$120,000 in my HSA. When do I start withdrawals?

[rmcelwee]

I have two HSA accounts totaling $120K. Both are invested in a Vanguard S&P fund. I'm 54 and have one more year to work. When I retire at 55, we will receive $1K per month from MegaCorp to spend on a healthcare plan until I turn 65. When I hit 65 my wife will receive $700 per month for 2.5 years until she turns 65. We have no kids.

My spreadsheet says that if I never touch the HSA it will be worth $1.2M when I turn 90. Even though I don't need the money that doesn't sound like a good plan. What would be a good withdrawal strategy for the HSA? Just save it for emergencies or actually start using it for doctors visits and such?

 

[Jerry1]

I’d leave it alone unless you need it. Then I’d revisit my plan when I turn 65 and get on Medicare. Basically, I’d try to keep it as long term care insurance, but as you noticed, just waiting it out and never using it is probably not a good plan. Still, no harm in letting it sit for now and revisiting this when you turn 65.

Also, keep ALL your medical receipts. You can use them any time. For example, let’s say between now and 65 you spend $50K on healthcare. You can take your receipts, take a tax free withdrawal against those and buy a car (or whatever).

 

[caninelover]

I like the idea of retaining it for LTC but $1.2 M is a bit excessive.

I would leave it alone until 65 and then start taking 3-4% out a year towards current medical expenses.

 

[rmcelwee]

I guess I hadn't update the sheet for a while. New numbers @ 8% INT:

$280K @ 65
$1.8M @ 90

 

[RunningBum]

My advice is to use it before tapping a Roth IRA. If you have any need of cash and don't want to create more taxable income, use the HSA up to the extent that you have receipts for medical expenses.

Remember that you don't need to use the HSA directly on medical expenses, but withdrawals have to be correlated to eligible medical expenses to withdraw tax free. So if you have a $30,000 medical expense today, you can pay the bill out of pocket and save the receipt and later, even years later, withdraw that $30K for a vacation, car, or whatever you want.

At 65 consider using them for the part of Medicare premiums that you are allowed to use them on.

Try to use them up before you and your wife die. While you are living the HSA seems a lot like a Roth IRA because you can withdraw from both tax free (with eligible expenses for the HSA). But the HSA loses that tax advantage upon your death. The entire balance of the inherited HSA is taxable income for your non-spouse heirs, so it has even more tax impact than an inherited tIRA. Of course it may not be possible to drain it if you have a sudden death, but do look for opportunities to withdraw from the HSA as you age.


I'm 59 and have only withdrawn $1000 so far but have receipts for about half of my HSA balance. I expect a few years of Medicare premiums will help cover the rest of the balance and I won't hesitate to pull from it as needed.

 

[MichaelB]

$120k today is not excessive. If you don’t need the money, leave it along to grow.

If you make it to age 90 and don’t need the money, consider yourself very fortunate. If you need LTC later in life, you have it funded with the HSA, and the LTC deductible should be enough to offset tax on withdrawals. Same with other possible major medical expenses along the way.

Make sure to save receipts for your eligible medical expenses.

 

[Athermos4u]

I have two HSA accounts totaling $120K. Both are invested in a Vanguard S&P fund. I'm 54 and have one more year to work. When I retire at 55, we will receive $1K per month from MegaCorp to spend on a healthcare plan until I turn 65. When I hit 65 my wife will receive $700 per month for 2.5 years until she turns 65. We have no kids.

My spreadsheet says that if I never touch the HSA it will be worth $1.2M when I turn 90. Even though I don't need the money that doesn't sound like a good plan. What would be a good withdrawal strategy for the HSA? Just save it for emergencies or actually start using it for doctors visits and such?

Keep it to use for Medicaid expenses like part D, subsidiaries for coverage, supplemental policies, and things like dental. Bought a $3,000 crown yet?

