HSAs--Can You Explain it Like I'm Five?

[Anoushka]

So we've had a High Deductible Health Insurance plan with an HSA for several years. It is through my husband's job, and we contribute the difference between the premium for our insurance and the old premium we used to pay for PPO insurance. His employer contributes 1,200 a year.

It's with HSA Bank, and on the website I have the option of investing the money if I open an account with TD Ameritrade or Devenir.

I keep reading that we should not be using this for current health expenses. Isn't that what it's for?

I know these are seriously tax advantaged because when I enter the information about ours into Turbotax, my refund goes up like crazy. It kind of freaks me out, because the numbers don't make sense to me. Looking at my account, I see that our total contributions (payroll deductions + employer contribution) will be 5,100 this year, but the IRS limit is 7,000. Should we be maxing this out? Why?

[Systems101]

Max it out. Invest. Don't use it for current expenses. Save current expense receipts (you can take the money out later tax free).

See: https://www.madfientist.com/ultimate-retirement-account/

[MDM]

I keep reading that we should not be using this for current health expenses. Isn't that what it's for?

If you can max all your tax-advantaged options (401k, HSA, IRA, etc.) then paying current health expenses from cash flow while allowing the HSA to grow tax free works well.

If you can't max all your tax-advantaged options (401k, HSA, IRA, etc.) then using the HSA to pay current health expenses so you can max (or at least contribute more to) the non-HSA tax-advantaged accounts works well.

[reeshau]

The trick to the HSA, particularly if you are/were used to FSA's, is that there is no time limit.  The connection between having an HDHP and an HSA is only for contributions.  You can pay for health care any time in the future, including for things Medicare doesn't cover, when you reach the age for Medicare coverage.  Married couples can expect to spend $285k in retirement for healthcare, and all that cost qualifies for HSA reimbursement.  (source: https://www.plansponsor.com/estimates-health-care-costs-retirement-continue-rise/  , from a Fidelity study)

Even better, per @Systems101 's suggestion, you can actually claim your current expenses far into the future; so, you could, say, save up 15 years worth of dental and optical bills, and spend that money on a trip to Hawaii.  (having let it grow, also tax free, in the meantime)  It's up to you to save your receipts, of course, in case such a withdrawal is challenged.  And, you cannot have claimed those expenses as tax deductions--not as big a deal now, with high standard deductions.

[terran]

I keep reading that we should not be using this for current health expenses. Isn't that what it's for?

If you can max all your tax-advantaged options (401k, HSA, IRA, etc.) then paying current health expenses from cash flow while allowing the HSA to grow tax free works well.

If you can't max all your tax-advantaged options (401k, HSA, IRA, etc.) then using the HSA to pay current health expenses so you can max (or at least contribute more to) the non-HSA tax-advantaged accounts works well.

This is the key point that I've seen people miss when discussing this topic. If you can't max out all other tax advantaged accounts in addition to paying medical expenses out of pocket then leaving money in the HSA is either worse or at least no better than withdrawing and contributing to another account and adds the administrative burden of tracking expenses for many years.

If you can max out all other tax advantaged accounts in addition to paying medical expenses out of pocket then leaving money in the HSA is essentially giving you another tax advantaged account that you wouldn't otherwise have which is generally better than investing that money in a taxable account.

[ender]

A huge perk to an HSA for tax purposes is you do not pay FICA on contributions.

So unless your income is over ~130k, you will save a ton of money just in FICA alone (not to mention income taxes).

[slappy]

I keep reading that we should not be using this for current health expenses. Isn't that what it's for?

If you can max all your tax-advantaged options (401k, HSA, IRA, etc.) then paying current health expenses from cash flow while allowing the HSA to grow tax free works well.

If you can't max all your tax-advantaged options (401k, HSA, IRA, etc.) then using the HSA to pay current health expenses so you can max (or at least contribute more to) the non-HSA tax-advantaged accounts works well.

This is the key point that I've seen people miss when discussing this topic. If you can't max out all other tax advantaged accounts in addition to paying medical expenses out of pocket then leaving money in the HSA is either worse or at least no better than withdrawing and contributing to another account and adds the administrative burden of tracking expenses for many years.

If you can max out all other tax advantaged accounts in addition to paying medical expenses out of pocket then leaving money in the HSA is essentially giving you another tax advantaged account that you wouldn't otherwise have which is generally better than investing that money in a taxable account.

I'm still not sure I fully understand this argument. Am I correct in thinking that the main concern here is the issue of keeping the receipts to be reimbursed at some point down the road? I guess my thought with an HSA is to use it for medical expenses in retirement. As a PP mentioned and linked, there will be plenty of them. So I'm less concerned about the issue of saving receipts. Am I thinking about this wrong?

[ctuser1]

I keep reading that we should not be using this for current health expenses. Isn't that what it's for?

