Best way to manage HSA funds?

[porcelain]

Here are some assumptions to help evaluating the choices above:

• Individual has a HDHP (High Deductible Heath Plan) that is HSA-eligable ($2,500 deductible).
• Individual has a 401(k) account, a Roth IRA account, and an HSA account, but not enough income to maximize contributions to all three accounts in a given year.
• Individual has a fully-funded emergency account.
• Individual is a healthy 24 year old male making around $50,000 per year.

After scouring the internet for a few days I have not been able to determine the best way to fit an HSA into an overall finance strategy. I have seen TromboneAl and others on this forum preaching poll Option 1. The original intent of HSAs seems to be Option 2 or Option 3. Option 4 is related to another question I have posted here. Option 5 seems like it could be a valid argument as well.

Lets hear what you think. If any of the assumptions were different, would your vote change?

 

[bssc]

I picked three as a way to convert money from pretax to post tax without paying taxes on them. If I don't spend the 2900 this year, I can save it for next.

 

[tryan]

At 24 you should be focused on your 401k ... pay medical out of pocket until the 401k is maxed out.

 

[ziggy29]

For wealth building, the best thing to do is not tap the HSA. Still, I'd fund the 401K and Roth before the HSA if that's the goal. For cash flow management, there's nothing wrong with tapping the HSA for your ongoing expenses. It depends on your goals.

I'm basically "saving" the HSA and paying routine costs out of pocket in case I get laid off and need to tap into it for COBRA.

 

[Animorph]

I think the HSA account could work very much like the Roth, except with the limitation that withdrawals must be medically related and the advantage of early withdrawal if (medically) necessary. I may try option 1 when I have to switch to private insurance. You might fund the HSA as part of your emergency funds to cover the deductible and then use it like a Roth if you can. Only you can decide how to split contributions between the HSA and Roth if you don't fully fund both.

 

[TromboneAl]

Actually, my plan is to not touch the funds for, say, 10 years, keep track of medical expenses, and reimburse myself then for those expenses with HSA money. I'll also use the funds for medicare premiums and medical expenses after age 65. This way the money will never be taxed.

 

[REWahoo]

What Al said.

 

[jIMOh]

I picked 3. All of the answers were acceptable and some were missing. I have an HSA and we use it to pay current expenses.

You need to assume you have "other money" to pay for a $200 doctor visit or $2000 shot for your kids. You also need to make some tax bracket assumptions to give any of the answers.

My basic premise is avoid taxes now. I am in 25% marginal bracket on an income of ~120k. Both spouses work. 401ks are used, Roths are maxed. After deductions we are usually in 15% bracket. The HSA is part of what gets us there.

If you get a $5000 medical bill (happened to us this winter in Jan-Feb) and the HSA is not used, I'd love to hear what people suggest in that case.

 

[jIMOh]

For wealth building, the best thing to do is not tap the HSA. Still, I'd fund the 401K and Roth before the HSA if that's the goal. For cash flow management, there's nothing wrong with tapping the HSA for your ongoing expenses. It depends on your goals.

I'm basically "saving" the HSA and paying routine costs out of pocket in case I get laid off and need to tap into it for COBRA.

I'd use the opposite logic.

401k to match
max HSA
then Roth
401k to max

it is easier to get money out of HSA early than the 401k early, and the HSA will be tax free.

This maximizes current tax deductions and tax free withdraws. My employer contributes $1500 to my HSA, so funding it before the 401k max makes sense for me.

I don't think generalizations should be made about prioritizing... this is a tax situation, medical expense situation and retirement plan all rolled into 1.

 

[ziggy29]

If you get a $5000 medical bill (happened to us this winter in Jan-Feb) and the HSA is not used, I'd love to hear what people suggest in that case.

Well, speaking only for myself, yes, I'd use it for a $5000 medical bill (well, $4000 since the annual out-of-pocket maximum in my plan is $4000), but for a routine $100 visit, I just pay it with other funds and keep the receipt in case I want reimbursement later.

Basically, if the expense is small enough that it doesn't significantly impact our cash flow, I tend to put it on a credit card that gets me 2% cash back. If it's large enough to totally hose our budget for the month, I'd use the HSA funds.

 

[jIMOh]

If you have an HDHP, I'd like to hear when the bills at the doctor are small. Our cheapest visit has been around $110 which we paid 20%.

My wife did get a perscription that cost her $.80...

But if you are under your deductable, a $110 hit to our budget (with two kids) is noticeable every month. If I had to choose between Roth contribution and tap HSA or pay cash for doctor and lower Roth contribution, I am tapping the HSA 10 times out of 10.

