Thinking about an HSA

[SecondCor521]

Hi all.

Background

Next month all of my three kids will be off my health insurance, so I will be able to switch to an HSA plan if I choose to. I am eligible to switch next month because my youngest going off to college qualifies me for a special enrollment period per my state marketplace customer service representative.

By way of background, I am 51 and basically healthy. I probably won't use much health insurance the rest of this year, but I do want catastrophic coverage, so I am likely to choose a bronze plan. The difference in monthly premium between bronze and silver doesn't seem to make the lower deductible and OOP worth it.

There is a bronze HSA-eligible policy that is offered by my current health insurer. I like the policy itself and I like the insurer.

I have a taxable account, a traditional IRA, a Roth IRA which are in a 11:64:25 ratio. I also have a paid off home, paid off car, and enough money set aside to get my kids through college debt free. I have a WR of 2.23%. I also have some non-portfolio income - meaning income that doesn't come from my portfolio - equal to about 1.47%, which means I have a net WR of 0.76%.

Every year I do Roth conversions, which according to my spreadsheet will be to the top of the 12% bracket for the next 10 years or so, and then up to the 22% bracket. I plan to start SS at 70 and RMDs at 72.

HSA thoughts

The status quo is that I and my dependents do have some qualifying expenses every year (dental checkups, etc.), which I just pay for out of checking, which eventually gets refilled from my taxable account.

Even better, it seems that if instead of doing that, I open an HSA, contribute $X, then immediately withdraw $X and pay for the qualifying expense, that is obviously better than the status quo, because I get to reduce my AGI and taxable income by $X.

Even better, I can simultaneously convert $X from my traditional to my Roth IRA, which leaves my AGI the same, and pays for the expense. So every $X I route through an HSA gives me a tax-free $X Roth conversion.

Even better, if I leave that $X in there for, say 15 years, and lets say it doubles, then I get a $X tax free Roth conversion as before, and I also get $X of taxable income in 15 years (using the non-qualified after-65 path).

The above is true if I have $X in expenses. What about if I contribute $Y to an HSA but don't have any qualifying expenses? Well, I still can do $Y in tax-free Roth conversions as above, and the $Y which ends up in the HSA looks approximately like a traditional IRA but with an age 65 withdrawal age instead of 59.5. I don't think I mind the 5.5 year age difference. So for every $Y I do this with, it's basically a $Y transfer from taxable to Roth.

Drawbacks

1. It's another account, with another tax form, username, password, custodian, account number, etc. Hassle factor, basically.

2. The HSA-eligible plan is about $21 more per month in premiums than a similar non-HSA-eligible plan.

3. If I die with a balance in my HSA, the amount in there becomes taxable income to my beneficiaries. If I don't do an HSA, they'll get a bigger taxable account with a step up in basis, a larger traditional IRA, and a smaller Roth IRA.

Conclusions

Since I can do this up to ~$3550 per year, and I have enough in my taxable, and I think I'd rather have money in my Roth, I think my conclusions are as follows:

1. Open an HSA, get the HSA-eligible Bronze plan with my current insurer, and start maxing it out monthly.

2. Do Roth conversions of the same amount as my contributions.

3. Collect receipts for qualified expenses for me and my dependents and don't reimburse right away.

4. Drain the HSA probably around age 65 or so, hopefully with enough receipts to make the withdrawal completely tax free. This step would be to avoid dying with an HSA.

Does anyone know if I happen to die unexpectedly with a large HSA and a folder full of HSA eligible expense receipts, can my executor do a post-death reimbursement for those expenses before passing the remainder of the HSA to my beneficiaries? Basically do step 4 of my plan above so as to avoid drawback number 3?

Also, I think I'll either open an account with HSA Administrators or Fidelity. I'd probably just invest in VTI or a similar Vanguard or Fidelity fund. I basically want a minimal expense decent quality company where I can invest my money into a low-cost, low-turnover, high-quality broadly diversified US equity index fund.

