Author Topic: Using HSA  (Read 1515 times)

Simpli-Fi

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Using HSA
« on: January 14, 2020, 12:05:58 AM »
Hello all - I'm curious about those who have HSA's.

I use mine for medical expenses but I'm questioning whether I should...if I can cover via normal cash flow...so I just stack funds in HSA for future use (once income is gone or downshifted.)

quick search only yielded https://www.madfientist.com/ultimate-retirement-account/

maybe there is a thread already here...I'm considering stopping and allow the growth

Paul der Krake

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Re: Using HSA
« Reply #1 on: January 14, 2020, 12:16:22 AM »
Yes this comes up often but I'm not even going to bother linking a thread because the consensus is clear on that one. Save receipts, reimburse at a strategic time.

Simpli-Fi

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Re: Using HSA
« Reply #2 on: January 14, 2020, 01:49:58 AM »
thanks for the quick reply.

mistymoney

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Re: Using HSA
« Reply #3 on: January 14, 2020, 05:51:53 AM »
Yes this comes up often but I'm not even going to bother linking a thread because the consensus is clear on that one. Save receipts, reimburse at a strategic time.

What's a strategic time?

I was thinking you just let it grow and use it if you have medical expenses you can't cover.

Do you need to cash by a certain time like FSA? Or could you cash in medical receipts from years prior when you need the cash for something else?

reeshau

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Re: Using HSA
« Reply #4 on: January 14, 2020, 06:24:47 AM »
Do you need to cash by a certain time like FSA? Or could you cash in medical receipts from years prior when you need the cash for something else?

The latter.  By saving your current receipts, you can reimburse yourself---years later--and take the money out tax-free for whatever you want, while having let it grow all that time.  Contrary to your first question, there is no time limit (at this time) for how long after you can reimburse for your costs.  You just need to keep the adequate receipts, which are easy enough to keep electronically.  Also make sure you know / keep the information net of any reimbursement or claim for tax deduction.

DadJokes

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Re: Using HSA
« Reply #5 on: January 14, 2020, 07:01:03 AM »
To be safe, we keep copies of bills received, receipts, and the corresponding credit card statements. We scan or take pictures of the documents and put them in Google Drive.

Then we have a tab on Google Sheets that tracks all unreimbursed medical expenses. We input the service date, service received, provider, amount, payment date, payment method, and reimbursement date, along with links to the saved bills, receipts, and CC statements. Then, we just use a formula to sum all of the columns that haven't been reimbursed. That way, we know exactly how much we have available for reimbursement at any given time.

Strategic times to reimburse (IMO, anyway):
1. We have an emergency that we can't cash flow. We can use unreimbursed HSA funds even if the expense isn't medical.
2. Bridge the gap between retirement and date we can access traditional retirement funds. Reimbursements from an HSA could be a great way to keep AGI down while doing Roth conversions. Those reimbursements also won't show up on the FAFSA if you're trying to keep a low EFC.
3. Not reimburse and just use it for late life healthcare costs (assuming we don't have some form of taxpayer-funded healthcare by then).
« Last Edit: January 14, 2020, 07:49:34 AM by DadJokes »

Brother Esau

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Re: Using HSA
« Reply #6 on: January 14, 2020, 07:34:48 AM »
Our plan is to pay out of pocket for all medical expenses (unless something big should happen) and let the $ in the HSA remain invested in mutual funds. It will be nice to be able to take out thousands if not tens of thousands of $ at some point in the future for any reason and tax free. 

terran

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Re: Using HSA
« Reply #7 on: January 14, 2020, 08:02:03 AM »
Yes, paying out of pocket, saving receipts and investing the HSA is a fantastic plan, but ONLY IF you're also able to max out all other tax advantaged accounts. This tends to get me in fights because people go all '"ooh, but but, the HSA is triple tax advantaged," so just remember that you've already gotten the first two tax advantages (no FICA and a tax deduction) as soon as you contribute and the only remaining tax advantage (tax free growth) is also available in a Roth IRA without having to save receipts. Or you can get another tax deduction with a traditional contribution depending on your personal traditional vs Roth math.

I would put not-reimbursing from an HSA and saving receipts between steps 6 and 7 of the recommended investment order. Call it step 6a. Possibly between steps 4 and 5 if your 401(k) investment options are crap.

Paul der Krake

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Re: Using HSA
« Reply #8 on: January 14, 2020, 08:51:07 AM »
Yes this comes up often but I'm not even going to bother linking a thread because the consensus is clear on that one. Save receipts, reimburse at a strategic time.

What's a strategic time?

I was thinking you just let it grow and use it if you have medical expenses you can't cover.

