Can an HSA get too large?

[Kings over Queens]

I agree with you in principal, but there is the question of timing. I'd like to deplete mine before I pass away, but I'd also like to wait before doing so to let the money grow tax free as long as possible.

I have a spreadsheet which targets depletion at my life expectancy. I'm unlikely to get it exactly right, but I at least have a reasonable plan.

"men make plans and God laughs." Don't know who said that originally but one of my favs.

I agree, it's good to have a plan and yours being tied into life expectancy is a good one.

Mine is to spend down strategically when both of us are alive, and if I die first, my instructions are for my wife to spend it more aggressively both so she doesn't leave money in those accounts that could be taxed, but also for convenience and simplicity.

 

[Exchme]

You can't withdraw them from your HSA and deduct them... no double dipping... perhaps that is what you meant and just worded it incompletely.

Yes, I was commenting on a post that touted using HSA money for LTC costs and was trying to make the point (badly apparently) that there is no double dipping of the tax preference - you can either use the expense as the basis for a qualified HSA withdrawal or you can use the expense as a deduction on the tax return.

Thanks for cleaning it up!

 

[bada bing]

I agree with you in principal, but there is the question of timing. I'd like to deplete mine before I pass away, but I'd also like to wait before doing so to let the money grow tax free as long as possible.

I have a spreadsheet which targets depletion at my life expectancy. I'm unlikely to get it exactly right, but I at least have a reasonable plan.

Just as an aside, all 4 of my grandparents and both parents knew they were in their final few days. Doesn't always happen, but it's fairly likely I'll be able to pull the trigger on draining my HSA before they pull the plug. Just another reason my neices and nephews need to wait before they pull that plug.

The worst case for an HSA for the original holder is it's equivalent to a tIRA. Pre-tax going in, taxed coming out. It doesn't get any worse for the owner than that and it's most likely better with the slightest luck and forethought.

Based on my reading here, and other places, and clearing up my misunderstandings of estate tax treatment, I've altered my HSA beneficiary to charity. If I don't manage to drain it myself, it's not an issue. For now, mine is invested and growing and my reciept pile is growing as well.

 

[bada bing]

Yes, I was commenting on a post that touted using HSA money for LTC costs and was trying to make the point (badly apparently) that there is no double dipping of the tax preference - you can either use the expense as the basis for a qualified HSA withdrawal or you can use the expense as a deduction on the tax return.

Thanks for cleaning it up!

Functionally, an HSA is a way to bypass the 7.5% of AGI threshold for deductibility of medical expenses. Of course there's lots of other moving parts, but that's how I think of it. Hopefully all of my deductible OOP medical expenses after age 45 will end up being pre-tax because of using an HSA.

Here's a question on tax strategy. Can you use receipts on an amount equal to the first 7.5% of AGI against your HSA and then take the whole remainder as deductible expenses that year ?

 

[RunningBum]

Functionally, an HSA is a way to bypass the 7.5% of AGI threshold for deductibility of medical expenses. Of course there's lots of other moving parts, but that's how I think of it. Hopefully all of my deductible OOP medical expenses after age 45 will end up being pre-tax because of using an HSA.

Here's a question on tax strategy. Can you use receipts on an amount equal to the first 7.5% of AGI against your HSA and then take the whole remainder as deductible expenses that year ?

I looked into that a few years ago and found that you cannot. I don't have sources to back that up anymore but I remember that I really wanted to do this but was convinced I couldn't.

 

[pb4uski]

Just as an aside, all 4 of my grandparents and both parents knew they were in their final few days. Doesn't always happen, but it's fairly likely I'll be able to pull the trigger on draining my HSA before they pull the plug. Just another reason my neices and nephews need to wait before they pull that plug.

The worst case for an HSA for the original holder is it's equivalent to a tIRA. Pre-tax going in, taxed coming out. It doesn't get any worse for the owner than that and it's most likely better with the slightest luck and forethought.