If you can max all your tax-advantaged options (401k, HSA, IRA, etc.) then paying current health expenses from cash flow while allowing the HSA to grow tax free works well.

If you can't max all your tax-advantaged options (401k, HSA, IRA, etc.) then using the HSA to pay current health expenses so you can max (or at least contribute more to) the non-HSA tax-advantaged accounts works well.

Allow me to offer a decision-flowchart. MDM, tell me if you agree.

Step 1: Figure out how much you can save per year.
           This is sometimes not a very simple exercise, because saving $1 in a tax-deferred account can often net tax savings.
           But humor me and come to a rough yearly $$ figure anyway. You can adjust this upward or downward if you see either money building up in or bleeding from your checking account.
Step 2: Refer to and understand the investment order by heart. https://forum.mrmoneymustache.com/investor-alley/investment-order/
            The order is well made. I, personally arrived at the same order completely independently before stumbling on to MMM.
Step 3: Start filling up from step 0, 1, 2 in that order, till you exhaust your yearly $$ figure.
            Doing so may net you tax savings. If so, go a bit further. There is no need to be exact, it is fine to build up a little bit of cash savings in your checking/savings account. Just sweep it into investments once it grows too big over time.

In the investment order, HSA's are considered to be higher priority than IRA's, 401k beyond company match etc. etc. etc.
Why?
Because they just act like IRA's, or better.
Worst case (extremely unlikely):
 You don't keep medical receipts around.
 You, your spouse or dependents never fall sick when they are old. You never pay medicare premiums.
 Then the money is simply tax deferred, like 401k's. You pay income tax when you take it out.

Likely case:
 You don't keep medical receipts around. But you have medical expenses, medicare premiums etc for which you use up the HSA.
 HSA's act better than tax deferred accounts. No tax on money going in, no tax on growth, no tax on money coming out. Completely and totally tax free bonanza!!

Best case (if you are a mustachian/bogleheads variety):
 You keep receipts, giving you serious cashflow planning options, on top of all the benefits you get from the "likely case".


In the investment order, HSA's are considered to be lower priority than 401k match
Why?
Because the company match (often @50% or @100% immediate return) upends all tax calculations.

[ctuser1]

So we've had a High Deductible Health Insurance plan with an HSA for several years. It is through my husband's job, and we contribute the difference between the premium for our insurance and the old premium we used to pay for PPO insurance. His employer contributes 1,200 a year.

It's with HSA Bank, and on the website I have the option of investing the money if I open an account with TD Ameritrade or Devenir.

I keep reading that we should not be using this for current health expenses. Isn't that what it's for?

I know these are seriously tax advantaged because when I enter the information about ours into Turbotax, my refund goes up like crazy. It kind of freaks me out, because the numbers don't make sense to me. Looking at my account, I see that our total contributions (payroll deductions + employer contribution) will be 5,100 this year, but the IRS limit is 7,000. Should we be maxing this out? Why?

>> I keep reading that we should not be using this for current health expenses. Isn't that what it's for?

Saving in HSA should be considered independent to your current health expenses.
Consider HSA as just another savings vehicles, and save in it based on the investment order.

Your current health expenses affect how much you can save yearly - i.e. it can indirectly affect how much you can save in HSA, but should not be a direct input.

[terran]

I keep reading that we should not be using this for current health expenses. Isn't that what it's for?

If you can max all your tax-advantaged options (401k, HSA, IRA, etc.) then paying current health expenses from cash flow while allowing the HSA to grow tax free works well.

If you can't max all your tax-advantaged options (401k, HSA, IRA, etc.) then using the HSA to pay current health expenses so you can max (or at least contribute more to) the non-HSA tax-advantaged accounts works well.

This is the key point that I've seen people miss when discussing this topic. If you can't max out all other tax advantaged accounts in addition to paying medical expenses out of pocket then leaving money in the HSA is either worse or at least no better than withdrawing and contributing to another account and adds the administrative burden of tracking expenses for many years.

If you can max out all other tax advantaged accounts in addition to paying medical expenses out of pocket then leaving money in the HSA is essentially giving you another tax advantaged account that you wouldn't otherwise have which is generally better than investing that money in a taxable account.

I'm still not sure I fully understand this argument. Am I correct in thinking that the main concern here is the issue of keeping the receipts to be reimbursed at some point down the road? I guess my thought with an HSA is to use it for medical expenses in retirement. As a PP mentioned and linked, there will be plenty of them. So I'm less concerned about the issue of saving receipts. Am I thinking about this wrong?

If you can afford to pay all current medical expenses out of pocket and max out all available tax advantaged accounts, including the HSA, then no, you're not thinking about it wrong.

However, if you can't afford to pay all current medical expenses out of pocket and max out all available tax advantaged accounts, including the HSA, then I think you are. Let's look at a couple of examples.

