HSA as tax deferred savings

[Time2]

My daughter just became a dentist and her husband makes over $100k, so they are making a pretty hefty income and it will go up.
She just called to see if she can pay a Dr. bill from May with a funds that she just contributed in June. That's the first question.
Now, the second and more important question,
Is there any reason a high income family should not just pay all medical expenses out of current income and just use the HSA as a tax free investment account?
I did that on a much lower income.

 

[njhowie]

My daughter just became a dentist and her husband makes over $100k, so they are making a pretty hefty income and it will go up.
She just called to see if she can pay a Dr. bill from May with a funds that she just contributed in June. That's the first question.
Now, the second and more important question,
Is there any reason a high income family should not just pay all medical expenses out of current income and just use the HSA as a tax free investment account?
I did that on a much lower income.

1. Yes, she can withdraw funds, no matter how recently contributed to fund current medical bills. However, your next question gives the proper response and way to think about it.

2. That is the theory. The money in the HSA grows tax free for as long as it's in there. So you don't want to touch it until you really need to.

 

[SecondCor521]

For an HSA expense to be qualified, it has to be a medical expense that occurred after the HSA was established. "Established" is a matter of state law; in my state it happens when the first contribution was made. So she should check her state law, but if she had opened and contributed to the account before she visited the doctor, then the answer is likely yes.

There are a few reasons I can think of not to do as you describe in your second question. First, if the person or couple doesn't have the cash flow to pay the medical expenses out of current cash flow. Second, if the person doesn't want to do so because they have other non-healthcare uses they prefer for the funds (like vacations or houses or babies or whatever). Third, if they are older and/or don't expect to have enough HSA qualified expenses in the rest of their lifetime - HSA accounts don't inherit as well as other types of accounts. Finally, if they just don't want the hassle of tracking receipts and paperwork over a number of years or decades and would prefer the simplicity of reimbursing everything at the time.

None of the above reasons apply to me currently, so I have one, contribute to it, and am paying my medical bills out of other sources. But I plan to drain mine sometime in my 70s because of the simplicity and inheritance reasons.

 

[pb4uski]

We had/have HSAs and put money in for the maximum allowed and then paid the medical bills with taxable funds and let the HSA grow... it is like being able to make additional Roth contributions because the earnings are tax-free as long as the money is spent on qualified medical expenses.

When we turned 65 we took a withdrawal for all of our medical expenses since we started the HSA and now do HSA withdrawals to reimburse ourselves for Medicare Part B and Part D premiums, the Medicare deductible and our dental and vision expenses annually.

If we ever need nursing care, we'll use it for that.

 

[Time2]

For an HSA expense to be qualified, it has to be a medical expense that occurred after the HSA was established. "Established" is a matter of state law; in my state it happens when the first contribution was made. So she should check her state law, but if she had opened and contributed to the account before she visited the doctor, then the answer is likely yes.

I'm surprised this a state law governed and not Federal. I'm in Florida and so far I have not been able to find info on the timing of bill and contribution.

There are a few reasons I can think of not to do as you describe in your second question. First, if the person or couple doesn't have the cash flow to pay the medical expenses out of current cash flow. Second, if the person doesn't want to do so because they have other non-healthcare uses they prefer for the funds (like vacations or houses or babies or whatever).

I've done my best to instill frugal-ness on them, but time will tell. They have been living on his paycheck for many years while she was in school. They will suddenly have 2-1/2 times more income then they have been living on, she can cover their mortgage, taxes and insurance with 3 days work*. I think an additional $7,200 is a minor cost to them.

Third, if they are older and/or don't expect to have enough HSA qualified expenses in the rest of their lifetime - HSA accounts don't inherit as well as other types of accounts. Finally, if they just don't want the hassle of tracking receipts and paperwork over a number of years or decades and would prefer the simplicity of reimbursing everything at the time.

Ya hassle, but every year, I added up my receipts, put them in an envelope with the amount and they year on the outside an put it the file cabinet. They are fairly young 30 years old and 40 years old. (she had a short career before she decided to be a dentist)

None of the above reasons apply to me currently, so I have one, contribute to it, and am paying my medical bills out of other sources. But I plan to drain mine sometime in my 70s because of the simplicity and inheritance reasons.

I used about $26k of HSA receipts last year to generate tax free income, I wanted to maximize a Roth conversion, while having enough income for our spending, daughters tuition, and still do the Roth conversion and stay in a lower tax bracket. So happy tuition is done!


* one of my happiest moments when the bought their dream house on the water as a HUD repo fixer upper. They ended up with a $240,000 mortgage, when it could have been $500k+.

 

[SecondCor521]

I'm surprised this a state law governed and not Federal. I'm in Florida and so far I have not been able to find info on the timing of bill and contribution.

It's because HSAs are technically trusts, and trust laws are, for whatever reason, done at the state level. You can find the definition by searching for the word "trust" at: https://www.law.cornell.edu/uscode/text/26/223.

Again, in my state, a trust is established once an asset has been placed into the trust, which for an HSA means a contribution has been made.

The restriction on the timing is found in IRS Pub 969:

"For HSA purposes, expenses incurred before you establish your HSA aren’t qualified medical expenses. State law determines when an HSA is established."

-- https://www.irs.gov/publications/p969#en_US_2021_publink1000204083

I didn't find that timing restriction in the law text, but I'm sure it's in there somehow.

 

[Time2]

I'm in Florida, does anyone have a link that explains the timing of Bill paying vs establishment of the HSA?

 

[cathy63]

I'm in Florida, does anyone have a link that explains the timing of Bill paying vs establishment of the HSA?

Here's the Florida trust code: Statutes & Constitution :View Statutes : Online Sunshine

It looks like in FL, a trust is created when property is transferred to it. For an HSA, that would be the date of the first deposit. If this account is funded through payroll deduction, then it's whenever the employer transferred the funds. She needs to look at the statements from the HSA trustee to figure out when they received the money.

If the account was opened and first funded in June, then it can't be used to pay a bill for services performed in May. However, if the account was opened and funded prior to the May service, then she can use money that was added to it after May to pay the bill.

 

[Time2]

Here's the Florida trust code: Statutes & Constitution :View Statutes : Online Sunshine

It looks like in FL, a trust is created when property is transferred to it. For an HSA, that would be the date of the first deposit. If this account is funded through payroll deduction, then it's whenever the employer transferred the funds. She needs to look at the statements from the HSA trustee to figure out when they received the money.

If the account was opened and first funded in June, then it can't be used to pay a bill for services performed in May. However, if the account was opened and funded prior to the May service, then she can use money that was added to it after May to pay the bill.

Thank you very much for the help.

 

[swakyaby]

I think it makes the most sense that while lots of cash is coming in from her income, to simply pay for medical expenses out of pocket and let the HSA grow tax-deferred or tax-free. Then when she is retired and income is more limited, to use the now larger HSA for tax-free medically qualified withdrawals.

 

[pb4uski]

^^^ That's what we did.

 

[audreyh1]

When did she open the account? That determines the start date for medical expenses that can be reimbursed.