When do I use my HSA Money

[Time2]

I have about $60k in my HSA, account and $12k of unused medical receipts.
No Pension, no SS, no RMDs.
I'm in a minimize income tax bracket, maximum Roth conversion mode.
Should I go ahead and use my $12 of receipts to get an extra $12k of Roth Conversion and start paying my Medicare premium from my HSA.
I'm just not ure what I'm saving it for now, I'm 66.

 

[mpeirce]

Many options for this.

One idea is to reserve the $12K in receipts. You can withdraw this money any time you need it in the future. While it's in there it keeps growing tax free (effectively a ROTH).

Ultimately you do want to use it to pay for health spending. So either keep accumulating receipts (growing the amount you can withdrawal tax fee in the future), or just start spending out of the HSA now. This depends on your cash flow needs.

That's basically where we are now. We have some "banked" spending that allows us to withdraw money when some cash need comes up, and we are using it to pay for our small amount of medical spending (mostly prescriptions, dental, copays for annual physicals).

Our HSA keeps growing faster than we spend it - for now.

 

[RunningBum]

I'm not clear how withdrawing $12K from your HSA gets you another $12K of Roth conversions, unless you mean it's $12K less of your tIRA you need for expenses, and you can redirect that money to your Roth as a conversion rather than a tIRA withdrawal. The $12K HSA withdrawal using qualified medical expenses has no impact on your taxes.

The main thing is that it's best to use your HSA in your lifetime, withdrawing from it before withdrawing from your Roth. A Roth is much better than an HSA for heirs. An HSA becomes immediately taxable income when inherited.

From my view I'm getting tax free growth with the risk of a sudden death that gives me no time to remove tax free funds from the HSA. Since I probably won't drain my taxable account anyway, moving it to a tax free account and not touching it (or some higher gain fund) amounts to nearly the same thing, assuming stepped up cost basis inheritance is still the law. The main difference is that dividends would be taxed.

So I will use my HSA to pay the eligible part of Medicare I can when I start, and probably use the rest I can withdraw tax-free as an emergency fund. Somewhere around 70 or 75 I'll probably withdraw all I can, and continue to withdraw as I incur medical expenses until it is empty.

 

[Time2]

I'm not clear how withdrawing $12K from your HSA gets you another $12K of Roth conversions, unless you mean it's $12K less of your tIRA you need for expenses, and you can redirect that money to your Roth as a conversion rather than a tIRA withdrawal. The $12K HSA withdrawal using qualified medical expenses has no impact on your taxes.

Yes, the $12k would be tax free income that I don't need to find in other taxable money, so, I have more room for the Roth Conversion.

The main thing is that it's best to use your HSA in your lifetime, withdrawing from it before withdrawing from your Roth. A Roth is much better than an HSA for heirs. An HSA becomes immediately taxable income when inherited.

From my view I'm getting tax free growth with the risk of a sudden death that gives me no time to remove tax free funds from the HSA. Since I probably won't drain my taxable account anyway, moving it to a tax free account and not touching it (or some higher gain fund) amounts to nearly the same thing, assuming stepped up cost basis inheritance is still the law. The main difference is that dividends would be taxed.

So I will use my HSA to pay the eligible part of Medicare I can when I start, and probably use the rest I can withdraw tax-free as an emergency fund. Somewhere around 70 or 75 I'll probably withdraw all I can, and continue to withdraw as I incur medical expenses until it is empty.

 

[RunningBum]

Yes, the $12k would be tax free income that I don't need to find in other taxable money, so, I have more room for the Roth Conversion.

Then yes, I would take the $12K out and also use the HSA for Medicare, to allow for more Roth conversions.

 

[pb4uski]

I have about $60k in my HSA, account and $12k of unused medical receipts.
No Pension, no SS, no RMDs.
I'm in a minimize income tax bracket, maximum Roth conversion mode.
Should I go ahead and use my $12 of receipts to get an extra $12k of Roth Conversion and start paying my Medicare premium from my HSA.
I'm just not ure what I'm saving it for now, I'm 66.

I wanted to make things easier for my executrix, so when we turned 65 I did a big $18,000 withdrawal for what I had in receipts from inception in 2010 to 2019. Now, after I've buttoned up my year end account reconciliations and tax return I do a withdrawal for the prior years eligible expenses (Medicare Part B and Part D premiums, Medicare deductible vision, dental, etc).

The extra smidgeon of tax-free growth by keeping it in the HSA given the amounts involved is inconsequential compared to the negative implications of failing to withdraw.

 

[Time2]

I seems as though it is time for me to start drawing it down.

 

[Midpack]

Apart from the income/Roth question, another factor for consideration - what's your HSA returning? My HSA was invested in bonds/cash so with yields/interest next to nothing I decided to spend ours down so I used those funds for every legal medical expense that we incurred. Took 9 years to use it all, but exhausted the HSA last April. Figured those funds were losing (real) value with the dismal returns, might as well use them sooner rather than later. Maybe some folks invest their HSA money more aggressively, I couldn't see risking losing value in my HSA so I didn't put any of it in equities - and the equity fund choices were horrible anyway. FWIW.

 

[SecondCor521]

My thought process is something like this:

HSA taxation at death is not very good, as RB pointed out.

Therefore, I want to drain my HSA account before death.

OTOH, I want to keep my HSA account value growing tax free.

I project my HSA account balance forward, taking into consideration my annual contributions and my expected investment growth (my HSA is at Fidelity and invested in VTI).

I project my Medicare expenses starting at age 65, which is my base Medicare plus the IRMAA I expect to pay.

I then calculate 4% of my HSA account balance each year.

I then look at where 4% of my HSA account balance exceeds my Medicare premiums and consider this the "Danger, your HSA account may be a runaway" and have plans to start draining it before then. For me, currently, this is age 64.

(The loose logic being that 4% of an investment account is pretty close to perpetual, and I don't want my HSA account to be perpetual. Probably lots of handwaving in the logic there, but I don't really feel the need to be super-precise about it, given that my HSA is a relative sideshow in my financial picture.)

 

[easysurfer]

I've been using my HSA like a FSA on steroids without having to send in any receipts.

So, my HSA balance isn't as high as some here but I like the non-delayed gratification seeing reimbursements every year.

 

[pb4uski]

Apart from the income/Roth question, another factor for consideration - what's your HSA returning? My HSA was invested in bonds/cash so with yields/interest next to nothing I decided to spend ours down so I used those funds for every legal medical expense that we incurred. Took 9 years to use it all, but exhausted the HSA last April. Figured those funds were losing (real) value with the dismal returns, might as well use them sooner rather than later. Maybe some folks invest their HSA money more aggressively, I couldn't see risking losing value in my HSA so I didn't put any of it in equities - and the equity fund choices were horrible anyway. FWIW.

We moved our to Fidelity so the world is our oyster in terms of available investments. I have ours in SWAN (somewhat of an experiment).

 

[audreyh1]

On taxation of inherited HSA - if a spouse is the beneficiary on your HSA account, it becomes their HSA account and maintains the tax benefits.

We invested more aggressively in our HSAs until recently, so got several years of good growth. As DH approached Medicare age when he expected to start drawdown, he became far more conservative. Me less so as I’ve still a few years to go before Medicare, but I’m more conservative now than I was a couple of years ago.

We had good investment options. At first we were with a custodian that offered a wide choice of Vanguard funds. Then a few years ago we switched to Fidelity.