Do you need to cash by a certain time like FSA? Or could you cash in medical receipts from years prior when you need the cash for something else?
There is no time limit.

See DadJokes's post for some ideas of what constitutes a "strategic" time. Personally, I'm all about using it to keep AGI low when it's most valuable, but there are many creative options.

ontheway2

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Re: Using HSA
« Reply #9 on: January 14, 2020, 02:10:50 PM »
Yes, paying out of pocket, saving receipts and investing the HSA is a fantastic plan, but ONLY IF you're also able to max out all other tax advantaged accounts. This tends to get me in fights because people go all '"ooh, but but, the HSA is triple tax advantaged," so just remember that you've already gotten the first two tax advantages (no FICA and a tax deduction) as soon as you contribute and the only remaining tax advantage (tax free growth) is also available in a Roth IRA without having to save receipts. Or you can get another tax deduction with a traditional contribution depending on your personal traditional vs Roth math.

I would put not-reimbursing from an HSA and saving receipts between steps 6 and 7 of the recommended investment order. Call it step 6a. Possibly between steps 4 and 5 if your 401(k) investment options are crap.

But the Roth doesn't have the first two tax advantages, the traditional doesn't have the third tax advantage, and the Roth only allows contributions to be withdrawn. I'd argue one should keep records of contributions if they anticipate withdrawing before 59.5

Why not do the one that gets all 3 tax advantages? Seems to be the best of both worlds

seattlecyclone

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Re: Using HSA
« Reply #10 on: January 14, 2020, 03:12:02 PM »
Yes, paying out of pocket, saving receipts and investing the HSA is a fantastic plan, but ONLY IF you're also able to max out all other tax advantaged accounts. This tends to get me in fights because people go all '"ooh, but but, the HSA is triple tax advantaged," so just remember that you've already gotten the first two tax advantages (no FICA and a tax deduction) as soon as you contribute and the only remaining tax advantage (tax free growth) is also available in a Roth IRA without having to save receipts. Or you can get another tax deduction with a traditional contribution depending on your personal traditional vs Roth math.

I would put not-reimbursing from an HSA and saving receipts between steps 6 and 7 of the recommended investment order. Call it step 6a. Possibly between steps 4 and 5 if your 401(k) investment options are crap.

But the Roth doesn't have the first two tax advantages, the traditional doesn't have the third tax advantage, and the Roth only allows contributions to be withdrawn. I'd argue one should keep records of contributions if they anticipate withdrawing before 59.5

Why not do the one that gets all 3 tax advantages? Seems to be the best of both worlds

You should absolutely contribute to the HSA either way. Your strategy of what to do with this money depends on if you can max out your other tax shelters. If you can, then it's better to leave the HSA invested, save your receipts, and withdraw at an opportune time during retirement. If you can't max out your retirement accounts, it's better to withdraw for medical expenses as they come up and put the extra cash from the tax savings into your retirement accounts to get closer to maxing them out.

DaMa

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Re: Using HSA
« Reply #11 on: January 14, 2020, 05:24:31 PM »
Yes, paying out of pocket, saving receipts and investing the HSA is a fantastic plan, but ONLY IF you're also able to max out all other tax advantaged accounts. This tends to get me in fights because people go all '"ooh, but but, the HSA is triple tax advantaged," so just remember that you've already gotten the first two tax advantages (no FICA and a tax deduction) as soon as you contribute and the only remaining tax advantage (tax free growth) is also available in a Roth IRA without having to save receipts. Or you can get another tax deduction with a traditional contribution depending on your personal traditional vs Roth math.

I would put not-reimbursing from an HSA and saving receipts between steps 6 and 7 of the recommended investment order. Call it step 6a. Possibly between steps 4 and 5 if your 401(k) investment options are crap.

Excellent point!  So if I'm withdrawing, I should withdraw from my HSA (up to my receipts) before withdrawing from my Roth.  Because I can withdraw from my Roth for anything, but am limited to medical receipts in the HSA.  I hadn't thought of that before.

terran

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Re: Using HSA
« Reply #12 on: January 14, 2020, 08:52:41 PM »
Yes, paying out of pocket, saving receipts and investing the HSA is a fantastic plan, but ONLY IF you're also able to max out all other tax advantaged accounts. This tends to get me in fights because people go all '"ooh, but but, the HSA is triple tax advantaged," so just remember that you've already gotten the first two tax advantages (no FICA and a tax deduction) as soon as you contribute and the only remaining tax advantage (tax free growth) is also available in a Roth IRA without having to save receipts. Or you can get another tax deduction with a traditional contribution depending on your personal traditional vs Roth math.

