setting up a health savings account

[kyounge1956]

I haven't had a cavity since I was in the 5th grade, so I'm planning to pay for dentistry out of pocket after retirement. My annual exam and cleaning cost less than the premiums for retirees' dental insurance. Retirees receive either 25% of our unused sick leave balance in cash, or 35% in an HSA, but the choice is based on a vote of everyone retiring that year, so I don't know yet which it will be. Either way, I expect it to be a significant sum, because my balance is over 1000 hours. My current plan is to leave the HSA (if I get one) alone unless I need some expensive dental work later in life. If the vote turns out in favor of the cash option, I don't think I'll be eligible to start an HSA because I probably won't have any earned income.

 

[ksr]

I'm planning to pay for dentistry out of pocket after retirement. My annual exam and cleaning cost less than the premiums for retirees' dental insurance.

You may find the non-negotiated dental costs higher than you expect. I was surprised at how much higher the costs were when I went from having employer-provided dental insurance to paying out of pocket. I ended up buying a dental plan to reduce the total costs.

I don't think I'll be eligible to start an HSA because I probably won't have any earned income.

You don't need to have earned income to open an HSA. You can find more details here: U.S. Treasury - HSA Frequently Asked Questions

 

[Free To Canoe]

Another good HSA thread.
My new years resolution to open one. Even though I am in a low tax bracket, my state tax savings alone will more than pay for the fees.

Free to canoe

 

[kyounge1956]

(snip) I'm planning to pay for dentistry out of pocket after retirement. My annual exam and cleaning cost less than the premiums for retirees' dental insurance.

You may find the non-negotiated dental costs higher than you expect. I was surprised at how much higher the costs were when I went from having employer-provided dental insurance to paying out of pocket. I ended up buying a dental plan to reduce the total costs.

I am planning to move about 100 miles away, so I don't know yet whether I will be keeping my same dentist or not. I might if I will be coming up rather frequently to visit my parents. Thanks for the heads-up, I was just looking at my bill and comparing that cost to the insurance premiums.

If the vote turns out in favor of the cash option, I don't think I'll be eligible to start an HSA because I probably won't have any earned income.

You don't need to have earned income to open an HSA. You can find more details here: U.S. Treasury - HSA Frequently Asked Questions

Righto. I got it mixed up with the rule that says you can't contribute after you enroll in Medicare.

I wonder how health care legislation is going to affect this.

 

[Gotadimple]

I wonder how health care legislation is going to affect this.

Who knows, but for now, it is just another part of your asset allocation with which you can earn income tax-free.

-- Rita

 

[easysurfer]

Starting 2010, I decided to go ahead an start reimbursing myself from my HSA for medical expenses. In fact, I just put in a reimbursement request (postal mail) for my 2008 expeneses (which were about $2000). Soon, I will also reimburse myself for my 2009 expenses. Then each year, I'll reimburse myself for the previous year's expenses I've paid.

My strategy for doing this: The money I reimburse to myself will be from expenses I paid in the past and will help pay for upcoming expected expenses this year (such as portions from my dental and eye doctor visits that aren't covered).

I decided to use Vanguard Wellington (through HSA Administrators) as my HSA investment.

With my new approach, in a way, I feel as though I'm just shuffling money back and forth (to HSA, then to reimburse myself, then medical expenses), but at least that is tax-free.

 

[ChrisC]

But why not use the HSA money at all, even for small expenses? I'm having a hard time understanding the reasoning behind this.

If you can pay for these small expenses now from taxable accounts, I'm having a hard time understanding the benefit you gain in foregoing the tax-deferred advantage of compounding your HSA contributions. It's not like you won't use the HSA money for these small expenses -- it's simply a timing issue. You delay payment of these expenses for a future date, while your contributions grow through the magic of compound interest or investment appreciation -- and when those future payments are made, you're not mickey-mousing yourself with small expenses over the years. You can make a few giant payments to reimburse yourself for all the medical expenses you delayed paying. This plan does have its downside; what if they change the rules on us and require annual reimbursement or, god forbid, you lose your paperwork on medical expenses?

I've had a HDHP-HSA for two years now and have around $14K. (Wife also has a spousal HSA account in which she can make "catch-up contribtuions and her account is around $2K.) We have incurred almost $8K in reimburseable medical expenses, which includes almost $6K in long-term health care insurance payments that I would never otherwise been able to offset or recapture by a tax deduction or pre-tax contribution. I haven't reimbursed myself for anything, yet.

A few weeks ago, I was thinking about switching to the regular health insurance plans in light of some major medical issues facing us in the upcoming year. I decided even with the prospect of major medical expenses, I'm still better off financially with the HDHP plan, in which my employer kicks in $1500 in an annual contribution and my medical deduction is $3000.