Am I thinking about this stuff accurately? Advice? Comments?

 

[Markola]

We’ve been using an HSA with Optum Bank and a Health Partners qualified High Deductible Health Plan at work. It works great.

 

[RunningBum]

https://healthsavings.com/happens-hsa-die/ covers what happens if you die. The HSA can transfer to your spouse, and they withdraw from it using your past medical expenses.

If it goes to other beneficiaries, they have a year to pay medical expenses from your HSA. The way it is stated under a spouse but not here makes me think they can only use current expenses, not past medical expenses that you saved receipts for.

That's always kind of nagged at me. I probably will start draining my HSA in the next 10 years.

 

[nobody]

I thought at age 65 the HSA money can be spent on anything you want.

 

[pb4uski]

I would go for the HSA, pay medical costs out of taxable funds and think of it like a Roth. You'll get a $3,550 deduction for HSA contributions that will allow you to do an additional $3,550 of Roth conversion tax free.

Then let it grow and keep good records of qualified medical costs. At 65 you can use it to pay for your Medicare Part B premums... currently $1,728/yr... and any other qualified medical costs (dental, vision, etc.). Also, if you end up needing LTC it can be used for that.

I have a faint recollection that if you die that your heirs can withdraw your documented medical costs tax free as long as they do so within a certain period of time. Found this:

The taxable amount of the HSA will be reduced by any qualified medical expenses incurred by the decedent prior to their death. In this case, the non-spouse beneficiary has only 12 months to use the closed HSA's funds to pay those qualified medical expenses.

That said, I let ours grow from 2010 to 2019 (55-64 yo) and recently withdrew our medical expenses for that period and will withdraw our Medicare Part B and other medical expenses annually from now on.

I would go with Fidelity... no fees and lots of investment options.

 

[pb4uski]

I thought at age 65 the HSA money can be spent on anything you want.

Yes, no penalty for withdrawal, but if not spent on qualified medical expenses then the withdrawal is taxed just like a withdrawal from a deductible contribution IRA.

All HSA distributions after age 65 are penalty free, even if the funds are not used for qualified health expenses. However, if you take a distribution that is not used for qualified medical expenses, it will be taxable.

 

[ivinsfan]

I would go for the HSA, pay medical costs out of taxable funds and think of it like a Roth. You'll get a $3,550 deduction for HSA contributions that will allow you to do an additional $3,550 of Roth conversion tax free.

Then let it grow and keep good records of qualified medical costs. At 65 you can use it to pay for your Medicare Part B premums... currently $1,728/yr... and any other qualified medical costs (dental, vision, etc.). Also, if you end up needing LTC it can be used for that.

I have a faint recollection that if you die that your heirs can withdraw your documented medical costs tax free as long as they do so within a certain period of time. Found this:


That said, I let ours grow from 2010 to 2019 (55-64 yo) and recently withdrew our medical expenses for that period and will withdraw our Medicare Part B and other medical expenses annually from now on.

I would go with Fidelity... no fees and lots of investment options.

I held on to mine and was unpleasantly surprised to find out just Part B can be paid out of the HSA...

 

[pb4uski]

I agree... it is BS that they don't allow Medigap premiums to be paid from an HSA.... but we can take out for Part B, Part D, deductibles, co-pays, dental, vision, LTC, etc.

Worst case, there is a remainder that is taxed.

 

[audreyh1]

I held on to mine and was unpleasantly surprised to find out just Part B can be paid out of the HSA...

Part D can be paid for as well.

Medicare advantage for those who go that route.

 

[SecondCor521]

Thanks all.

The 12-month post-death thing is nice to know about, especially since I don't currently have a spouse and am unlikely to have one in the future. That's enough to tip me over the deciding point to actually do it (open the HSA that is, not die without withdrawing for receipts). To be sure, I checked and @pb4uski's reference is correct: "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." - IRS Pub 969.