I would put not-reimbursing from an HSA and saving receipts between steps 6 and 7 of the recommended investment order. Call it step 6a. Possibly between steps 4 and 5 if your 401(k) investment options are crap.

Excellent point!  So if I'm withdrawing, I should withdraw from my HSA (up to my receipts) before withdrawing from my Roth.  Because I can withdraw from my Roth for anything, but am limited to medical receipts in the HSA.  I hadn't thought of that before.

Exactly.

terran

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Re: Using HSA
« Reply #13 on: January 14, 2020, 09:01:28 PM »
Yes, paying out of pocket, saving receipts and investing the HSA is a fantastic plan, but ONLY IF you're also able to max out all other tax advantaged accounts. This tends to get me in fights because people go all '"ooh, but but, the HSA is triple tax advantaged," so just remember that you've already gotten the first two tax advantages (no FICA and a tax deduction) as soon as you contribute and the only remaining tax advantage (tax free growth) is also available in a Roth IRA without having to save receipts. Or you can get another tax deduction with a traditional contribution depending on your personal traditional vs Roth math.

I would put not-reimbursing from an HSA and saving receipts between steps 6 and 7 of the recommended investment order. Call it step 6a. Possibly between steps 4 and 5 if your 401(k) investment options are crap.

But the Roth doesn't have the first two tax advantages, the traditional doesn't have the third tax advantage, and the Roth only allows contributions to be withdrawn. I'd argue one should keep records of contributions if they anticipate withdrawing before 59.5

Why not do the one that gets all 3 tax advantages? Seems to be the best of both worlds

Right, but once you've contributed to the HSA you've already gotten the first two tax advantages whether you withdraw or not. So the question is, should you not-withdraw and save receipts, or should should you withdraw and contribute to Roth and not saving receipts? Both options have tax free growth and allow withdrawal of the amount already used for medical expenses anytime without tax or penalty. The first option (not withdraw) requires receipt saving and growth can only be used for medical expenses. The second option (withdraw and contribute to Roth) doesn't require receipt saving and growth can be used for anything (once you're 59.5 years old).

Whether to contribute to Roth or traditional after withdrawing from HSA is a separate decision that doesn't change the fact that you should withdraw from HSA so you have more money to contribute to one or the other. For the decision about whether to withdraw from the HSA we can assume you'll make the best decision for Roth vs traditional for your personal situation. You're right that traditional won't have the third advantage (tax free growth), but it does have the effect of doubling the 2nd advantage (an income tax deduction).

Simpli-Fi

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Re: Using HSA
« Reply #14 on: January 15, 2020, 04:26:38 AM »
wish I would have been a badass from the start...only one event ever really called for HSA; but savings would have sufficed.

ChooseFI episode (lady built 6 figures in HSA) made me think I wasn't doing it right, but they didn't really discuss all the advantages or strategies; glad I asked.  Good discussion here.

begs the questions, "what else I'm doing wrong"

DadJokes

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Re: Using HSA
« Reply #15 on: January 15, 2020, 06:25:44 AM »
Yes, paying out of pocket, saving receipts and investing the HSA is a fantastic plan, but ONLY IF you're also able to max out all other tax advantaged accounts. This tends to get me in fights because people go all '"ooh, but but, the HSA is triple tax advantaged," so just remember that you've already gotten the first two tax advantages (no FICA and a tax deduction) as soon as you contribute and the only remaining tax advantage (tax free growth) is also available in a Roth IRA without having to save receipts. Or you can get another tax deduction with a traditional contribution depending on your personal traditional vs Roth math.

I would put not-reimbursing from an HSA and saving receipts between steps 6 and 7 of the recommended investment order. Call it step 6a. Possibly between steps 4 and 5 if your 401(k) investment options are crap.

But the Roth doesn't have the first two tax advantages, the traditional doesn't have the third tax advantage, and the Roth only allows contributions to be withdrawn. I'd argue one should keep records of contributions if they anticipate withdrawing before 59.5

Why not do the one that gets all 3 tax advantages? Seems to be the best of both worlds

You should absolutely contribute to the HSA either way. Your strategy of what to do with this money depends on if you can max out your other tax shelters. If you can, then it's better to leave the HSA invested, save your receipts, and withdraw at an opportune time during retirement. If you can't max out your retirement accounts, it's better to withdraw for medical expenses as they come up and put the extra cash from the tax savings into your retirement accounts to get closer to maxing them out.

I was under the impression that if you aren't currently maxing out 401k/IRA, then it is mathematically the same to withdraw from HSA or to pay out-of-pocket for medical expenses and save receipts. Is that not the case?