Let's say you have a $1000 medical expense, $1000 in a bank account, your HSA has been maxed for the year (2019 family limit = $7000), but there is $1000 of space left in other tax advantaged accounts. You could pay the medical expense from your HSA (Option 1: $1000 cash, $6000 HSA), you could pay it from cash (Option 2: $0 cash, $7000 HSA), or you could pay from HSA and contribute cash to either a traditional or Roth IRA/401(k)/403(b)/etc (Option 3a: $0 cash, $6000 HSA, $1000 Roth IRA; Option 3b: $0 cash, $6000 HSA, $1000 traditional IRA). All have the same net in that the medical expense is paid and you have $7000 remaining, the only difference is where the money is located.

Remember that all of these options assume you've maxed your HSA, and the only question is whether or not you withdraw from the HSA. This means that you've already gotten the income tax deduction, and the FICA tax reduction (if you contributed through payroll), so the only question is whether you keep the tax deferred or tax free growth (depending on whether it's used for medical expenses in the future.

Option 1 is suboptimal because any earnings on the money will be taxed.

Option 2 is good because as long as you save receipts you can withdraw that money at any time without paying tax, however any earnings on that money will be taxed unless they're spent on medical expenses

Option 3a is good because contributions and growth within a Roth IRA are never taxed again. This is nearly equivalent to leaving money in the HSA (Option 2) but it's better because you don't have to keep receipts in order to never have the contribution taxed again, and growth within the IRA is never taxed again no matter what it's spent on, but growth within an HSA is only never taxed again if spent on medical expenses.

Option 3b is good because you receive a tax deduction when you contribute to a traditional IRA. If you're in a higher tax bracket now than when you withdraw this is better than leaving the money in the HSA for the same reason that contributing to a traditional IRA is better than contributing to a Roth IRA: money in the Roth IRA or HSA (if used form medical expenses) will not be taxed in the future, but it's better to avoid tax at a high rate now and pay tax at a low rate later (see https://www.bogleheads.org/wiki/Traditional_versus_Roth). Traditional IRA contributions may not be an other depending on income, but this applies to workplace retirement plans as well

I think where people get tripped up is the trope that "The HSA is a triple tax advantaged account (tax free in, no FICA, and tax free growth/out), so it's better than all the other tax advantaged accounts" but they forget that once you've contributed to an HSA you've already realized the first two tax advantages. The only remaining tax advantage (tax free growth/out) is slightly worse than a Roth IRA (receipt tracking and growth must be spent on medical expenses), and potentially much worse than traditional IRA depending on current vs future marginal tax brackets.

[ender]

There's also a hassle factor in tracking/keeping receipts for small medical bills.

We max our HSA, invest the bulk of the balance, and just pay our regular medical bills from contributions. So far, we've been able to put more in every year than we spend and have a decent amount invested as a result.

I personally find that to be the optimal use of the triple tax advantaged aspect that @terran is describing.

[ctuser1]

HSA Receipt Tracking should NOT be a required for most normal circumstances!! Hence it should not be cited as a burden making HSA's unattractive.

A typical senior will spend a lot of out of pocket money in healthcare.
https://investornews.vanguard/how-much-does-retirement-health-care-cost/

HSA accounts are rarely above $100k. You will blow through that in average lifetime medicare premiums alone!! Double that for you and spouse. Add all out of pocket costs!! All that will easily eat through typical HSA balances.

If you managed to accrue a million+ in HSA, then it is a different matter.

Receipt tracking is only for true Mustachian/bogleheads nerds. It's something akin to agonizing over the last 0.01% expense ratio - more a feel good factor that does not seriously impact the bottomline.

[slappy]

There's also a hassle factor in tracking/keeping receipts for small medical bills.

We max our HSA, invest the bulk of the balance, and just pay our regular medical bills from contributions. So far, we've been able to put more in every year than we spend and have a decent amount invested as a result.

I personally find that to be the optimal use of the triple tax advantaged aspect that @terran is describing.

I love @terran's explanation. I think the two issues in my mind are that 1)my medical bills are not small. I have three kids and at least one ends up hospitalized every year. So there is my OOP max right there. So the issue of saving medical bills doesn't really bother me because I only really have to save that one bill. 2) Since I'm planning to use the HSA to cover medical expenses that occur in retirement, I guess I think of it as being the same as the Roth IRA.

[slappy]

I keep reading that we should not be using this for current health expenses. Isn't that what it's for?

If you can max all your tax-advantaged options (401k, HSA, IRA, etc.) then paying current health expenses from cash flow while allowing the HSA to grow tax free works well.

If you can't max all your tax-advantaged options (401k, HSA, IRA, etc.) then using the HSA to pay current health expenses so you can max (or at least contribute more to) the non-HSA tax-advantaged accounts works well.

