Any reason not to liquidate HSA?

[SecondCor521]

I have a relatively small HSA at our credit union, enough to cover a funeral. A receipt folder with at least twice the amount and growing. Simple pension fixed income and doing max Roth conversions to 12%. Like Koolau I see it as money in a different pocket. Its true that using this approach would probably get use better returns in Roth in the long run, but for now its an easily accessible tax free savings account...

I'm pretty sure a funeral is not a qualified expense for HSA distributions, and as pb4uski has mentioned, your receipt folder can't be used by your heirs, although they can be used by your spouse. So your plan works for the first funeral but probably not the second.

Maybe the second person stops paying their medical bills for a while before they pass away.

 

[sdtech]

Kids can use an inherited HSA to pay themselves tax free for medical expenses from a deceased parent if the expenses happened were in the last year of life… I think a surviving spouse has no time restriction.

 

[RunningBum]

Kids can use an inherited HSA to pay themselves tax free for medical expenses from a deceased parent if the expenses happened were in the last year of life… I think a surviving spouse has no time restriction.

I don't think that's right. They (non-spouse) can use the HSA to pay medical bills the deceased incurred in the last year. I've never seen that they can reimburse themselves from the HSA for already paid bills.

 

[sdtech]

I meant that the deceased paid bills not from the HSA but cash and kept documentation

 

[big-papa]

I have an HSA I've let grow since retirement. It's not huge - about 1.5% of my NW. I have documented health expenses that exceed the value of the HSA so I could liquidate it without consequence. Ordinarily one should keep money in an HSA to allow for further tax free growth, but what happens if you're also taking IRA distributions and doing Roth conversions?

It seems to me that if I'm taking a total of X dollars out my IRA in a given year - with S going to spending and the remainder R converted to Roth - then liquidating H dollars from from HSA reduces the amount I need for spending money by that amount. This effectively means that of the X dollars I take out of my IRA, now S-H could go to spending while R+H could be converted to the Roth. So in essence when I liquidate money from the HSA I'm really just transferring it to my Roth IRA.

Is there anything wrong with this analysis?

It's fine. It's similar to what we're doing. While I have folders full of receipts for unreimbursed expenses, we've opted to reimburse as we go - reimbursing for Medicare Part B premiums and our LTCi premiums. This gives us that more to convert each year as we're converting to just below our (best guess) of the 1st IRMAA bracket 2 years from now.

One additional thing we do. The amount that we're reimbursing ourselves for is money that would have otherwise come out of our TIRA, sourced from our TIPS ladders. So inside our TIRAs, the equivalent dollar amount that we would have withdrawn is then used to purchase more stock.

This approach has a couple of positives: In the current year it's giving us around $11K more that we can convert vs. having not done that. And it's increasing the amount we will convert over time, since we're adding more stock shares inside our TIRA. We have already drained my wife's smaller HSA and mine will be drained sometime in our early 70's.

We're in our mid 60's now and expect to complete the Roth conversions somewhere between the time I turn 70 and when RMDs would ordinarily start which, for us, is age 75. Really depends on the market between now and then. We're only converting stock in our TIRAs and leaving the TIPS ladders alone.

Cheers.

 

[gauss]

Another tactic to avoid leaving your heirs with a tax problem: make a charity the beneficiary.

At this point, that is what I am considering.

• Leave Roth to an (RLT) revocable living trust as beneficiary
• After Tax assets/real estate moved into an RLT prior to death
• Traditional IRA assets left to charity as beneficiary
• HSA assets left to charity as beneficiary.
• Professional Trustee such as Charles Schwab to sell home then quickly distribute trust assets to named family / friends / and perhaps additional charities.

FWIW DW and I have no descendants of our own and no siblings. This plan may not make sense for those in other situations.

-gauss

 

[Mulligan]

“It's fine. It's similar to what we're doing. While I have folders full of receipts for unreimbursed expenses, we've opted to reimburse as we go - reimbursing for Medicare Part B premiums…..”
Im still going to keep my receipts, but at 65 I will start reimbursing myself like you for the Medicare Part B (and D for me) premiums. The HSA still will continue to grow while doing this though.

 

[RunningBum]

I meant that the deceased paid bills not from the HSA but cash and kept documentation

No, that's not allowed.

 

[old medic]

So your plan works for the first funeral but probably not the second.

Theres only enough for the first funeral anyway...