If so, then the decision comes down to preference. Paying out-of-pocket and saving receipts can be a hassle, and HSA investment options aren't always as good as 401k options. On the other hand, not reimbursing leaves greater flexibility with investments in the future while still having ideal tax treatment.


terran

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Re: Using HSA
« Reply #17 on: January 15, 2020, 07:20:12 AM »
I was under the impression that if you aren't currently maxing out 401k/IRA, then it is mathematically the same to withdraw from HSA or to pay out-of-pocket for medical expenses and save receipts. Is that not the case?

If so, then the decision comes down to preference. Paying out-of-pocket and saving receipts can be a hassle, and HSA investment options aren't always as good as 401k options. On the other hand, not reimbursing leaves greater flexibility with investments in the future while still having ideal tax treatment.

You're right, not-withdrawing from HSA by saving receipts and withdrawing and contributing to Roth are (mostly) mathematically equivalent, but not PITA equivalent since you have to save receipts. I say "mostly" because gains in the HSA have to spent on medical expenses while gains in Roth can be spent on anything. This is mostly about preference though.

However, the not-withdrawing/withdraw-Roth-contribute pair (which are mostly equivalent) are not equivalent to withdrawing and contributing to traditional. Contributing to traditional is usually preferable to contributing to Roth for most people.

terran

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Re: Using HSA
« Reply #18 on: January 15, 2020, 07:21:24 AM »
https://forum.mrmoneymustache.com/ask-a-mustachian/hsas-can-you-explain-it-like-i'm-five/msg2481954/#msg2481954

I think that's the other thread on this forum I got into a "fight" about this. And the explanation you've linked to there is probably better than what I've written here, thanks!

slappy

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Re: Using HSA
« Reply #19 on: January 15, 2020, 10:56:29 AM »
https://forum.mrmoneymustache.com/ask-a-mustachian/hsas-can-you-explain-it-like-i'm-five/msg2481954/#msg2481954

I think that's the other thread on this forum I got into a "fight" about this. And the explanation you've linked to there is probably better than what I've written here, thanks!

You are I were going back and forth in this one, but not in a "fight". You did a good job explaining what I was having trouble understanding with regards to the HSA/Roth discussion. I think there may have been some other back and forth as well. I only remember the way you descibed it to me so that I could understand. :)

seattlecyclone

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Re: Using HSA
« Reply #20 on: January 15, 2020, 11:49:57 AM »
I was under the impression that if you aren't currently maxing out 401k/IRA, then it is mathematically the same to withdraw from HSA or to pay out-of-pocket for medical expenses and save receipts. Is that not the case?

If so, then the decision comes down to preference. Paying out-of-pocket and saving receipts can be a hassle, and HSA investment options aren't always as good as 401k options. On the other hand, not reimbursing leaves greater flexibility with investments in the future while still having ideal tax treatment.

You're right, not-withdrawing from HSA by saving receipts and withdrawing and contributing to Roth are (mostly) mathematically equivalent, but not PITA equivalent since you have to save receipts. I say "mostly" because gains in the HSA have to spent on medical expenses while gains in Roth can be spent on anything. This is mostly about preference though.

Leaving the money in HSA or moving the money to Roth are mathematically equivalent if you end up having big enough medical bills to spend the entire HSA balance. If you live long enough to be on Medicare for a while, those premiums will likely be sufficient to help you spend it down, assuming Medicare still has a premium when you're old enough to be on it, and assuming those premiums are still HSA-qualified expenses at the time.

If you die in a car crash or have a heart attack at 55 and don't survive long enough to make it to the hospital and incur big medical bills, then maybe you die with a pretty big HSA balance. What happens then? If you have a surviving spouse who you have designated as your HSA beneficiary, the HSA becomes theirs with no change in tax status. No problem there. If your beneficiary isn't your spouse, the entire balance becomes taxable income to your beneficiary in the year of your death. Compare this to a Roth IRA where the entire balance is tax-free to your beneficiary.

Furthermore it's not clear to me that your "saved receipts" would be of any use to a non-spouse beneficiary. The IRS publication on the matter states that your beneficiary would be able to deduct any of your medical expenses that they paid after your death from the amount that they would otherwise be taxed on from your HSA, but it doesn't say anything about expenses you paid and failed to reimburse yourself for prior to your death.

Between the hassle of receipt tracking and the strictly worse tax treatment of inherited HSAs, I don't see a compelling reason not to transfer money from your HSA to your Roth if your Roth contribution space would otherwise go unused for the year and you have decided to prefer Roth retirement contributions over tax-deferred contributions.