Based on my reading here, and other places, and clearing up my misunderstandings of estate tax treatment, I've altered my HSA beneficiary to charity. If I don't manage to drain it myself, it's not an issue. For now, mine is invested and growing and my reciept pile is growing as well.

I dunno. The HSA is better to the extent that you can withdraw for qualified medical expenses since those withdrawals are tax free like Roth withdrawals (if you're over 59-1/2).

Bad for non-spouse beneficiaries compared to a tIRA... HSA is immediately taxed vs withdrawals at your choice over 10 years for tIRAs.

Both my parents died unexpectedly. DF while sitting in a chair in his hospital room... DM thought he fell asleep but visiting friends knew better, and DM in her sleep... found by assisted living home staff when they went in to give her meds. If DM had an HSA and a pile of medical receipts we would have been SOL.

Making a charity beneficiary is an interesting idea.

 

[pb4uski]

...Here's a question on tax strategy. Can you use receipts on an amount equal to the first 7.5% of AGI against your HSA and then take the whole remainder as deductible expenses that year ?

No.

ETA: AI Overview
You cannot "double-dip" by using the same expenses for both a tax deduction and an HSA withdrawal. Expenses paid with tax-free HSA funds cannot be claimed as an itemized deduction.

 

[bada bing]

I looked into that a few years ago and found that you cannot. I don't have sources to back that up anymore but I remember that I really wanted to do this but was convinced I couldn't.

I used AI - which obviously isn't the most trusted source - and it says:

[mod edit]

Please don’t copy and paste AI content as per our guidelines.

https://www.early-retirement.org/threads/forum-posting-standards-update-use-of-ai-in-member-posts.124025/[mod edit]

I dunno. Google AI claims that is a quote from turbotax support. I'm not in a position to need this, but it's a question to file away in case of a big medical catastrophe.

Sorry for the thread hijack.

 

[SecondCor521]

Here's a question on tax strategy. Can you use receipts on an amount equal to the first 7.5% of AGI against your HSA and then take the whole remainder as deductible expenses that year ?

No, you cannot. Medical expenses can either be itemized on Schedule A or used for HSA qualified distributions. In your example, you're trying to count the receipts both against the 7.5% of AGI *and* reimburse them from the HSA, and that form of double dipping is not allowed.

 

[sengsational]

I'm with PB4uski primarily to simplify and not to get caught out and have that money taxed. Every year at tax time I grab the oldest folder of receipts from the medical files (each folder is a specific year) and do a transaction to withdraw exactly that amount from the HSA. The folder gets marked "pulled" and goes into the year's tax folder. HSA balance is going down, but not that fast because of the growth. I might have to start pulling 2 years worth. I'm applying the oldest receipts so I can toss the oldest ones sooner. I think the IRS has so many years to ask me about the details for non-criminal stuff, after that my obligation to produce details ends.

 

[Aggie1999]

Interesting discussion. Even though I am early 50's, I won't have a spouse as an heir. Thinking maybe I should start cashing in some of the medical receipts I have been saving for years.

 

[pb4uski]

^^^ If you don't, nobody else can, so don't die unexpectedly.

 

[RunningBum]

Interesting discussion. Even though I am early 50's, I won't have a spouse as an heir. Thinking maybe I should start cashing in some of the medical receipts I have been saving for years.

I've been mostly holding off, treating the HSA account (with receipts) as a place to grab money for emergencies or irregular expenses (such as a new car or major home repairs) without generating more taxable income. As others have suggested, my beneficiary is a charity (my DAF, which my son was take over to direct grants), so if I do go early and unexpectedly, the HSA will still be handled tax efficiently. If I do have time, you bet I will drain the HSA with as much receipts as I have, but if a bus hits me I won't be around to have any regrets, and my final words won't be "Withdraw from my HSA NOW!"

I'm just not too worried about maximizing everything in case I go early. I'd rather maximize for the case where I live long and potentially eat into my investment base. It's hard to maximize both outcomes so slant towards the one important to you. Maximizing for your heirs is another case to consider. I don't know if pulling money out now "just in case" is better than managing for a more timely death.