This is the key point that I've seen people miss when discussing this topic. If you can't max out all other tax advantaged accounts in addition to paying medical expenses out of pocket then leaving money in the HSA is either worse or at least no better than withdrawing and contributing to another account and adds the administrative burden of tracking expenses for many years.

If you can max out all other tax advantaged accounts in addition to paying medical expenses out of pocket then leaving money in the HSA is essentially giving you another tax advantaged account that you wouldn't otherwise have which is generally better than investing that money in a taxable account.

I'm still not sure I fully understand this argument. Am I correct in thinking that the main concern here is the issue of keeping the receipts to be reimbursed at some point down the road? I guess my thought with an HSA is to use it for medical expenses in retirement. As a PP mentioned and linked, there will be plenty of them. So I'm less concerned about the issue of saving receipts. Am I thinking about this wrong?

If you can afford to pay all current medical expenses out of pocket and max out all available tax advantaged accounts, including the HSA, then no, you're not thinking about it wrong.

However, if you can't afford to pay all current medical expenses out of pocket and max out all available tax advantaged accounts, including the HSA, then I think you are. Let's look at a couple of examples.

Let's say you have a $1000 medical expense, $1000 in a bank account, your HSA has been maxed for the year (2019 family limit = $7000), but there is $1000 of space left in other tax advantaged accounts. You could pay the medical expense from your HSA (Option 1: $1000 cash, $6000 HSA), you could pay it from cash (Option 2: $0 cash, $7000 HSA), or you could pay from HSA and contribute cash to either a traditional or Roth IRA/401(k)/403(b)/etc (Option 3a: $0 cash, $6000 HSA, $1000 Roth IRA; Option 3b: $0 cash, $6000 HSA, $1000 traditional IRA). All have the same net in that the medical expense is paid and you have $7000 remaining, the only difference is where the money is located.

Remember that all of these options assume you've maxed your HSA, and the only question is whether or not you withdraw from the HSA. This means that you've already gotten the income tax deduction, and the FICA tax reduction (if you contributed through payroll), so the only question is whether you keep the tax deferred or tax free growth (depending on whether it's used for medical expenses in the future.

Option 1 is suboptimal because any earnings on the money will be taxed.

Option 2 is good because as long as you save receipts you can withdraw that money at any time without paying tax, however any earnings on that money will be taxed unless they're spent on medical expenses

Option 3a is good because contributions and growth within a Roth IRA are never taxed again. This is nearly equivalent to leaving money in the HSA (Option 2) but it's better because you don't have to keep receipts in order to never have the contribution taxed again, and growth within the IRA is never taxed again no matter what it's spent on, but growth within an HSA is only never taxed again if spent on medical expenses.

Option 3b is good because you receive a tax deduction when you contribute to a traditional IRA. If you're in a higher tax bracket now than when you withdraw this is better than leaving the money in the HSA for the same reason that contributing to a traditional IRA is better than contributing to a Roth IRA: money in the Roth IRA or HSA (if used form medical expenses) will not be taxed in the future, but it's better to avoid tax at a high rate now and pay tax at a low rate later (see https://www.bogleheads.org/wiki/Traditional_versus_Roth). Traditional IRA contributions may not be an other depending on income, but this applies to workplace retirement plans as well

I think where people get tripped up is the trope that "The HSA is a triple tax advantaged account (tax free in, no FICA, and tax free growth/out), so it's better than all the other tax advantaged accounts" but they forget that once you've contributed to an HSA you've already realized the first two tax advantages. The only remaining tax advantage (tax free growth/out) is slightly worse than a Roth IRA (receipt tracking and growth must be spent on medical expenses), and potentially much worse than traditional IRA depending on current vs future marginal tax brackets.

Love this explanation. Thank you!

[terran]

Love this explanation. Thank you!

You're welcome. Glad it made sense.

HSA Receipt Tracking should NOT be a required for most normal circumstances!! Hence it should not be cited as a burden making HSA's unattractive.

A typical senior will spend a lot of out of pocket money in healthcare.
https://investornews.vanguard/how-much-does-retirement-health-care-cost/

HSA accounts are rarely above $100k. You will blow through that in average lifetime medicare premiums alone!! Double that for you and spouse. Add all out of pocket costs!! All that will easily eat through typical HSA balances.

If you managed to accrue a million+ in HSA, then it is a different matter.

Receipt tracking is only for true Mustachian/bogleheads nerds. It's something akin to agonizing over the last 0.01% expense ratio - more a feel good factor that does not seriously impact the bottomline.

I'll grant you this. I still say that at best leaving money in an HSA is as good as a Roth IRA, so why not withdraw from the HSA and contribute the Roth on the off chance you don't see the "best" case scenario (high medical expenses in retirement)? Or if the Roth vs traditional calculation turns out to favor traditional (which it usually does), why not contribute to traditional?