Quote
However, the not-withdrawing/withdraw-Roth-contribute pair (which are mostly equivalent) are not equivalent to withdrawing and contributing to traditional. Contributing to traditional is usually preferable to contributing to Roth for most people.

I hesitate to make such a blanket statement ("traditional is usually preferable to Roth for most people") anymore. If you expect the ACA (or something like it that bases costs on income) to be around during your early retirement, then it's quite likely for someone to experience higher marginal rates in retirement even if their income decreases by a substantial amount.

BradminOxt19

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Re: Using HSA
« Reply #21 on: January 15, 2020, 11:55:51 AM »
Regarding receipt tracking - it's fairly simple these days to just use a smartphone to snap pictures of receipts and upload them to Gmail / google drive, etc., for long term storage.  I have a dedicated folder for receipts, which are backed up to Office 365 folders as well for redundancy.

I max out our HSA because I can't contribute to a Roth.  I also am hesitant to do a backdoor Roth because we have significant IRA balances that would need to be converted as well, plus it being a gray area, some future politicians could cause the IRS to look at the previous backdoor conversions and reclassify them to be officially taxable since you are skirting the Roth contribution rules to do so.

TL;DR - I don't think it matters in the long run if one does HSA or Roth, but HSA does give some nice pretax benefits and medical peace of mind.  With health insurance / health care costs skyrocketing, I wouldn't feel bad one bit about having a healthy HSA balance.

DadJokes

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Re: Using HSA
« Reply #22 on: January 15, 2020, 12:05:17 PM »
Regarding receipt tracking - it's fairly simple these days to just use a smartphone to snap pictures of receipts and upload them to Gmail / google drive, etc., for long term storage.  I have a dedicated folder for receipts, which are backed up to Office 365 folders as well for redundancy.

Agreed. I thought keeping track would be a hassle until I actually started keeping track. I just take a picture of the receipt, upload it to my Google Drive, and add a line on a Google Sheet. The whole process takes less than 5 minutes.

terran

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Re: Using HSA
« Reply #23 on: January 15, 2020, 12:12:03 PM »
Good points all the way @seattlecyclone. Especially those about not living long enough to use up the HSA on medical expenses or dying before reimbursing yourself. I hadn't thought of those advantages of withdrawing and contributing to Roth.

MissNancyPryor

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Re: Using HSA
« Reply #24 on: January 15, 2020, 12:16:55 PM »
To contribute to a Roth you have to have W-2 wages of some kind, and you can only contribute up to that amount of earnings.  With an HSA I can still put money in a tax free account without having a job. 

I plan to never use the HSA and treat it like a Roth for withdrawal or to pass along in my estate, but if I had some catastrophic event I would consider using it.

terran

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Re: Using HSA
« Reply #25 on: January 15, 2020, 12:23:45 PM »
I plan to never use the HSA and treat it like a Roth for withdrawal or to pass along in my estate, but if I had some catastrophic event I would consider using it.

Take a look at @seattlecyclone's post above. An HSA is just about the worst thing you can pass on in an estate. In order of best things to pass: a Roth IRA will never be taxed but must be withdrawn within 10 years*, a taxable account will receive stepped up basis, a traditional IRA will be taxable and must be completely withdrawn within 10 years, an HSA is taxable and must be completely withdrawn immediately.

*The 10 year withdrawal requirement for IRAs is new as of this year thanks to the recent SECURE act.

MissNancyPryor

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Re: Using HSA
« Reply #26 on: January 15, 2020, 12:40:33 PM »
Thanks for the redirect.  Guess I will have to use it for my cadillac nursing home. 

BTDretire

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Re: Using HSA
« Reply #27 on: January 15, 2020, 08:37:25 PM »
 We are retired.
We have about $10k of medical receipts in 5 envelopes saved over the last 5 years.
 I have a little over $60k in my HSA account.
 I haven't figured out when is a good time to use my receipts, but maybe I can use it to generate tax free spending, while also doing Roth conversions. It is my plan to stay in the 12% bracket while doing conversions and the bit of income wold be helpful.

Dave1442397

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Re: Using HSA
« Reply #28 on: January 16, 2020, 05:40:46 AM »
I upload all my receipts to my HSA provider. There's an option called 'File Cabinet' where you can add your receipts, along with the amount to be reimbursed and a note about what it was for. You can just click on 'reimburse' any time to withdraw the money.

 

DaMa

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Re: Using HSA
« Reply #29 on: January 16, 2020, 10:54:42 AM »
I upload all my receipts to my HSA provider. There's an option called 'File Cabinet' where you can add your receipts, along with the amount to be reimbursed and a note about what it was for. You can just click on 'reimburse' any time to withdraw the money.

Good idea, but I'm on my 4th HSA provider.