 

[Aerides]

You're 54, so between now and 65 you can expect to have a high deductible to spend a lot of it on. Odd are between the two of you, you'll blow out a knee, tear a shoulder, need a few crowns (hey big spender, you can go implant!). I don't know who said it here, but your 50's is when your check engine light starts coming on more often.

But yeah with $120k I'd probably stop contributing.

 

[RunningBum]

I guess I hadn't update the sheet for a while. New numbers @ 8% INT:

$280K @ 65
$1.8M @ 90

Remember that any other investment you have will grow the same if you have it invested the same way. Roth will grow tax free and is inherited tax free. Taxable account gains are taxed at more favorable capital gains rates, and if you don't sell them they are inherited with stepped up basis, so also tax free to heirs under current laws. So pull from the HSA before using other funds. You've already gotten the taxable income reduction on the HSA contribution. It's grown tax free, and now you can withdraw it tax free.

 

[rmcelwee]

Odds are between the two of you, you'll blow out a knee, tear a shoulder, need a few crowns.

But yeah with $120k I'd probably stop contributing.

Horrible to think about but you are probably right. Bodies are so fragile.

I probably won't stop since contributions for 2021 are already set up and I wouldn't want to take the tax hit. This does make me think about not contributing for the first two months of 2022 before retiring.

 

[SecondCor521]

I'm 51 and single and don't like the way the HSA is taxed on death. I started my HSA in 2020 and plan to contribute the maximum from now on.

In my HSA spreadsheet I monitor:

1. My HSA balance.
2. Future HSA contributions, taking into account the catchup and that I have to stop at 65.
3. Current HSA qualified expenses.
4. Future HSA qualified expenses (basically my Medicare B premium).

From the above I can project my HSA balance in future years. Since the 4% rule implies reasonable safety over 30 years and I want to drain it over more like 10 years (to make sure it's drained before I die), I know I need to take out something more like 10% or more of the balance each year. I can then see when that crossover point will likely be when, if I don't start draining it I'll have a runaway HSA situation.

At this point that crossover point is probably around age 60. If my check engine light starts coming on more often, that point may shift out into the future a bit.

 

[RunningBum]

Horrible to think about but you are probably right. Bodies are so fragile.

I probably won't stop since contributions for 2021 are already set up and I wouldn't want to take the tax hit. This does make me think about not contributing for the first two months of 2022 before retiring.

I would take full advantage of the taxable income reduction as long as you have an HSA eligible health insurance plan. Even if you turn around and use it for medical expenses right away there's still a savings. And if you never have enough medical expenses to drain the HSA, you can make taxable withdrawals just like a tIRA.

 

[pb4uski]

I have taken the totally opposite view and I don't have as much in my HSA as you do.

The problem I see is that once the second of us die that unlike a Roth that our kids would inherit tax free the HSA would be immediately taxable... even worse than a non-spouse inheriting a tIRA where the distributions can be stretched over up to 10 years. With an HSA there is absolutely no opportunity to manage the tax burden like there is with an inherited tIRA.

The other concern that I have is while either of us can withdraw any qualified expenses at any time, when the second of us dies will our heirs know and remember to do so.

So given that pigs get fat and hogs get slaughtered, I withdrew for our qualified expenses since we set up the HSA last year (about 23% of our balance) and will withdraw for our Medicare Part B and Part D premiums, Medicare deductibles, vision and dental annually from here on. Depending on the growth, there may be enough leftover for a year of LTC if needed but if it is gone then that isn't a big deal to me because for every $1 that I withdraw from the HSA is $1 less withdrawn from our tIRAs or Roths, which are much more tax efficient to our heirs.

 

[Animorph]

We've been saving our receipts for eligible expenses for a few years now, which should facilitate larger withdrawals when we start them.

I treat our HSA's pretty much like Roth accounts for planning purposes. But because the HSA's have restrictions and inheritance taxes I'll try to drain the HSA's before taking any Roth withdrawals. That should work for us, with moderate HSA balances and a need to make some Roth withdrawals in the future.