[ctuser1]

I still say that at best leaving money in an HSA is as good as a Roth IRA, so why not withdraw from the HSA and contribute the Roth on the off chance you don't see the "best" case scenario (high medical expenses in retirement)? Or if the Roth vs traditional calculation turns out to favor traditional (which it usually does), why not contribute to traditional?

We have the investment order precisely to guide through this decision, isn't it?

You decide on $$ first, and then simply fill the buckets in the order specified in https://forum.mrmoneymustache.com/investor-alley/investment-order/.

Any pitfalls with that?

[Anoushka]

Thanks, everybody.

@Systems101 the article you shared was really helpful.

It sounds like an HSA works just like a traditional IRA in the future, if you end up not needing it for healthcare expenses.

Max it out. Invest. Don't use it for current expenses. Save current expense receipts (you can take the money out later tax free).

See: https://www.madfientist.com/ultimate-retirement-account/

[terran]

I still say that at best leaving money in an HSA is as good as a Roth IRA, so why not withdraw from the HSA and contribute the Roth on the off chance you don't see the "best" case scenario (high medical expenses in retirement)? Or if the Roth vs traditional calculation turns out to favor traditional (which it usually does), why not contribute to traditional?

We have the investment order precisely to guide through this decision, isn't it?

You decide on $$ first, and then simply fill the buckets in the order specified in https://forum.mrmoneymustache.com/investor-alley/investment-order/.

Any pitfalls with that?

I could be missing it, but the investment order doesn't seem to address the idea of leaving money invested in the HSA let alone the variations dependent on the ability to contribute to other tax advantaged accounts. Clarification should perhaps be added under "3. Max Health Savings Account (HSA) if eligible." to indicate that current medical expenses should be payed out of pocket and not reimbursed from the HSA before proceeding to step 7, but that current medical expenses should be withdrawn from the HSA if necessary to proceed to steps 4-6. Of course, this is further complicated if the 401(k) in step 5 has high fees. I wonder what @MDM thinks of this potential edit to the investment order?

[ctuser1]

I could be missing it, but the investment order doesn't seem to address the idea of leaving money invested in the HSA let alone the variations dependent on the ability to contribute to other tax advantaged accounts.

I believe it does!! Have you considered that you don't pay FICA on HSA contribution, but you do on 401k??

This can be big if you earn @ or below $140k or so - which I think the majority of the people do. You'd be essentially saving $500+/year (and your employer will be saving the same) if you max out HSA. Most employers I know (including mine) will kick in additional match in HSA for this tax saving on their end. I get $600 free money in HSA from employer for just contributing $600 from my side (I max out)!!

Clarification should perhaps be added under "3. Max Health Savings Account (HSA) if eligible." to indicate that current medical expenses should be payed out of pocket and not reimbursed from the HSA before proceeding to step 7,

Agree.

but that current medical expenses should be withdrawn from the HSA if necessary to proceed to steps 4-6. Of course, this is further complicated if the 401(k) in step 5 has high fees. I wonder what @MDM thinks of this potential edit to the investment order?

I'd propose to modify your proposal further.
Current medical expenses are just like any other expenses. You decide your savings bucket simply based on all expenses (including current medical expenses). They should not be directly linked to HSA contribution.

If your total yearly $$ savings (after factoring in all expenses, including medical expenses) only take you up to step 3 - that be it. If you can save more (maybe you got a large bonus), then you just keep creeping up higher till you hit the taxable account in step 8!!

[MDM]

ctuser1 and terran: agreed (at least at first glance) with all your comments.

Let me think a bit about the HSA withdrawal question, for two reasons:
1) This discussion is ringing a faint bell to indicate this has already been discussed elsewhere, so a copy & paste (or at least a reference) might be appropriate.
2) It is the "Investment" order,,, and now we would be adding "Withdrawal" order.  Not a bad idea at all, just pondering whether to include it there or start a new thread...?  Good arguments either way.

[terran]

Have you considered that you don't pay FICA on HSA contribution, but you do on 401k??

This can be big if you earn @ or below $140k or so - which I think the majority of the people do. You'd be essentially saving $500+/year (and your employer will be saving the same) if you max out HSA. Most employers I know (including mine) will kick in additional match in HSA for this tax saving on their end. I get $600 free money in HSA from employer for just contributing $600 from my side (I max out)!!

Yes, I have. Please go back and read what I posted above. In particular, the final paragraph should clear up this (common) confusion:

I think where people get tripped up is the trope that "The HSA is a triple tax advantaged account (tax free in, no FICA, and tax free growth/out), so it's better than all the other tax advantaged accounts" but they forget that once you've contributed to an HSA you've already realized the first two tax advantages. The only remaining tax advantage (tax free growth/out) is slightly worse than a Roth IRA (receipt tracking and growth must be spent on medical expenses), and potentially much worse than traditional IRA depending on current vs future marginal tax brackets.

