HSA, Inflation, and Reimbursement

[Jmoody10]

This is my first year with an HSA and I am on track to max it out. We have had about $1000 in medical expenses so far (a guy wreck into my wife). We've paid out of pocket for everything so far. I have two questions though:

1. We are young (26/25) and will not reach FIRE for 10-11 years. My understanding of an HSA is that we let the $1000 that we could withdraw sit and grow. We then can withdraw that $1000 whenever you feel like it. From reading, it looks like many will withdraw that amount in the first few years of ER. Would the inflation eat away at that $1000 making it worth less to withdraw (or are you allowed to withdraw the equivalent of $1000 in the future)? I would assume that the big benefit is that the $1000 was able to grow which would cover future medical expenses.

2. I think I know this answer but want to double check. If we eventually receive an insurance payout for the medical expenses, are we still able to withdraw the out of pocket expenses from the HSA? :)

And on a positive note - my wife and I were able to buy a used prius in cash on the private market. Something unheard of in our families. :)

[TheAnonOne]

Well, the amount isn't really important. Regardless if it is 1k or 50k, inflation would have the same effect in percentage terms. Both investments would also grow at the same rate. So your 1k may turn into 2k and your 50k may turn into 100k after a period of time.

All in all, inflation wouldn't have any more effect than it would on your other investment accounts assuming similar funds.

[Paul der Krake]

Currently, there's no inflation calculation whatsoever in the rules. So you're right, if nothing changes you'll only be able to withdraw $1000 in 2065. Doesn't matter if inflation has been rampant and fast food workers make $500/hour. Of course things could change, but given how much more complex this would make things, I wouldn't hold my breath. Not reimbursing yourself immediately is kind of a hack already, after all.

However, remember that after age 65, the withdrawal rules are the same as an IRA (not subject to the health expenses requirement).

[MDM]

My understanding of an HSA is that we let the $1000 that we could withdraw sit and grow. We then can withdraw that $1000 whenever you feel like it. From reading, it looks like many will withdraw that amount in the first few years of ER. Would the inflation eat away at that $1000 making it worth less to withdraw (or are you allowed to withdraw the equivalent of $1000 in the future)? I would assume that the big benefit is that the $1000 was able to grow which would cover future medical expenses.

You can withdraw the $1,000 and all investment returns coming from it at any time to pay for qualified medical expenses.

The amount of investment returns will depend on how you choose to invest within your HSA and how those investments perform - the same as with any other money you invest.  The primary benefit of the HSA is that you pay no tax at all - not on the original investment, nor the returns while invested, nor the amounts withdrawn - provided the money is used for those qualified medical expenses.

If you are fortunate enough not to have medical expenses you get to treat the HSA as an IRA after you reach age 65.  I.e., you pay tax when you withdraw the money then for any non-medical reasons.

From http://www.irs.gov/publications/p969/ar02.html: "Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses."  You don't get to deduct expenses covered by insurance, so....

[milesdividendmd]

If you have your HSA fully invested in the stock market, your $1000 will continue to grow and should at least keep pace with inflation. Almost assuredly it will beat inflation by at least a couple of percentage points as long as you keep your expenses down.

So although your tax-free withdrawls may not keep up with inflation, (A good point that you raise) your wealth certainly should outpace it.

The final point being that to date healthcare costs have outpaced inflation, so sadly your bills in the future will preserve your ability to withdraw your hsa money tax-free!

[Jmoody10]

Thank you all for the replies and for clearing up my questions!

[seattlecyclone]

My understanding of an HSA is that we let the $1000 that we could withdraw sit and grow. We then can withdraw that $1000 whenever you feel like it. From reading, it looks like many will withdraw that amount in the first few years of ER. Would the inflation eat away at that $1000 making it worth less to withdraw (or are you allowed to withdraw the equivalent of $1000 in the future)? I would assume that the big benefit is that the $1000 was able to grow which would cover future medical expenses.

You can withdraw the $1,000 and all investment returns coming from it at any time to pay for qualified medical expenses.

This seems dubious. Do you have a source for this?

As to HSA strategy, there are two basic ways to do it. Do you currently max out all of the tax-sheltered accounts available to you? If so, pay for medical expenses out of taxable funds and save your receipts for retirement. Otherwise, take some money out of the HSA and use the tax savings on these expenses to contribute more to your retirement accounts.

[brooklynguy]

This seems dubious. Do you have a source for this?

IRS Publication 969 makes no distinction between distributions of contributions and distributions of earnings.  MDM's interpretation is consistent with my understanding and, I believe, the consensus among the tax cognoscenti of the early retirement community.

Why do you say it is dubious?  Do you have a source for doubting MDM's interpretation?