 

[porcelain]

Actually, my plan is to not touch the funds for, say, 10 years, keep track of medical expenses, and reimburse myself then for those expenses with HSA money. I'll also use the funds for medicare premiums and medical expenses after age 65. This way the money will never be taxed.

@TromboneAl & @REWahoo
What is special about 10 years?

My intuition is telling me that the ideal strategy is to reimburse yourself right away and re-invest those funds somewhere, or leave the HSA alone until age 65. What is the rationale for wanting to reimburse yourself somewhere in between these two extremes?

 

[REWahoo]

Sorry, nothing special about 10 years. I plan on contributing and leaving my HSA untouched until age 65.

No need to reimburse and reinvest if your custodian provides investing options meeting your needs. Mine allows me to invest in Vanguard funds.

 

[jdw_fire]

Sorry, nothing special about 10 years. I plan on contributing and leaving my HSA untouched until age 65.

No need to reimburse and reinvest if your custodian provides investing options meeting your needs. Mine allows me to invest in Vanguard funds.

which 1 do u use? and r u happy with them?

 

[REWahoo]

which 1 do u use? and r u happy with them?

I use HSA Administrators and have had no problems in the 2 1/2 years I've had the account.

 

[mark500]

Our HSA offers a passbook savings rate of return and no other investment options. If I leave money in it, it looses purchasing power every year. Thus, I spend all of it each year.

 

[TromboneAl]

What is the rationale for wanting to reimburse yourself somewhere in between these two extremes?

Well, I want to reimburse myself at some point, because if I just take it out after age 65, I have to pay tax on it.

If I reimburse myself right away, I lose 10 or more years of tax-free compounding. If I were in the 20% tax bracket, it could mean getting 10% annual return on my money instead of 8%.

 

[ziggy29]

Our HSA offers a passbook savings rate of return and no other investment options. If I leave money in it, it looses purchasing power every year. Thus, I spend all of it each year.

Right now mine pays 0.25% (it was paying 1.5% a year ago). I do have investment options, but I won't use those until I have at least a couple years of out of pocket maximums in cash (that would be $8000 total). Above that I probably will invest some, but I don't want a significant illness or injury to cause us to withdraw $4,000 a year by being forced to sell stocks low.

 

[TromboneAl]

Right now mine pays 0.25% (it was paying 1.5% a year ago). I do have investment options, but I won't use those until I have at least a couple years of out of pocket maximums in cash (that would be $8000 total). Above that I probably will invest some, but I don't want a significant illness or injury to cause us to withdraw $4,000 a year by being forced to sell stocks low.

That's not a problem. If you need the money you can use the patented TromboneAl Switcheroo[FONT=Times New Roman, serif]®.[/FONT] Take out the $4K, but switch $4K from MM to stock fund somewhere else.

 

[KB]

Patelco Credit union is paying 5.12% at this time. I opened my account a year ago and have had no problems.

https://www.patelco.org/accounts/hsa.aspx

 

[jdw_fire]

Well, I want to reimburse myself at some point, because if I just take it out after age 65, I have to pay tax on it.

If I reimburse myself right away, I lose 10 or more years of tax-free compounding. If I were in the 20% tax bracket, it could mean getting 10% annual return on my money instead of 8%.

reimburse as late as possible, when u want to be taking the money out to supplement ur retirement. if u keep all ur reciepts since u got ur HSA/HD health insurance u can reimburse all of them, at any time (at least that is my understanding)

 

[RDamien]

I chose 3. I'm maxing my 401k, not eligible for a Roth because we make too much (that still gets under my skin, I am not rich ... ) and going to put in as much as I can afford into the HSA. I wont say I'm not going to touch it, but I'm going to try and keep my hands off of it.

I dont think I fully understand the concept behind paying out of pocket then reimbursing at a later time. To gain the interest? I was unaware that money could be invested in Vanguard funds. I'll have to check into that.

 

[kaneohe]

I dont think I fully understand the concept behind paying out of pocket then reimbursing at a later time. To gain the interest?

The HSA is a rare beast where (in effect) you get a deduction for the contribution going in, tax-free growth, and then tax-free distributions (for qualified medical expenses) coming out. Other things like TIRAs have only the first 2 and Roth IRAs have only the last 2. It is to your advantage to feed the HSA as much as possible and keep it going as long as you can.....of course you want to use it for medical expenses before you leave this world else you forfeit some of the advantages.