 

[tulak]

I'm still working and fully funding my HSA, but I've been collecting receipts. Once I retire, I will cash in all the receipts and then use the HSA for medical expenses. This will help with income before I'm 59.5 - I won't have to take as much from the Roth - and it reduces the amount of tax-deferred income, which will help in qualifying for ACA subsidies. And no more tracking of medical expenses for reimbursement, which is a win for simplicity.

I plan to also continue to contribute to an HSA, assuming I have a qualifying plan, which is likely. In that case, I will "rollover" tax-deferred income into the HSA, up to the maximum amount. Worst case scenario, it will be a wash, but if I use it for medical expenses, then I avoid paying taxes. And it shouldn't affect my ability to qualify for an ACA subsidy, since it'll be a wash for MAGI (need to confirm).

I don't mind having a large HSA, but I'm not going to intentionally grow it. I'll actively spend it down for medical expenses.

 

[old medic]

I'll agree with that its possible to have too large a HSA. But it seems if you do, it won't be your problem.
My plan is to deplete my small HSA with my receipt pile and make cash contributions to our Roth IRAs this last year of DW employment.

 

[fosterscik]

I'm in the "spend it down now" camp.

If I have medical or dental charges (especially dental) I withdraw HSA funds. Yes, leaving money in the HSA allows tax-free growth, but if I use other funds to pay those expenses they would instead come from IRA or Roth accounts (I'm currently spending after tax accounts, but only to the 0% capital gain limit and we spend all those funds without considering medical/dental expenses). So for us its a choice between tax-free growth in an HSA or an IRA. Given the restrictions on inherited HSA accounts, it seems prudent to me to preferentially spend from the HSA.

 

[sengsational]

There aren't many ways to not pay income tax, but the HSA is one way. I'd feel like a failure if I let it shift to the estate, for a tax gobsmack. That's some cognitive dissonance I'm trying to avoid by spending it. I've got a good majority of the possible tax-free growth already...no need to get greedy.

 

[The Cosmic Avenger]

I think part of it depends on how much you have in receipts, too. We currently have about $55K in our HSA and $22K in expenses tracked. I wish we had more in our HSA, but if we had $200K or more with the same amount tracked, I'd start thinking it might be time to pull back. Unless you're going to self-insure, that is, in which case the HSA should be as big as you can grow it!

 

[Mulligan]

Interesting discussion. Even though I am early 50's, I won't have a spouse as an heir. Thinking maybe I should start cashing in some of the medical receipts I have been saving for years.

I just put a $32 medical receipt into my HSA receipt folder today and have over $200k in an HSA account. At present pace I will never put much of a receipt dent into my ever growing HSA brokerage account. But there are bigger problems to worry about as this means I have been healthy. So for me, hopefully this “problem” continues to get worse if I am lucky!

 

[pb4uski]

I think part of it depends on how much you have in receipts, too. We currently have about $55K in our HSA and $22K in expenses tracked. I wish we had more in our HSA, but if we had $200K or more with the same amount tracked, I'd start thinking it might be time to pull back. Unless you're going to self-insure, that is, in which case the HSA should be as big as you can grow it!

I think you are taking a lot of risk with what you are doing unless your contingent beneficiaries are charities.

If you both die simultaneously and your HSA goes to non-spouse beneficiaries that $22k that you could withdraw tax free today will end up being taxed at the beneficiaries' marginal tax rates.

If you die unexpectedly... it happens... both DF and DM in my case... will your DW know about the $22k of receipts and know how to withdraw it from the HSA?

Knowing what I know today it seems like a no brainer to not sit on a pile of receipts. The tax-free growth on that $22k isn't worth the risk IMO.

 

[The Cosmic Avenger]

I think you are taking a lot of risk with what you are doing unless your contingent beneficiaries are charities.

If you both die simultaneously and your HSA goes to non-spouse beneficiaries that $22k that you could withdraw tax free today will end up being taxed at the beneficiaries' marginal tax rates.

If you die unexpectedly... it happens... both DF and DM in my case... will your DW know about the $22k of receipts and know how to withdraw it from the HSA?