If it looked like we might both die before we emptied the HSA's I might stop contributing. I have not looked at that problem closely since I don't expect it in our situation. From an inheritance standpoint, with current laws, a step-up in basis for investments in a taxable account might be better than saving taxes now contributing to an HSA but leaving heirs to be taxed on it in the future.

 

[bbqcoder]

The other concern that I have is while either of us can withdraw any qualified expenses at any time, when the second of us dies will our heirs know and remember to do so.

This is why you need to keep good records and leave instructions for the heirs. I have a spreadsheet that tracks my eligible expenses and withdrawals.

I'm not contributing to a Roth IRA directly so I've been pulling out my eligible expenses from my HSA and putting them in the Roth IRA so I can bank my savings. I'm slightly concerned about years down the road, taking a 50K withdrawal and having the IRS asking for receipts.

 

[rmcelwee]

I'm slightly concerned about years down the road, taking a 50K withdrawal and having the IRS asking for receipts.

That has been one of my concerns as well, but maybe only because I have never taken a WD from it and have no idea what I am talking about.

 

[RunningBum]

The problem I see is that once the second of us die that unlike a Roth that our kids would inherit tax free the HSA would be immediately taxable... even worse than a non-spouse inheriting a tIRA where the distributions can be stretched over up to 10 years. With an HSA there is absolutely no opportunity to manage the tax burden like there is with an inherited tIRA.

The other concern that I have is while either of us can withdraw any qualified expenses at any time, when the second of us dies will our heirs know and remember to do so.

What is it you want your heirs to know and remember? Once you have both passed, I don't think heirs can use your old receipts to make withdrawals. They can pay your current bills from your HSA. Anything left is taxable income to them in the year they inherit.

 

[RunningBum]

This is why you need to keep good records and leave instructions for the heirs. I have a spreadsheet that tracks my eligible expenses and withdrawals.

See my reply above to pb4. The heirs can't use those expenses once you're gong.

I'm not contributing to a Roth IRA directly so I've been pulling out my eligible expenses from my HSA and putting them in the Roth IRA so I can bank my savings. I'm slightly concerned about years down the road, taking a 50K withdrawal and having the IRS asking for receipts.

You are taking money from your HSA and putting it in your Roth? You can't do that. You can contribute to your Roth if you have wage income, and you can convert tIRA money to your Roth, but you can't transfer money from an HSA to a Roth.

 

[RunningBum]

That has been one of my concerns as well, but maybe only because I have never taken a WD from it and have no idea what I am talking about.

When I get a medical receipt, I assign it a YYYY-NN number like 2021-01 for my first receipt this year, and write that on the receipt. I enter the expense as a line in a spreadsheet. Then I scan it and put it in a folder with my other scanned HSA receipts. Then I put the paper copy in a shoe box with my other receipts.

That's overkill. I don't think you need to have receipts for anything under $75, and either the scanned or physical copies of the other are good enough, but I'm going with belt and suspenders in case I ever do get called on it.

People with smaller balances can probably cover it all with the eligible medicare premiums so it's not the end of the world if you didn't save receipts, but it would be good to try to go back and find the big ones.

I also track mileage for doctor visits. I'm at least 20 miles from any doctor or dentist I go to, so it adds up for me.

 

[harllee]

DH and I also have large HSAs. We are planning to use the HSAs to pay a big portion of our entrance fee into a very nice Continuing Care Retirement Community. A portion of the entrance fee for the CCRC is considered a medical expense and you can use your HSA to pay that portion. If you have no plans for a CCRC you could also use the money for dental expenses. It is very difficult to find decent dental insurance after retirement so we are having to pay all of our dental expenses out of pocket, $10,000 in the last couple of years.

 

[Montecfo]

I have a large HSA approaching $200k. No longer in HDHP so not adding. Have never drawn from it. I do keep receipts etc.