In my view, the very fact that two people as knowledgeable as seattlecyclone and MDM are disagreeing is reason alone to dig deeper into this issue, which I now plan to do...

[milesdividendmd]

My understanding of an HSA is that we let the $1000 that we could withdraw sit and grow. We then can withdraw that $1000 whenever you feel like it. From reading, it looks like many will withdraw that amount in the first few years of ER. Would the inflation eat away at that $1000 making it worth less to withdraw (or are you allowed to withdraw the equivalent of $1000 in the future)? I would assume that the big benefit is that the $1000 was able to grow which would cover future medical expenses.

You can withdraw the $1,000 and all investment returns coming from it at any time to pay for qualified medical expenses.

This seems dubious. Do you have a source for this?

As to HSA strategy, there are two basic ways to do it. Do you currently max out all of the tax-sheltered accounts available to you? If so, pay for medical expenses out of taxable funds and save your receipts for retirement. Otherwise, take some money out of the HSA and use the tax savings on these expenses to contribute more to your retirement accounts.

What seems dubious?

You can withdraw principle and earnings to pay for qualified medical expenses at any time.

That is the stated purpose of HSA's.

Where's the controversy?

[brooklynguy]

Oh wait a minute, I thought the $1000 in the example referred to the amount of the HSA contribution, not the amount of the medical expense.

In that case, I agree with seattlecylone.  (Maybe MDM had the same misimpression as me when making the quoted statement?)

[forummm]

Make sure your HSA funds are invested in something that will grow. Many are in approximately 0% interest rate accounts. Also, make sure there aren't a lot of fees associated with keeping your money in the account for a long time.

[seattlecyclone]

My understanding of an HSA is that we let the $1000 that we could withdraw sit and grow. We then can withdraw that $1000 whenever you feel like it. From reading, it looks like many will withdraw that amount in the first few years of ER. Would the inflation eat away at that $1000 making it worth less to withdraw (or are you allowed to withdraw the equivalent of $1000 in the future)? I would assume that the big benefit is that the $1000 was able to grow which would cover future medical expenses.

You can withdraw the $1,000 and all investment returns coming from it at any time to pay for qualified medical expenses.

This seems dubious. Do you have a source for this?

As to HSA strategy, there are two basic ways to do it. Do you currently max out all of the tax-sheltered accounts available to you? If so, pay for medical expenses out of taxable funds and save your receipts for retirement. Otherwise, take some money out of the HSA and use the tax savings on these expenses to contribute more to your retirement accounts.

What seems dubious?

You can withdraw principle and earnings to pay for qualified medical expenses at any time.

That is the stated purpose of HSA's.

Where's the controversy?

The part that seems dubious is the idea that you can contribute $1,000 to your HSA this year, spend $1,000 at the doctor this year, wait a while for the HSA to grow to $2,000, and then withdraw $2,000. Maybe that's not what MDM meant, and in that case I apologize for the misunderstanding.

[DavidAnnArbor]

So is it possible to save receipts for medical/dental bills you paid from a non-HSA account (even though you had an HSA) and then years later pay yourself for those bills from the HSA account ? 

[seattlecyclone]

So is it possible to save receipts for medical/dental bills you paid from a non-HSA account (even though you had an HSA) and then years later pay yourself for those bills from the HSA account ? 

Yes, as long as you opened the HSA before you paid the medical bill.

[DavidAnnArbor]

Wow!

[MDM]

The part that seems dubious is the idea that you can contribute $1,000 to your HSA this year, spend $1,000 at the doctor this year, wait a while for the HSA to grow to $2,000, and then withdraw $2,000. Maybe that's not what MDM meant, and in that case I apologize for the misunderstanding.

Yes, you can withdraw the $2,000...to pay for qualified medical expenses.  If no extra qualified medical expenses beyond the original, then no extra tax-free withdrawal.  All agreed?

[MooseOutFront]

OP you raise a good point about that $1000 free withdrawal losing value over time.  However miles raises a good point about us all being relatively certain that other medical bills will come along to fill the void.  We should all be so lucky so as to "lose" the HSA game by having to convert balances to an IRA at 65.

[kpd905]

I plan to use HSA withdrawals and Roth IRA contributions to fund the first few years before the Roth conversion ladder kicks in.

[MDM]

I plan to use HSA withdrawals and Roth IRA contributions to fund the first few years before the Roth conversion ladder kicks in.

That might work, as long as you have included this in your plans: "If you receive [HSA] distributions for other [i.e., not qualified medical expense] reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax."  From http://www.irs.gov/publications/p969/ar02.html#en_US_2014_publink1000204081.

[kpd905]

I mean qualified medical expenses, not just straight withdrawals.  I figure if I have a kid or two between now and then we'll probably have some medical bills pop up.

