HSA Funds out then in

[SoReady]

Every year I lower my AGI by putting money in an HSA. I just went on Medicare and have funded my HSA to the max. My wife's still needs $3600 to max hers out.

I'm a little short on additional funds to put in her HSA this year. So I'm thinking...

1. Take $3600 out to pay for some of the medical expenses for last year - 2020. (Wife broke her hip and plenty of bills to use the $3600 against)

2. I don't need the $3600 and want to continue to take advantage all that HSA has to offer, so I would then put the $3600 back in to the HSA.

3. Deduct the HSA contribution from my earnings to lower my AGI for 2021.

Any issues I may be missing?

TIA

 

[FlaGator]

I've done just what you describe for several years, so if you're missing something, I am too

 

[qwerty3656]

That makes sense to me. You know you each get an additional $1000 catch up amount if your over 55. Also, you get a 1-time roll over from your IRA.

 

[RunningBum]

That's all fine. You are entitled to take out any amount you want, tax free for anything you have eligible expenses for. And with a qualifying plan, your wife is eligible to make an HSA contribution. As long as you make two separate transactions, you can do this.

You can't just wave your hands and say $3600 out, $3600 in and take the taxable income reduction without making actual transactions, but you aren't suggesting this.

 

[njhowie]

To not raise any red flags, I would not do identical amounts. Maybe take out $3498.29 (for instance) and put in $3600.

 

[SoReady]

You can't just wave your hands and say $3600 out, $3600 in and take the taxable income reduction without making actual transactions, but you aren't suggesting this.

I'm not sure what you mean. I would take out $3600 and then correspond them with medical bills that match or exceed $3600 and file that away somewhere. I hadn't planned on taking out a transaction for each amount that adds up to $3600. Is that necessary?

 

[SoReady]

That makes sense to me. You know you each get an additional $1000 catch up amount if your over 55. Also, you get a 1-time roll over from your IRA.

I am aware of the catch up and have separate HSA's for me and my wife and fund the catch up for each. What I'm unaware of is the 1-time IRA roll over.

 

[SoReady]

To not raise any red flags, I would not do identical amounts. Maybe take out $3498.29 (for instance) and put in $3600.

Interesting idea - thanks.

 

[SecondCor521]

What you're talking about is fine. You can even make them identical amounts if you want.

The other thing that jumps out at me is that you said you went on Medicare and funded your HSA to the max.

I hope you are aware that eligibility for HSA contributions is monthly and being on Medicare makes you ineligible. So if you went on Medicare this month, you would only be eligible to contribute to your HSA for January through March. Thus you would only be eligible to make 1/4 of whatever your maximum contribution is for the year.

If you've contributed the whole annual maximum for yourself and being on Medicare makes you ineligible for some of those contributions that you have already made, you are entitled to remove the excess contribution plus any attributable earnings. This would be another way to raise cash for your spouse's HSA contribution.

You can both remove the excess contribution and make a distribution if you wish.

 

[RunningBum]

I'm not sure what you mean. I would take out $3600 and then correspond them with medical bills that match or exceed $3600 and file that away somewhere. I hadn't planned on taking out a transaction for each amount that adds up to $3600. Is that necessary?

No, that was just an aside in case anyone thinks you could say that if you are taking out and contributing the same amount, why bother doing anything at all. Just call it even and take the $3600 income reduction on taxes. You are doing it the right way by actually taking it out and then putting it back in.

 

[SoReady]

The other thing that jumps out at me is that you said you went on Medicare and funded your HSA to the max.

I hope you are aware that eligibility for HSA contributions is monthly and being on Medicare makes you ineligible. So if you went on Medicare this month, you would only be eligible to contribute to your HSA for January through March. Thus you would only be eligible to make 1/4 of whatever your maximum contribution is for the year.

Thanks I'm aware of this too. I prorated it to 1/4 of the year.