 

[sengsational]

So I was effectively able to move $14k from HSA to Roth, and get rid of a few year's worth of receipts. Win/win.

Condolences on your wife having a j*b, but nice move, tax-wise. I guess the HSA withdrawal in 2026 can go on 2025 taxes.

 

[old medic]

So I was effectively able to move $14k from HSA to Roth, and get rid of a few year's worth of receipts. Win/win.

We are planning to do the same this year before DW retires

 

[RunningBum]

Condolences on your wife having a j*b, but nice move, tax-wise. I guess the HSA withdrawal in 2026 can go on 2025 taxes.

No need for that, and it actually wouldn't be. If they instead sold stock now to fund that 2025 HSA contribution before 4/15 the stock sale would be a 2026 taxable event. So an HSA withdrawal now would be accounted for in a 1099-R for 2026. Those are two separate transactions that just happen to be for the same amount. An HSA withdrawal (or stock sale for my other example) in 2026 is a 2026 tax event. An HSA contribution can be designated as a 2025 event if done before 4/15/26.

 

[Healthy Lifestyle]

Do I only need to maintain electronic medical receipts to support my HSA withdrawals?

Has anyone every been audited or questioned about HSA withdrawals?

 

[mrfeh]

Condolences on your wife having a j*b, but nice move, tax-wise. I guess the HSA withdrawal in 2026 can go on 2025 taxes.

Somebody needs to explain to me how this is a good tax move...

If one is looking to spend down their HSA, I understand. Otherwise, it's just an HSA withdrawal and a Roth contribution. Saying it's a "transfer" from HSA to Roth is just mental accounting.

 

[old medic]

Somebody needs to explain to me how this is a good tax move...

For us it has a chance of better return, currently HSA earn 3%, My Roth IRA has gained about 14% last year, tax free....

 

[gauss]

Do I only need to maintain electronic medical receipts to support my HSA withdrawals?

Has anyone every been audited or questioned about HSA withdrawals?

Never audited -- but haven't made many HSA distributions.

My plan is to have subcategories in Quicken for the years where I do take distributions.

I would change an expense category from Health Care to Health Care: HSA TY2025 if I took the distribution/deduction in 2025 for that particular health care payment.

That way I can run reports in the future showing exactly where the claimed distributions went and in what year. If I were to file Schedule A and claim medical expenses for that year, I would need to have a similar category to avoid double claiming. This is my planned primary record keeping mechanism for HSA distributions.

I also try to save the EOB statements and the billing receipts, but the Quicken logs would be my primary record. Not sure if it would stand up to IRS scrutiny, but I have started paying the $49 / year audit defense insurance to have a tax professional represent me before the IRS if I ever do get challenged on anything. I prepare my own tax returns with very inexpensive software.

For me this seems like a decent balance between risk, record keeping, cost and peace of mind. YMMV

-gauss

 

[shotgunner]

I have a small HSA with a local credit union. It's not earning very much these days. I contributed from 2008 when I semi retired and continued to contribute until 2022 when I reached Medicare age. I have been using it to pay for prescriptions, copays and deductibles and what has really helped towards liquidation is reimbursing myself for Medicare Part B premiums. I feel liquidation is the way to go because of the low earnings and the strings attached to my heir(daughter) when I pass.

 

[mrfeh]

For us it has a chance of better return, currently HSA earn 3%, My Roth IRA has gained about 14% last year, tax free....

Ok, but the Roth contribution could've been made regardless of the HSA withdrawal.

Still not seeing the point...

 

[Out-to-Lunch]

Ok, but the Roth contribution could've been made regardless of the HSA withdrawal.

Still not seeing the point...

In my case, I didn't have another way to fund the Roth contribution, i.e., no spare money.

I likely won't have saved any tax, but I think we all agree that money in a Roth is better than money in an HSA. So, yes, it was more of a move to reposition the funds from HSA to Roth now to use up some receipts and reduce the HSA.

 

[sengsational]

Somebody needs to explain to me how this is a good tax move...

If one is looking to spend down their HSA, I understand. Otherwise, it's just an HSA withdrawal and a Roth contribution. Saying it's a "transfer" from HSA to Roth is just mental accounting.

Yeah, I see your point. I didn't think very hard on it and was focused on the fact that HSA went down* and as a direct consequence, Roth went up.

*I'm biased toward reducing HSA balance, since that's what I've been doing the last few years.