The one thing I have done is begin investing it a bit more conservatively and including a cash/bond allocation so I can draw when needed without selling into a possible market decline.

I think the average retiree couple spends close to $300k on healthcare after 65. So no plans to pull any immediately. I expect to have plenty to spend it on, though hopefully not.

 

[Exchme]

You can nibble away at it once you have Medicare by paying part B and D premiums (and any associated IRMAA taxes) I don't have anywhere near as much in mine, but I like the idea of doing that as my issue prior to RMDs will be having cash without having to take a bunch of capital gains taxes on appreciated assets. If I recall right, the gains in these accounts are taxable to your heirs, so they are not that great to keep to the end.

 

[pb4uski]

b of tax-free

...Once you have both passed, I don't think heirs can use your old receipts to make withdrawals. They can pay your current bills from your HSA. Anything left is taxable income to them in the year they inherit.

[-]Actually RB, I think they can... this is what the IRS says:

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.

So as long as the beneficiary is not the estate (for us it would be our kids) then qualified medical expenses are for the decedent and paid within 1 year of the decedent's death then they are tax free... so the expense might be 20 or 40 years old but if it qualifies and is withdrawn within 1 year then it is tax-free.
[/-]
But to me... the tax-free growth of the HSA isn't all that important... our Roth's are 8X our HSAs and growing every year due to Roth conversions so we already have plenty of tax-free growth.

The Big Freakin' Deal is to make sure that money is withdrawn tax free and I'm not willing to take a chance on that... so I did 2010-2019 in 2020 and will withdraw annually from here on out.

 

[pb4uski]

Here is what Ed Slott advises:

...Your Kids Do Not Fare So Well

Things get more complicated if your spouse is not your beneficiary. Maybe your spouse is deceased and now you want to name your kids as your HSA beneficiaries. Be warned! Non-spouse HSA beneficiaries do not fare very well. The account value of your HSA account becomes taxable to your children in the year of your death. This means that your children will need to include all the HSA funds in their income in one year. They may not use the funds for their own medical expenses. There are no inherited HSA accounts. This means there is no stretch available for HSAs.

If your children are in high tax brackets, the requirement of a lump sum distribution means your HSA assets could be gobbled up by taxes. Uncle Sam may end up with more than your kids. That certainly is not a great outcome.

How can you avoid this? To avoid losing your HSA to taxes, if your spouse is not your beneficiary, you may want to consider being more open to taking tax-free distributions from your HSA during your own lifetime whenever possible to pay for medical expenses. Remember, you can even reimburse yourself for qualified medical expenses you paid out of pocket in previous years as long as those expenses occurred after you established the HSA and you have proof of those expenses. This may be the most tax efficient way to distribute the remaining balance in the HSA.

By using your HSA during your lifetime you can preserve other assets for your children. They would fare better from a tax perspective inheriting your Roth IRA or even your Traditional IRA. With those assets, unlike the inherited HSA, they could use the stretch.
(emphasis added)
Source:https://www.irahelp.com/slottreport/why-your-kids-don’t-want-your-hsa

 

[RunningBum]

Actually RB, I think they can... this is what the IRS says:

Quote: 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.

So as long as the beneficiary is not the estate (for us it would be our kids) then qualified medical expenses are for the decedent and paid within 1 year of the decedent's death then they are tax free... so the expense might be 20 or 40 years old but if it qualifies and is withdrawn within 1 year then it is tax-free.

I read this differently than you. The "paid by the beneficiary" part means those 20 year old expenses that you paid do not qualify because you paid them, not the beneficiary. At least that's how I read it.

And the warnings I've read, like from Ed Slott that you quoted in the next post, don't talk about the hassle of figuring out your parents' receipts, they just talk about the tax impact of inheriting the HSA.

Like you, I want to make sure I get the tax-free withdrawal benefit, so I'm going to try my best to drain the HSA in my lifetime and not deal with the inheritance question.