In other words, withdrawing from an HSA is not the same thing as never having contributed to an HSA in the first place.

but that current medical expenses should be withdrawn from the HSA if necessary to proceed to steps 4-6. Of course, this is further complicated if the 401(k) in step 5 has high fees. I wonder what @MDM thinks of this potential edit to the investment order?

I'd propose to modify your proposal further.
Current medical expenses are just like any other expenses. You decide your savings bucket simply based on all expenses (including current medical expenses). They should not be directly linked to HSA contribution.

If your total yearly $$ savings (after factoring in all expenses, including medical expenses) only take you up to step 3 - that be it. If you can save more (maybe you got a large bonus), then you just keep creeping up higher till you hit the taxable account in step 8!!

Agreed, current medical expenses shouldn't be directly linked to an HSA contribution, but they should be linked directly to an HSA withdrawal. Again, whether or not to withdraw from an HSA is not the same as whether or not to contribute. If your total yearly $$ savings (after factoring in all expenses, including medical expenses) only takes you up to step 3, then that should not be it, you should withdraw medical expenses from the HSA so you can proceed to step 4.

[ctuser1]

Agreed, current medical expenses shouldn't be directly linked to an HSA contribution, but they should be linked directly to an HSA withdrawal. Again, whether or not to withdraw from an HSA is not the same as whether or not to contribute. If your total yearly $$ savings (after factoring in all expenses, including medical expenses) only takes you up to step 3, then that should not be it, you should withdraw medical expenses from the HSA so you can proceed to step 4.

Ok, I see what you are saying now.

If you can proceed further into maxing out 401k ONLY BY withdrawing from HSA, then you should do that.

Doing so, you get tax benefits from contributions to BOTH HSA and extra 401k room you get to BECAUSE you withdrew from HSA.

That makes sense.

[terran]

2) It is the "Investment" order,,, and now we would be adding "Withdrawal" order.  Not a bad idea at all, just pondering whether to include it there or start a new thread...?  Good arguments either way.

Good point, although I think the decision not to withdraw from an HSA for current medical expenses actually is a form of contribution/investment (how's that for a mind bender?). It's basically a double negative. If a withdrawal is the opposite of an investment, then a not-withdrawal is an investment. So not-withdrawing from an HSA when you're unable to invest in an IRA is making a decision to invest in a non-deductible HSA for the limited purpose tax free growth instead of investing in a traditional IRA for the tax deduction or a Roth IRA for the unlimited purpose tax free growth. Non-deductible because an HSA contribution is deductible, but an HSA not-withdrawal is not. And limited purpose because the growth must be spent on medical expenses to be tax free. I don't think that level of nuance is necessary for the investment order as just needs to lay out what do do about medical expense reimbursement depending on funds available to proceed to further steps.

[terran]

Agreed, current medical expenses shouldn't be directly linked to an HSA contribution, but they should be linked directly to an HSA withdrawal. Again, whether or not to withdraw from an HSA is not the same as whether or not to contribute. If your total yearly $$ savings (after factoring in all expenses, including medical expenses) only takes you up to step 3, then that should not be it, you should withdraw medical expenses from the HSA so you can proceed to step 4.

Ok, I see what you are saying now.

If you can proceed further into maxing out 401k ONLY BY withdrawing from HSA, then you should do that.

Doing so, you get tax benefits from contributions to BOTH HSA and extra 401k room you get to BECAUSE you withdrew from HSA.

That makes sense.

Exactly!

[ericrugiero]

It's definitely advantageous to max out the HSA.  They are better than anything other than a 401K with an employer match.  In normal "taxable" investments you must pay taxes on the original income and also on the gains that happen while you own the investment.  In the "tax advantaged" retirement accounts you pay taxes on one but not the other (401K and tIRA you pay no taxes on the original income buy you pay taxes when you withdraw.  Roth 401K or IRA you pay taxes on the income but then none on the gains.)  HSA is the only one that you pay no taxes on either (if used for medical expenses).  Plus, you can use it for retirement expenses but it's treated like a traditional IRA in that case so you pay taxes on the withdraw. 

One thing to watch is making sure your HSA is invested in a good mutual fund.  By default mine was in cash so I missed some gains until I changed it. 

I'm not sure I buy the fact that it's better to pay medical expenses out of pocket and keep the receipts so you can withdraw that amount (be reimbursed) from your HSA at any time.  That seems like paying the taxes to roll funds from tIRA to Roth IRA.  You are paying the taxes now so you don't need to pay them later.  If the marginal tax rate stays the same then mathematically they work out the same.  You might end up with more pre-tax money or less tax-free money but by the time the dust settles unless the marginal tax rate changes the after tax money ends up the same.  The only reason to do it is if the marginal tax rate is better now than it will be in the future.  Can someone explain if I'm missing something?  Right now it just seems like a unneeded complication to me. 

