the deferral strategy that T Al is talking about (and that I am planning on employing).

 

[TromboneAl]

Well, those are good points (law changes and death), I will have to think about this some more.

and that I am planning on employing

Are you saying that despite the risk, you plan to let it compound?

 

[justin]

Are you saying that despite the risk, you plan to let it compound?

Yes, that is I plan to keep a shoebox full of receipts and not withdraw from my HSA initially. I'll allow the HSA to compound year after year and might use it for tax planning purposes should the need arise. I haven't nailed down the exact exit strategy. Maybe I'll try to withdraw essentially all of it by the time mortality rates start to creep up (in my 50's or 60's?). That, or hedge the tax benefits with some term life, depending on the costs. Or just self-insure the risk. Don't know yet. FYI, me and DW are around age 30, so current mortality rates for our age group are very small.

I think the risk of tax laws changing is relatively small. I'll hopefully have enough time after the new laws go into effect to withdraw tax-free all expenses previously incurred. I've seen retroactive tax laws when the taxpayer benefits, but I think it'd be a hard sell to retroactively change the tax laws to the detriment of taxpayers who had relied on the status quo. The tax laws could always change to make the HSA more favorable. For example, the law could change to allow previously incurred expenses to be reimbursed completely after the demise of the HSA owner regardless of when the expense was incurred.

I'll also have at least 5-6 years of needing a low income for FAFSA's when my kids are going through college (starting in 15 more years ). Non-income income from HSA's could significantly help out.

 

[bow-tie]

...not withdraw from my HSA initially. I'll allow the HSA to compound year after year...

Ditto. We'll see how it works out. I can forsee me taking it the shorts...


edited to add - Justin, do you plan to max out your HSA contribution - i.e. $5600-ish for a family HSA plan? Just curious...

 

[bamsphd]

Despite my fear of congressional action, I will admit, just thinking of an HSA as another flavor of IRA without that pesky earned income requirement makes considerable sense to me.

If I do that, I would also file my receipts in the hope of getting Roth like tax treatment on the eventual withdrawals at some distant future time.

 

[justin]

edited to add - Justin, do you plan to max out your HSA contribution - i.e. $5600-ish for a family HSA plan? Just curious...

I'm maxing it out this year $5650 I think? And $5800 for next year. DW's employer is allowing the full $5800 to be payroll deducted, meaning we'll save another 7.65% on the $5800 by not paying SS/Medicare taxes.

 

[justin]

Regarding the receipts: I plan to sit down one cozy december or January afternoon and put the amounts all into a spreadsheet, then prep them to be scanned into the computer so I'll have portable electronic backups available.

I'm viewing it as a supercharged traditional IRA on the way in (tax deduction plus FICA tax avoidance completely), and as a Roth on the way out.

 

[twaddle]

I'll allow the HSA to compound year after year and might use it for tax planning purposes should the need arise. I haven't nailed down the exact exit strategy. Maybe I'll try to withdraw essentially all of it by the time mortality rates start to creep up (in my 50's or 60's?).

I'm also letting mine compound. On my death, the HSA becomes my DW's HSA.

I hadn't planned to keep any receipts or seek reimbursement. If I ever hit major medical expenses, that's when I'll use it. Since most medical expenses hit you when you're a really old fart, that's when I expect to need it.

 

[teejayevans]

I'm maxing it out this year $5650 I think? And $5800 for next year. DW's employer is allowing the full $5800 to be payroll deducted, meaning we'll save another 7.65% on the $5800 by not paying SS/Medicare taxes.

No, SS takes its cut before HSA/401K deductions.
TJ

 

[justin]

No, SS takes its cut before HSA/401K deductions.
TJ

That's not the way the HSA payroll deduction works in my past experience with DW's employer. I agree w/ the 401k - SS is always taken out. I believe the HSA is taken out through a cafeteria plan, just like the dental and health insurance, and SS is never taken out. 401k is treated differently. I could see how some employers might have the HSA not funneled through the cafeteria plan, and in that case the deductions could be treated as post tax.

 

[ziggy29]

I'm also letting mine compound. On my death, the HSA becomes my DW's HSA.

I hadn't planned to keep any receipts or seek reimbursement. If I ever hit major medical expenses, that's when I'll use it. Since most medical expenses hit you when you're a really old fart, that's when I expect to need it.

We're being moved into an HSA at Megacorp next year, and I plan to do the same, but in reality it depends on our cash flow.

The main reason for me is that you can pay for COBRA coverage with the HSA. Since we'd likely be unemployed and thus have rotten cash flow if we were both unemployed and had no health insurance, I'd need a nice, fat balance in the HSA to pay for continued coverage because it's not like we could afford it with unemployment insurance and any other crappy part-time jobs we might have in the interim.