 

[simple girl]

Ok, so based upon what people have said I've done some additional research. According to this article (Year-end Health Savings Account Tax Strategies) it appears there are 3 basic strategies for how to fund and use your HSA:

1. Put no money in the account, except when you incur a medical expense. This strategy allows you to legally "launder" any money used to pay medical expenses. In other words, by depositing money into your HSA, then immediately withdrawing it to reimburse yourself for medical expenses, you are making your medical expenses all tax-deductible. You may want to use this strategy if you are on a tight budget and want to keep your cash outlay as low as possible.
2. Fully fund the account, or at least put in as much as possible based on your budget. Take money out of the account any time medical expenses are incurred, and let the rest grow tax-deferred. This strategy will maximize your tax deduction, while making your HSA funds available to pay any non-covered medical expenses before your deductible is met.
3. Fully fund the account, but pay all medical expenses from a non-HSA account. Reimburse yourself for medical expenses at a later date. This strategy will allow you to maximize your tax deduction, and will also allow you to maximize the tax-deferred growth of your HSA. You can then reimburse yourself, tax-free, at any time in the future for medical expenses incurred over the ensuing years.

So, when researching HSA's, you should first decide how you are going to use them. Once that strategy is decided, you can then filter out the offerings better (since some do not offer mutual fund options at all).

I also found this calculator on the HSA Bank website to show how much your account would grow depending on multiple factors:

HSA Bank

Lastly, this article put it all together for me: Free Money Finance: Using Your Health Savings Account as a "Super Roth" Investment Vehicle

We have decided to go with Strategy #3. My main concern is about holding receipts for years and years and then turning them in for reimbursement...worried the rules will change on this...so as a prior poster said, this is a bit of a gamble. Hopefully, if that does occur, there will be enough warning of the impending change so we can get reimbursed before it goes into effect.

Now, back to looking at which HSA is best for us!

 

[simple girl]

I went with Health Savings Administrators when I set up my HSA in 2006 and have been happy with them due primarily to the cost and availability of Vanguard funds.

Please let us know who you choose (and why) - I haven't looked at alternatives for a while and there may be better choices.

My goal is to eventually move all these funds elsewhere with better investment options. Health Savings Administrators was the front runner based on my previous research from a couple years ago. Vanguard also mentioned they may start an HSA or affiliate with an HSA provider. I'll be interested to see what you find out, since I think my ~$17000 in HSA is large enough to justify moving to a better custodian.

And the winner is...

Health Savings Administrators.

I looked at as many providers as I could stand and have come to the conclusion that they are the best choice for us, too.

Criteria: had to offer investments, and those investments had to have good variety and quality, and low costs.

Most of the companies I looked at offered investments that were load funds, had high expense ratios, and the choices were slim.

I still don't like the fees associated with HSA Administrators ($20 to open account, $39 annual fee, .0008/quarter on each account balance, capped at $20K per account). HSA Bank was runner up - only $24/yr annual fee for mutual fund accounts - but I wasn't thrilled with their mutual fund offerings - high expense ratios. At this point I wonder if the fees associated with HSA Admin would end up equaling or being more than those with HSA Bank (exp ratio costs), but since I'm not sure how to figure that out and I'm comfortable with Vanguard funds, I'm going with HSA Admin.

Hope this helps others!

 

[easysurfer]

Simple Girl,

Thanks for all your "detective work" on HSAs.

If I could afford it, I would continue with strategy #3. But the keyword is "afford." For me, to pay the annual HSA contributions and then medical expenses out of personal funds, my budget would really feel the pinch

So, it looks like I mostly follow strategy #2.

Easysurfer

 

[ziggy29]

Maybe if more people use HSAs (assuming they remain an option into the future), the fees may eventually start going away. Today we take a "no-fee IRA" for granted, but as I recall there was a time this was not the case. Only once there was enough accounts and enough money to compete for did the custodians really start getting aggressive about "no fees."

 

[FUEGO]

Sounds good, simple girl.

I'm starting to have second thoughts about holding the receipts forever. This new health insurance bill has a provision that looks to eliminate most reimbursements for over the counter drugs. Not sure if that provision applies to eligibility for reimbursement based on time of purchase or time of reimbursement, but I tend to think it will be time of reimbursement. So all of a sudden my OTC meds may no longer qualify as "qualified expenses".

Also note that the Senate health insurance bill has a provision that increases the non-qualified HSA withdrawal penalty from 10% to 20%. That penalty is on top of income tax due on the withdrawal for non-qualified expenses.

 

[ziggy29]

I'm starting to have second thoughts about holding the receipts forever. This new health insurance bill has a provision that looks to eliminate most reimbursements for over the counter drugs. Not sure if that provision applies to eligibility for reimbursement based on time of purchase or time of reimbursement, but I tend to think it will be time of reimbursement. So all of a sudden my OTC meds may no longer qualify as "qualified expenses".