Knowing what I know today it seems like a no brainer to not sit on a pile of receipts. The tax-free growth on that $22k isn't worth the risk IMO.

Yes, she has access to the Google Doc spreadsheet, which keeps a running total and allows you to specify whether specific expenses are reimbursed or not. And we have good friends and professionals that could advise her if she wanted it, but she managed budgets for many multi-million dollar projects, so she probably won't NEED help.

And right now I'm more concerned about paying for unexpected medical care than our heirs getting a bit more money but paying a higher percentage in taxes. When we get older I'll probably start drawing it down, maybe around Medicare age, depending on the balance then and our circumstances.

 

[bada bing]

I've actually never put numbers on the outcomes for holding onto my HSA balance. There is a tax advantage to keeping the $$ in the HSA shelter, but how much depends on how you have it invested. In my case, mine is invested in a 70/30 automatically rebalanced, plain vanilla indexed portfolio. Account page says it has had a 15 year CAGR of ~9.02%, with ~2.5% of that currently coming from interest and dividends. I have $140K in it today and I've never pulled anything out yet. If I pulled it out to a taxable account, I'd pay roughly 2.5% * $140K * 15% LTCG rates, or a $525/year tax savings/deferral today for being in the HSA. Of course, the balance in the portfolio will hopefully continue growing, if the 9% CAGR holds it could be pushing $1M in 20 years.

Right now, my best guess is my longevity is 20 more years, 50/50 chance. That would still have me dying younger than any of my parents and grandparents. It's anyone's guess, but I'd say that there's only a 30% chance that my actual exit event happens so fast I couldn't call in a distribution against receipts, but the chances of that outcome grow as time goes on.

My personal situation, which isn't common, is my receipt pile isn't going to grow very fast until maybe the later years. I have a "Retiree Reimbursement Account" that currently pays for my Medicare insurance premiums and deductibles and it has $80K remaining in it. My receipts so far are basically my dental bills. My plan for my HSA, besides covering all my qualified expenses after the reimbursement account runs out, is to use it against the medical portion of the entrance fee for a CCRC. It may be that's not my future course though, I'm hopefully 15+ years from considering a CCRC. But right now, I only have ~$20K of receipts to use against the growing HSA balance.

In the interim, I've swapped my HSA beneficiary to my DAF. I may get married in the next couple years, so I may have a spouse beneficiary. A recent "free" consult with a financial planner provided as a benefit from DGF's ex-employer recommended we get legally hitched for estate and survivor reasons. We've been a "household" for 17 years now but neither of us has had good feelings from former marriages, so maybe have irrationally avoided the license. She doesn't have an HSA and her medical is a Medicare Advantage subsidized by her former employer with thankfully very low OOP, in spite of a lot of medical expense in the last few years. She probably won't generate a lot of qualified OOP expenses either, in the event she inherits my HSA.

TLDR: bada bing will continue to hold his HSA account balance for now. And taxes will probably eventually get paid on some of his HSA.

 

[pb4uski]

Yes, she has access to the Google Doc spreadsheet, which keeps a running total and allows you to specify whether specific expenses are reimbursed or not. And we have good friends and professionals that could advise her if she wanted it, but she managed budgets for many multi-million dollar projects, so she probably won't NEED help.

And right now I'm more concerned about paying for unexpected medical care than our heirs getting a bit more money but paying a higher percentage in taxes. When we get older I'll probably start drawing it down, maybe around Medicare age, depending on the balance then and our circumstances.

But even if you withdraw, that $22k now, it is still available to pay for unexpected medical care, it's just in a different type of account.

 

[chemEguy]

This has been a great series of replies, thank for all of those. It sounds like it’s sensible for us to continue to grow the HSA while we’re both working. Certainly there’s a tax benefit now for us.

 

[Texas Proud]

Since I do not have an HSA I do not know all the benefits...

But why would it be better than a ROTH? IOW, I would want to take money out of an HSA before a ROTH..

And if I had high taxes I would want to take it out instead of a regular IRA...