[MDM]

I'm not sure I buy the fact that it's better to pay medical expenses out of pocket and keep the receipts so you can withdraw that amount (be reimbursed) from your HSA at any time.  That seems like paying the taxes to roll funds from tIRA to Roth IRA.  You are paying the taxes now so you don't need to pay them later.  If the marginal tax rate stays the same then mathematically they work out the same.  You might end up with more pre-tax money or less tax-free money but by the time the dust settles unless the marginal tax rate changes the after tax money ends up the same.  The only reason to do it is if the marginal tax rate is better now than it will be in the future.  Can someone explain if I'm missing something?  Right now it just seems like a unneeded complication to me.

Take terran's example from earlier and modify it a bit.  Assume single filer with
- $19K in to 401k and $6K in to Roth IRA.
- $3500 in to HSA
- $10000 in the bank (some combination of checking and savings)
- $1000 medical bill arrives.

From where do you draw to pay the bill and why?

[Gin1984]

Thanks, everybody.

@Systems101 the article you shared was really helpful.

It sounds like an HSA works just like a traditional IRA in the future, if you end up not needing it for healthcare expenses.

Max it out. Invest. Don't use it for current expenses. Save current expense receipts (you can take the money out later tax free).

See: https://www.madfientist.com/ultimate-retirement-account/

No, it does NOT act like a traditional IRA. It acts like a Roth IRA.

[terran]

Thanks, everybody.

@Systems101 the article you shared was really helpful.

It sounds like an HSA works just like a traditional IRA in the future, if you end up not needing it for healthcare expenses.

Max it out. Invest. Don't use it for current expenses. Save current expense receipts (you can take the money out later tax free).

See: https://www.madfientist.com/ultimate-retirement-account/

No, it does NOT act like a traditional IRA. It acts like a Roth IRA.

You're both right after a fashion, but with the addendum "if you end up not needing it for healthcare expenses" they're right that it acts more like a traditional IRA.

[use2betrix]

I'm not sure I buy the fact that it's better to pay medical expenses out of pocket and keep the receipts so you can withdraw that amount (be reimbursed) from your HSA at any time.  That seems like paying the taxes to roll funds from tIRA to Roth IRA.  You are paying the taxes now so you don't need to pay them later.  If the marginal tax rate stays the same then mathematically they work out the same.  You might end up with more pre-tax money or less tax-free money but by the time the dust settles unless the marginal tax rate changes the after tax money ends up the same.  The only reason to do it is if the marginal tax rate is better now than it will be in the future.  Can someone explain if I'm missing something?  Right now it just seems like a unneeded complication to me.

Take terran's example from earlier and modify it a bit.  Assume single filer with
- $19K in to 401k and $6K in to Roth IRA.
- $3500 in to HSA
- $10000 in the bank (some combination of checking and savings)
- $1000 medical bill arrives.

From where do you draw to pay the bill and why?

The bank. I wouldn’t touch the HSA so it could instead be invested and grow tax free and be used tax free down the road. I would also save the $1000 tax bill for reimbursement down the road.

I’ve maxed my HSA the last two years and will again this coming January. I have my employer pull $3500 from my each two paychecks to cover it. I save receipts in a folder with my other important files. Pretty basic.

HSA’s can also be used for cobra premiums if needed.

[ctuser1]

I'm not sure I buy the fact that it's better to pay medical expenses out of pocket and keep the receipts so you can withdraw that amount (be reimbursed) from your HSA at any time.  That seems like paying the taxes to roll funds from tIRA to Roth IRA.  You are paying the taxes now so you don't need to pay them later.  If the marginal tax rate stays the same then mathematically they work out the same.  You might end up with more pre-tax money or less tax-free money but by the time the dust settles unless the marginal tax rate changes the after tax money ends up the same.  The only reason to do it is if the marginal tax rate is better now than it will be in the future.  Can someone explain if I'm missing something?  Right now it just seems like a unneeded complication to me.

Take terran's example from earlier and modify it a bit.  Assume single filer with
- $19K in to 401k and $6K in to Roth IRA.
- $3500 in to HSA
- $10000 in the bank (some combination of checking and savings)
- $1000 medical bill arrives.

From where do you draw to pay the bill and why?

The bank. I wouldn’t touch the HSA so it could instead be invested and grow tax free and be used tax free down the road. I would also save the $1000 tax bill for reimbursement down the road.

I’ve maxed my HSA the last two years and will again this coming January. I have my employer pull $3500 from my each two paychecks to cover it. I save receipts in a folder with my other important files. Pretty basic.

HSA’s can also be used for cobra premiums if needed.

This example does not illustrate the point terran was making.

Take this case instead:
Assume single filer with
- $7.5K in to 401k (up to company match).
- $3500 in to HSA
- No Roth, since he can't afford it after all expenses (including medical bills).
- $10000 in the bank (some combination of checking and savings).
- $1000 medical bill arrives.