Also, since Medicare Part B and final illness expenses are qualifying expenses, that raises the amount of "tax free" HSA money and lowers the amount of "taxable leftover" HSA money I'll likely end up with. I also think OOP dental is included, and I know older retirees often have lots of dental expenses. All of this makes it a better deal.

 

[easysurfer]

I use my HSA to reimburse myself for qualified medical expenses the prior year. OOP dental is probably my largest expense since when retired, paying for dental insurance on your own pretty much doesn't make sense.

 

[karen1972]

Thanks all.


Also, since Medicare Part B and final illness expenses are qualifying expenses, that raises the amount of "tax free" HSA money and lowers the amount of "taxable leftover" HSA money I'll likely end up with. I also think OOP dental is included, and I know older retirees often have lots of dental expenses. All of this makes it a better deal.

Dental and eye glasses. Though honestly I have to think co-pays on therapy for me is my biggest expense, back issues, knee issues, a few visits here and there sure adds up.

 

[ivinsfan]

Part D can be paid for as well.

Medicare advantage for those who go that route.

That's an advantage for Medicare advantage..I do not use advantage at this point and my supplement cannot be paid for with an HSA..it seems very arbitrary.

 

[SecondCor521]

Followup thought:

It seems like the dying with an HSA balance and not enough expenses being taxable income to heirs - rather than leaving those funds in taxable which gets a step up in basis - is Congress' way of penalizing overfunding. So I think I'll try not to overfund.

Personally I'll probably invest my HSA into the same thing as in my taxable - VTI or similar.

Does anyone here who's had an HSA for a while worry about a runaway HSA where the balance is "too high" and there won't likely be enough qualifying expenses to drain it?

Obviously it's hard to say, because you don't know what the next few years holds, or end-of-life expenses, but it is something I'm sure folks have given a thought to.

At 51 and putting ~$3500 a year in for 15 years could build up a bit of a head of steam, so to speak. First world problems, sure.

 

[RunningBum]

I believe I've had an HSA plan since 2008, and contributed fully since then. My account is $65K, and I have receipts for about half that. I think some may have larger accounts because it was a few years before I moved it to where I could pick my investment.

My strategy is to hold onto receipts and use it as a kind of emergency fund that I can tap into with no tax liability (just the half with receipts), and spend the rest down (with Medicare premiums and other expenses) after 65. Since I'll no longer be able to add to my HSA I don't think it'll take too terribly long to use it up. And it's not like it's totally gone if I die.

 

[CoolChange]

I have had an HSA and fully funded it as long as I have been eligible, never withdrawn a penny.



Personally, I consider it one of the best tax sheltered accounts available, just wish the cap was higher. Unless I die in some kind of fiery plane crash, I expect that I, like most, will have plenty of end of life expenses to drain the account.

 

[audreyh1]

Followup thought:

It seems like the dying with an HSA balance and not enough expenses being taxable income to heirs - rather than leaving those funds in taxable which gets a step up in basis - is Congress' way of penalizing overfunding. So I think I'll try not to overfund.

Personally I'll probably invest my HSA into the same thing as in my taxable - VTI or similar.

Does anyone here who's had an HSA for a while worry about a runaway HSA where the balance is "too high" and there won't likely be enough qualifying expenses to drain it?

Obviously it's hard to say, because you don't know what the next few years holds, or end-of-life expenses, but it is something I'm sure folks have given a thought to.

At 51 and putting ~$3500 a year in for 15 years could build up a bit of a head of steam, so to speak. First world problems, sure.

Well we decided to drain ours between ages 65 and 70 to cover Medicare premiums until SS pays for them directly. That seemed like the easiest way to go, and the amounts will probably about match. Then by age 70 we don’t have to worry about the account and paperwork anymore.

If we had much more in the accounts, we might have earmarked a good chunk for long term care expenses.

 

[REWahoo]

We drained ours between 65 and 73 to cover dental expenses.

