Can an HSA get too large?

Texas Proud said:
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...
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We are no longer eligible for Roth contributions due to salary level.

HSA contributions, however, are tax deductible with no phase out on high salary.

Regular IRA contributions have no impact on our AGI.
 
chemEguy said:
We are no longer eligible for Roth contributions due to salary level.
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Then adding to the HSA is a no brainer, Even if you end up pulling it out for non qualified reason it may be at a lower tax level.
 
According to this article, most dont have the “problem” some of us have.
Many of these accounts are small. About 51% of HSA accounts have balances of $500 or less, and 39% of accounts have balances more than $1,000. Accounts of at least $25,000 make up 2% of HSA accounts.
Apart from general growth, the report noted that many HSA account holders do not invest their HSA assets efficiently, or at all. Only “38% of all HSA assets are in investments as of December 31st, 2023.”
 
Mulligan said:
According to this article, most dont have the “problem” some of us have.
Many of these accounts are small. About 51% of HSA accounts have balances of $500 or less, and 39% of accounts have balances more than $1,000. Accounts of at least $25,000 make up 2% of HSA accounts.
Apart from general growth, the report noted that many HSA account holders do not invest their HSA assets efficiently, or at all. Only “38% of all HSA assets are in investments as of December 31st, 2023.”
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That makes sense to me. Maxing an HSA is usually last on the list of options people will consider. If somebody is hitting IRS limits on every option available (401K, IRA, etc), that person is likely out earning a significant percentage of people in the US.

Our strategy (that I defined in my first post) was suggested to my wife at a business dinner over a decade ago by a senior leader at her company. We immediately employed it and kicked ourselves for not taking advantage sooner.
 
Kings over Queens said:
I share the contrarian view.

To the op's question, can an HSA get too large? My reply, yes, but only to the degree that you can't, don't or won't spend it all before dying.

What a shame to defer all that money and have it grow tax free only to give it all up and pay the taxes on it. T-deferred money is taxed anyway, and Roth's pass tax free anyway. Why not focus on depleting the HSA?
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Well I think MOST of us plan to have tax deferred money remaining when we die. Not spending it all pre-death is not a failing in any sense.

I guess if we each knew our exact future medical costs that would allow us to optimize.

Statistically, Fidelity and others say average uninsured medical costs for a retired couple on Medicare after 65 is 350k ish. That does not include LTC.

So I think few HSA's would be statistically too large but some of us may enjoy better health than others.

But if healthy in a 30 year retirement $350K is less than $6k annually per person which does not seem an impossibly large sum.
 
chemEguy said:
That makes sense to me. Maxing an HSA is usually last on the list of options people will consider. If somebody is hitting IRS limits on every option available (401K, IRA, etc), that person is likely out earning a significant percentage of people in the US.

Our strategy (that I defined in my first post) was suggested to my wife at a business dinner over a decade ago by a senior leader at her company. We immediately employed it and kicked ourselves for not taking advantage sooner.
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Probably various peoples situations control the outcomes some too. Some probably treat it like a flex spending account to mainly get the initial tax break from medical expenditures. Some probably dont feel financially comfortable enough to pay out of pocket and let the balance grow. And many I suspect are set up in accounts that do not even allow investment choices.
I have a friend who has 30k in his account. But the HSA is connected to the local bank and CDs and money market are the only options. And creating a separate HSA to transfer it into like Fidelity was a PIA step he wasn't going to do.
My experiences over time is many HSA’s are set up to collect fees than to get optimal investment opportunities. I have had to move mine three times because they eventually tried to put the screws to you in terms of investment options. Hopefully now at Fidelity, I wont have that issue again.
 
Montecfo said:
.... Statistically, Fidelity and others say average uninsured medical costs for a retired couple on Medicare after 65 is 350k ish. That does not include LTC. ...
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Perhaps from 65 to an average age of 85 with inflation might total $350k of a couple. Each of the last two years 2024 and 2025 we have only spent $12k a year on medical (Part B, Part B deductible, Medigap/Medicare Supplement, Part D, Rx.deductibles and copays, vision and dental, etc). That would only be $240k, but with inflation might approach $350k.
 
Mulligan said:
Probably various peoples situations control the outcomes some too. Some probably treat it like a flex spending account to mainly get the initial tax break from medical expenditures. Some probably dont feel financially comfortable enough to pay out of pocket and let the balance grow. And many I suspect are set up in accounts that do not even allow investment choices.
I have a friend who has 30k in his account. But the HSA is connected to the local bank and CDs and money market are the only options. And creating a separate HSA to transfer it into like Fidelity was a PIA step he wasn't going to do.
My experiences over time is many HSA’s are set up to collect fees than to get optimal investment opportunities. I have had to move mine three times because they eventually tried to put the screws to you in terms of investment options. Hopefully now at Fidelity, I wont have that issue again.
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We have ours invested in two funds, both vanguard index funds. One a bond fund and one equity, I think we split it 50/50.
 
pb4uski said:
Perhaps from 65 to an average age of 85 with inflation might total $350k of a couple. Each of the last two years 2024 and 2025 we have only spent $12k a year on medical (Part B, Part B deductible, Medigap/Medicare Supplement, Part D, Rx.deductibles and copays, vision and dental, etc). That would only be $240k, but with inflation might approach $350k.
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The statistics don't suggest yours or anyone's experience will match exactly. And of course medical spending spikes at the end. I think the statistics are probably a better long term planning measure than projecting based on a couple of recent years.
 
pb4uski said:
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.
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I'm completely on-board with draining the HSA before I go, but not for the reason of simultaneous death!