[Jmoody10]

OP here.

My wife and I are not able to max out our IRAs this year. From what I understand, we should reimburse ourselves from the HSA and use that money to further fund our IRAs. Is that correct?

Our HSA is with HSABank and invested with Vanguard in the VTSAX fund.

[MooseOutFront]

Were your HSA contributions via payroll deductions?  If so then you saved FICA taxes and I consider it the single best investment vehicle available.  If not then it's closer, but I still wouldn't bother with recharacterizing HSA money to IRA money.

This year since my wife is staying at home with kids, I'm maxing my HSA and not my 401k.  For example.

[Jmoody10]

Sadly, no. I think I am the only one at my work that uses an HSA - the benefits people had no idea what I was talking about. :)

[Mississippi Mudstache]

OP here.

My wife and I are not able to max out our IRAs this year. From what I understand, we should reimburse ourselves from the HSA and use that money to further fund our IRAs. Is that correct?

Our HSA is with HSABank and invested with Vanguard in the VTSAX fund.

Yes, if you're not able to max your traditional IRA's otherwise, then pulling out as much as possible without incurring penalties and funneling that money into your t.IRA is an easy way to reduce your tax burden.

[seattlecyclone]

Were your HSA contributions via payroll deductions?  If so then you saved FICA taxes and I consider it the single best investment vehicle available.  If not then it's closer, but I still wouldn't bother with recharacterizing HSA money to IRA money.

This year since my wife is staying at home with kids, I'm maxing my HSA and not my 401k.  For example.

It's not about recharacterizing, or choosing between accounts. Max out the HSA to save tax on that contribution. Then when you have medical expenses, take money out of the HSA to pay for them. Compared to leaving the money in the HSA and paying for medical expenses out of taxable funds, this will leave you with more money available to contribute to your IRA and/or 401(k) to reduce your taxes again.

[Million2000]

OP here.

My wife and I are not able to max out our IRAs this year. From what I understand, we should reimburse ourselves from the HSA and use that money to further fund our IRAs. Is that correct?

Our HSA is with HSABank and invested with Vanguard in the VTSAX fund.

Yes, if you're not able to max your traditional IRA's otherwise, then pulling out as much as possible without incurring penalties and funneling that money into your t.IRA is an easy way to reduce your tax burden.

I recently had this realization. On $500 of recent medical expenses we in the end saved over $200 in taxes by "double dipping" this way. We're in the 15% tax bracket with a state income tax that doesn't have deductions for IRAs so your own tax savings will likely be much bigger. Even putting it in a taxable account is better in my opinion since you will be able to withdrawal the principal and earnings in early retirement compared to just the principal if left in the HSA.

[Pooperman]

If you're in the 15% bracket, then changing the HSA to a taxable account may make sense. It's like converting it to Roth, and it's exactly the same as paying medical expenses from the account and putting into taxable that amount. Taxable accounts also have less fees and more freedom. Finally, if you live in NJ, AL, or the other state that pretends HSAs don't exist, they were already equivalent state tax wise.

[seattlecyclone]

If you're in the 15% bracket, then changing the HSA to a taxable account may make sense. It's like converting it to Roth, and it's exactly the same as paying medical expenses from the account and putting into taxable that amount. Taxable accounts also have less fees and more freedom. Finally, if you live in NJ, AL, or the other state that pretends HSAs don't exist, they were already equivalent state tax wise.

I don't really agree with withdrawing your whole HSA balance into a taxable account in most cases. An HSA is a great idea at any tax bracket (except perhaps 0%). You don't have to choose between paying tax now or later like with IRAs, you don't pay tax on any of that money ever.

[Pooperman]

If you're in the 15% bracket, then changing the HSA to a taxable account may make sense. It's like converting it to Roth, and it's exactly the same as paying medical expenses from the account and putting into taxable that amount. Taxable accounts also have less fees and more freedom. Finally, if you live in NJ, AL, or the other state that pretends HSAs don't exist, they were already equivalent state tax wise.

I don't really agree with withdrawing your whole HSA balance into a taxable account in most cases. An HSA is a great idea at any tax bracket (except perhaps 0%). You don't have to choose between paying tax now or later like with IRAs, you don't pay tax on any of that money ever.

Consider this:

Let's say a taxable account is basically a Roth (for someone in the 15% bracket or lower, it is). Living in NJ as I do, all gains are taxed on the state level already. I already got the ~30% benefit through my employer. The HSA has higher fees than the taxable account (considerably more). So investing it in something like the total stock market fund, long term returns will come down to fees and taxes.