This is why I tend to seek reimbursement immediately. Yeah, the tax deferral is nice, but Congress giveth and Congress taketh away. I *know* that if I use my HSA for currently reimbursable and covered expenses, the income I earned to pay for it is 100% tax free. That may or may not change, but it's a pretty good guarantee that the deal will never get *better* than that and it may get worse.

I'm grabbing 100% tax-free wherever I can lock it in these days. It would be nice if I trusted Washington to keep all my medical expenditures from my HSA as 100% tax free for life so I could let the HSA compound tax-free for decades, but I don't trust them -- so I'm getting "tax free" while the getting is good.

 

[simple girl]

Just completed our application on line. Very easy to do. Had one question and had to call customer service. They answered with a real live person after ONE ring and were very helpful. I'm happy with my choice!

 

[Alan]

This is why I tend to seek reimbursement immediately. Yeah, the tax deferral is nice, but Congress giveth and Congress taketh away. I *know* that if I use my HSA for currently reimbursable and covered expenses, the income I earned to pay for it is 100% tax free. That may or may not change, but it's a pretty good guarantee that the deal will never get *better* than that and it may get worse.

I'm grabbing 100% tax-free wherever I can lock it in these days. It would be nice if I trusted Washington to keep all my medical expenditures from my HSA as 100% tax free for life so I could let the HSA compound tax-free for decades, but I don't trust them -- so I'm getting "tax free" while the getting is good.

I don't qualify for an HSA, even in retirement, but this is the approach I would use. I have used an FSA for many years and love being able to pay for medical/dental/vision stuff tax free but I HATE the restriction of "use it or lose it" each year.

 

[dgoldenz]

Starting 2010, I decided to go ahead an start reimbursing myself from my HSA for medical expenses. In fact, I just put in a reimbursement request (postal mail) for my 2008 expeneses (which were about $2000). Soon, I will also reimburse myself for my 2009 expenses. Then each year, I'll reimburse myself for the previous year's expenses I've paid.

My strategy for doing this: The money I reimburse to myself will be from expenses I paid in the past and will help pay for upcoming expected expenses this year (such as portions from my dental and eye doctor visits that aren't covered).

I decided to use Vanguard Wellington (through HSA Administrators) as my HSA investment.

With my new approach, in a way, I feel as though I'm just shuffling money back and forth (to HSA, then to reimburse myself, then medical expenses), but at least that is tax-free.

I don't think you can re-imburse yourself for past expenses with an HSA....that kind of defeats the purpose, unless your state has some special rules or things have changed.

 

[easysurfer]

By expenses, I was meaning eligible medical expenses. Not expenses such as HSA fees.

 

[dgoldenz]

By expenses, I was meaning eligible medical expenses. Not expenses such as HSA fees.

That's what I was referring to also. The policy and account must have been set up before the expenses occurred....if that was the case, it would seem that you would have already had the money in there to pay the past claims with.

U.S. Treasury - HSA Frequently Asked Questions

Can I use my HSA to pay for medical expenses incurred before I set up my account?
No. You cannot reimburse qualified medical expenses incurred before your account is established. We recommend you establish your account as soon as possible.

 

[easysurfer]

Okay. I see. My HSA was set up in the beginning of 2008, so it looks like I'm okay. Thanks for the clarification in your link.

 

[Gone4Good]

1. Put no money in the account, except when you incur a medical expense. This strategy allows you to legally "launder" any money used to pay medical expenses. In other words, by depositing money into your HSA, then immediately withdrawing it to reimburse yourself for medical expenses, you are making your medical expenses all tax-deductible. You may want to use this strategy if you are on a tight budget and want to keep your cash outlay as low as possible.
2. Fully fund the account, or at least put in as much as possible based on your budget. Take money out of the account any time medical expenses are incurred, and let the rest grow tax-deferred. This strategy will maximize your tax deduction, while making your HSA funds available to pay any non-covered medical expenses before your deductible is met.
3. Fully fund the account, but pay all medical expenses from a non-HSA account. Reimburse yourself for medical expenses at a later date. This strategy will allow you to maximize your tax deduction, and will also allow you to maximize the tax-deferred growth of your HSA. You can then reimburse yourself, tax-free, at any time in the future for medical expenses incurred over the ensuing years.

We have decided to go with Strategy #3. My main concern is about holding receipts for years and years and then turning them in for reimbursement...worried the rules will change on this...

My original plan was to go with #3 but the idea that you can accumulate receipts from prior tax years seems like a loophole asking to be closed. The Senate health care legislation eliminates non-prescription meds as "qualified expenditures" and increases the withdrawal penalty to 10% from 20%. I wonder how durable these HSA accounts will prove to be over time.

So I'll probably use a combination of 1 & 2. I have a balance already established that I'll let grow. But I'll make future contributions and withdrawals equal to my annual medical expenses.