 

[Montecfo]

I have had an HSA and fully funded it as long as I have been eligible, never withdrawn a penny.



Personally, I consider it one of the best tax sheltered accounts available, just wish the cap was higher. Unless I die in some kind of fiery plane crash, I expect that I, like most, will have plenty of end of life expenses to drain the account.

Same situation for me. The balance is getting rather robust, $125K or so.

I would consider myself very blessed indeed if we do not have enough future medical to drain it. We also have the old records of medical but it it is far less than the current balance.

For that reason I do not worry about post death taxes. First world problem for sure.

 

[Sandy & Shirley]

I am 73 and do not have an HSA account. A huge mistake that can’t be corrected after the age of 65! I just checked with Fidelity and if I also had an HSA account with them, I could manage it just like my IRA account. This is my personal situation:

I currently pay $253.93 for my Medicare Supplement Plan and $77.10 for my prescription drug plan. As I read publication 502, both of these premiums could be paid, Tax Free, from my HSA account, if I had one!

The problem I face deals with taxes! The total $331.03 monthly cost also makes $281.38 of my Social Security taxable at the 85 cents per dollar level for a total taxable increase of $612.41 monthly, $7,348.87 yearly. At the 12% tax bracket, this costs me $881.86 in additional Federal Taxes each year, and if my taxable income gets pushed into the 22% bracket my yearly extra taxes would jump to $1,616.75. If the cost of my medical premiums was coming from a HSA, my additional taxes would be ZERO.

So, my advice is simple. If you can enter your retirement years with both an IRA and an HSA, do it!

 

[kaneohe]

......................
I currently pay $253.93 for my Medicare Supplement Plan and $77.10 for my prescription drug plan. As I read publication 502, both of these premiums could be paid, Tax Free, from my HSA account, if I had one!

.........................................................

not the supplement plan...........see posts 8,13 on prev pg.

 

[DR1959]

I want to clarify that I am doing my HSA right.
So I contribute to it now for a few years.
In 2017 I stopped taking money out if it.
Instead, I save all my receipts and explanation of benefits from insurance to document my out of pocket qualified medical expenses.
I was told, I can keep doing this and take the money out whenever I want.
So I have about $10K in expenses, so if I wanted to in 5 years, I can take that $10K out with no worries?

I see some people are doing it yearly.

Also, am I at risk letting this grow too large. So I have $7K in expenses but I have $60K in the HSA. I figure my expenses will go up over time.


Thanks!

 

[Aerides]

I want to clarify that I am doing my HSA right.
So I contribute to it now for a few years.
In 2017 I stopped taking money out if it.
Instead, I save all my receipts and explanation of benefits from insurance to document my out of pocket qualified medical expenses.
I was told, I can keep doing this and take the money out whenever I want.
So I have about $10K in expenses, so if I wanted to in 5 years, I can take that $10K out with no worries?

I see some people are doing it yearly.

Also, am I at risk letting this grow too large. So I have $7K in expenses but I have $60K in the HSA. I figure my expenses will go up over time.


Thanks!

You have it correct. As long as the expense is a qualifying one, you can take the money now or later, much later.

 

[RunningBum]

...
So I have about $10K in expenses, so if I wanted to in 5 years, I can take that $10K out with no worries?

...

Also, am I at risk letting this grow too large. So I have $7K in expenses but I have $60K in the HSA. I figure my expenses will go up over time.

Yes, you can take it out tax free. Mark those medical receipts as used somehow, and keep them with your tax records for that year until the audit period is over.

You can also pay a lot, but not all of your medicare premiums with HSA money so that's one way to use it up.

Don't forget all of the other expenses you can use it for--dental, vision, travel to doctors, prescription drugs, things like that. IRS Pub 502 has the full list.

 

[2017ish]

"Worst" case is that you have abnormally low healthcare expenses and amazing HSA returns; then in your 80s, you cash it out and, to the extent it exceeds your expenses, it is taxed like an IRA.

IMHO, a pretty good worst case.