If you look at the big picture, spending after-tax money on medical expenses while keeping the money growing is the same as paying for the medical expenses through the HSA and investing the after-tax money you would have spent into a Roth (or in my case, a taxable account because fuck NJ). So the question is, why not do just that? You already got the benefit by loading it through your employer, so why not put that money into a lower fee holding instead of keeping it in the legal framework of the HSA?

[kendallf]

Were your HSA contributions via payroll deductions?  If so then you saved FICA taxes and I consider it the single best investment vehicle available.  If not then it's closer, but I still wouldn't bother with recharacterizing HSA money to IRA money.

This year since my wife is staying at home with kids, I'm maxing my HSA and not my 401k.  For example.

It's not about recharacterizing, or choosing between accounts. Max out the HSA to save tax on that contribution. Then when you have medical expenses, take money out of the HSA to pay for them. Compared to leaving the money in the HSA and paying for medical expenses out of taxable funds, this will leave you with more money available to contribute to your IRA and/or 401(k) to reduce your taxes again.

Thank you for this.  I hadn't really thought this through and I recently paid our full deductible thanks to my wife's rotator cuff tear and subsequent surgery.  I reluctantly had dropped my TSP contributions down from the max thanks to some significant expenses this year for house renovation and medical bills (I left the HSA maxed for the additional FICA tax benefit).  Now I'm going to pull that money and bump the TSP contributions back up.  My TSP investment options are better than the HSA ones anyway.

One additional note on how I'm going to implement this: I'm actually going to leave the HSA money invested as I have a good bit of 0% credit card space available to float the ongoing renovation expenses.  When those 0% periods end, I'll evaluate whether I can find others and keep kicking that ball forward, or I'll withdraw the HSA money if necessary to pay the bills.  That lets me keep the money invested as long as possible.  There is of course some investment risk there but I have the current year HSA contributions in cash anyway for a reserve.

[seattlecyclone]

Let's say a taxable account is basically a Roth (for someone in the 15% bracket or lower, it is).

No. A taxable account isn't "basically a Roth" for someone in the 15% bracket. Just because the federal tax on long-term gains and qualified dividends is currently zero, there are a lot of other reasons why growth in a Roth account or HSA can be better than growth in a taxable account. Taxable investment income (even if taxed at 0%) can reduce your eligibility for ACA subsidies, the saver's credit, the earned income credit, and plenty of other things. If you're invested in a fund that distributes some non-qualified dividends, those will be better in a tax shelter as well. In the best case a taxable account is no worse than a Roth account or HSA from a tax perspective, but there are plenty of cases where it is worse.

This doesn't even touch on the possibility that you might not be in the 15% bracket forever, or the possibility that Congress would raise the long-term rate from zero (this rate has only been around since 2008 and I think it's foolish to assume it will be that way forever).

If you look at the big picture, spending after-tax money on medical expenses while keeping the money growing is the same as paying for the medical expenses through the HSA and investing the after-tax money you would have spent into a Roth (or in my case, a taxable account because fuck NJ). So the question is, why not do just that?

If you still have room to contribute to your retirement accounts, you absolutely should pay for medical bills out of your HSA and then invest whatever you can in your retirement accounts. I however disagree that withdrawing from the HSA to fund a taxable account is optimal for most people. If your HSA fees are high and you're in a low tax bracket and you have enough unreimbursed medical expenses to withdraw the HSA funds penalty-free and your state ignores HSA tax sheltering and you've maxed out your retirement accounts it might make sense, but that's a pretty narrow niche of people.

[missundecided]

So is it possible to save receipts for medical/dental bills you paid from a non-HSA account (even though you had an HSA) and then years later pay yourself for those bills from the HSA account ? 

Yes, as long as you opened the HSA before you paid the medical bill.

I wanted to go back to this really quick. Sorry, OP, for the sidetrack.  I just wanted to make this distinction. If you paid medical bills with an FSA already, then no you cannot double-dip. You can only reimburse yourself once. But if you meant from the get-go that you paid medical bills with non-FSA, non-HSA, then ignore my comment. :)

[seattlecyclone]

So is it possible to save receipts for medical/dental bills you paid from a non-HSA account (even though you had an HSA) and then years later pay yourself for those bills from the HSA account ? 

Yes, as long as you opened the HSA before you paid the medical bill.

I wanted to go back to this really quick. Sorry, OP, for the sidetrack.  I just wanted to make this distinction. If you paid medical bills with an FSA already, then no you cannot double-dip. You can only reimburse yourself once. But if you meant from the get-go that you paid medical bills with non-FSA, non-HSA, then ignore my comment. :)

Yeah, double-dipping is not allowed. I should have been more specific. If the bill was already paid through an FSA or you claimed the expense as an itemized deduction on your taxes, you can't later get reimbursed for that same expense out of your HSA. Otherwise there's no time limit for "reimbursing" yourself for that expense out of the HSA.