The chances of that are much less than 1 in 1,000 for a married couple in the US. Maybe 1 in 10,000. Too small to worry about. I refuse to plan for that. Just because something is easy to image (car or plane crash) doesn't mean it's at all likely.
 
I hear you but a work colleague of mine lost both of his parents simultaneously when their tour bus crashed in South America on their first year of retirement. It happens though I agree long odds.
 
Most of us should be planning on longevity, statistically speaking. And the way to best manage the marginal risk of wipeout type scenario is with a well crafted will or estate plan.

A single HSA account, even a large one, is not a large consideration in my estimation.

Having a large HSA account is a high class opportunity. I have a hard time thinking of it as a problem.

But I have begun draining mine, primarily because some of the expenses go back 15 years. But when I am all caught up it will still be $200k-ish.
 
It doesn't have to be simultaneous. When someone loses a spouse, how quickly are they likely to get their life back in order enough to do things like use receipts to withdraw from their HSA?
 
That was another reason why Im cashing in receipts. Will DW know to withdraw even if I leave good instructions? I would hope so, but it's not worth the risk just for continued tax free growth as we have plenty in Roth IRAs that do that for us. IOW, continued tax free growth isn't worth the admittedly small risk that the tax free withdrawals fail to happen.
 
pb4uski said:
IOW, continued tax free growth isn't worth the admittedly small risk that the tax free withdrawals fail to happen.
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I understand your point.

I think it depends on one's age and mortality risk. I'm a pretty healthy 56 year old, so I prefer the tax free growth. My answer at 86 would be to prefer the tax free withdrawals.

It's also different for married versus single. Married people have the option for the spouse to assume the HSA tax free. Single/divorced/widowed people do not have that option.

Other things also could come into play - other tax free money, cash flow, size of HSA, etc.
 
Spouse has some kind of work account that they fund for medical expenses, spouse can not contribute to it or make investment selections. After about 10 years of collecting everything medical we claimed all those receipts, it worked just fine but honestly it was a little mind numbing and a PIA, the ballance is still around $8k. I just claim them as they come now. They sent us debit cards for the account so tried that this year thinking that would be easier, you still need to login and upload the receipts, still a PIA.


Now that we are approaching using the ACA will probably open HSAs to help control income pre 65. I'm not looking forward to scanning and recording more health bills to be honest. But one must do what they must.

The idea that some have floated to let it grow as a end of life type of nest egg is not something I given thought too but may have some appeal. If I did do that I would probably dump all record keeping on my kids:)

All that said, I'm in the camp I don't want to deal with a HSA and its record keeping job. Maybe when I retire and have more time I will change my mind, will see.
 
I have never had to upload medical receipts. I withdraw it, get a 1099 and report it on my tax return. I have to check a box that it was for qualified medical expenses in order for the withdrawals to not be taxable. It's up to me to keep receipts in case the IRS ever demands evidence.

In my case in early January I tally up the qualified medical expenses based on my Quicken payment records for the prior year and then withdraw that amount from our HSAs. During the year I have a folder dedicated to medical receipts.
 
pb4uski said:
I have never had to upload medical receipts. I withdraw it, get a 1099 and report it on my tax return. I have to check a box that it was for qualified medical expenses in order for the withdrawals to not be taxable. It's up to me to keep receipts in case the IRS ever demands evidence.

In my case in early January I tally up the qualified medical expenses based on my Quicken payment records for the prior year and then withdraw that amount from our HSAs. During the year I have a folder dedicated to medical receipts.
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Some HSAs annoyingly require this. The best thing is to transfer your assets to better HSA asap.
 
I scan all withdrawal-related receipts/EOBs for my records anyway, so then uploading them is not too much of a bother.
 
pb4uski said:
I have never had to upload medical receipts. I withdraw it, get a 1099 and report it on my tax return. I have to check a box that it was for qualified medical expenses in order for the withdrawals to not be taxable. It's up to me to keep receipts in case the IRS ever demands evidence.

In my case in early January I tally up the qualified medical expenses based on my Quicken payment records for the prior year and then withdraw that amount from our HSAs. During the year I have a folder dedicated to medical receipts.
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We use Fidelity for our HSA account. They (also?) do not require any documentation for reimbursement. It's a nice simple process to get a cash transfer at the end of the year based upon our eligible spending - lately mostly dental bills.
 
Flyfish1 said:
Naive question- can I simply transfer the HSA elsewhere?
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Yes - you can transfer/rollover, whatever they call it. You can initiate at the new financial institution.
To switch Health Savings Account (HSA) providers, open a new account, then initiate a direct trustee-to-trustee transfer by submitting a transfer form from your new custodian to your old one. This method avoids taxes and penalties. Alternatively, you can do a 60-day rollover once every 12 months, where you move funds yourself.
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A lot of people do the latter because it’s faster. You just need to get things right. I did the former which was slow.
 
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