Where should he take it from?

Case 1. He takes it from his bank account. Bank account is now $9k.
Case 2. He takes it from his HSA, and moves $1000 from his bank account to 401k.

In case 2, he got additional tax savings on the extra $1000 he saved in 401k.

[MDM]

This example does not illustrate the point terran was making.

Correct - it illustrates a different point. :)

[terran]

This example does not illustrate the point terran was making.

Correct - it illustrates a different point. :)

Right, @MDM was addressing the case where you HAVE already maxed out all other tax advantaged accounts.

[monarda]

Does any of this change when you're over 59.5? I am.

I'm maxing 403b, nearly maxing HSA, everything leftover goes to 457b and traditional/Roth IRA combination up to what I can afford.

I expect where things go matters less at my age? Or the same as everyone else?

[seattlecyclone]

Does any of this change when you're over 59.5? I am.

I'm maxing 403b, nearly maxing HSA, everything leftover goes to 457b and traditional/Roth IRA combination up to what I can afford.

I expect where things go matters less at my age? Or the same as everyone else?

Even at your age the HSA is an attractive place to put your money because you get to deduct the contributions and the withdrawals don't count as income when withdrawn for medical expenses (including Medicare premiums).

I would say that it's fine to go ahead and spend your HSA as eligible medical expenses come in. If you die married, your widow can treat your HSA as their own. That's fine for the first spouse to die. After that, if you happen to die, unmarried, with a big HSA, that whole amount is taxable to your beneficiary in the year of your death. This is much worse than what can happen with IRAs or even taxable brokerage accounts. For this reason as you age you might want to give a slight preference to spending out of the HSA instead of other accounts just because of how bad the tax treatment is upon your death.

[terran]

Does any of this change when you're over 59.5? I am.

I'm maxing 403b, nearly maxing HSA, everything leftover goes to 457b and traditional/Roth IRA combination up to what I can afford.

I expect where things go matters less at my age? Or the same as everyone else?

Over 55 you can contribute an extra $1000/year to an HSA. If you have a family plan and both spouse's are over 55 it's an extra $2000. Nothing happens over 59.5. You're no longer eligible once you're on medicare, but you can pay medicare premiums from an HSA. At 65 you can withdraw for any reason without paying a penalty, but you will pay income tax unless the withdrawals are supported by qualified expenses, so it's best to use the HSA for medical expenses unless you're in the unlikely position of having a huge HSA that won't get used up during retirement between medicare premiums and out of pocket expenses.

[monarda]

Does any of this change when you're over 59.5? I am.

I'm maxing 403b, nearly maxing HSA, everything leftover goes to 457b and traditional/Roth IRA combination up to what I can afford.

I expect where things go matters less at my age? Or the same as everyone else?

Over 55 you can contribute an extra $1000/year to an HSA. If you have a family plan and both spouse's are over 55 it's an extra $2000. Nothing happens over 59.5. You're no longer eligible once you're on medicare, but you can pay medicare premiums from an HSA. At 65 you can withdraw for any reason without paying a penalty, but you will pay income tax unless the withdrawals are supported by qualified expenses, so it's best to use the HSA for medical expenses unless you're in the unlikely position of having a huge HSA that won't get used up during retirement between medicare premiums and out of pocket expenses.

The automated thing through HR says that my max contribution for next year is $3800. That already includes the extra $1000? I signed up for $3600 ($300 a month), but I have 3 days to change if I want.

[terran]

Does any of this change when you're over 59.5? I am.

I'm maxing 403b, nearly maxing HSA, everything leftover goes to 457b and traditional/Roth IRA combination up to what I can afford.

I expect where things go matters less at my age? Or the same as everyone else?

Over 55 you can contribute an extra $1000/year to an HSA. If you have a family plan and both spouse's are over 55 it's an extra $2000. Nothing happens over 59.5. You're no longer eligible once you're on medicare, but you can pay medicare premiums from an HSA. At 65 you can withdraw for any reason without paying a penalty, but you will pay income tax unless the withdrawals are supported by qualified expenses, so it's best to use the HSA for medical expenses unless you're in the unlikely position of having a huge HSA that won't get used up during retirement between medicare premiums and out of pocket expenses.

The automated thing through HR says that my max contribution for next year is $3800. That already includes the extra $1000? I signed up for $3600 ($300 a month), but I have 3 days to change if I want.

The full year contribution limit for a single HSA is $3550 ($7100 family) so $4550 ($8100 family) with the age 55 catch up. Any amount your employer contributes to your HSA counts against the limit, so that might explain the difference, but it would be worth checking. It's best to contribute through payroll deduction since this usually avoids FICA tax on the contribution, but you can always contribute the rest to hit your limit directly to the HSA any time until your tax filing deadline.

Note that it seems I (and the article I got it from) was wrong about both spouse's getting a catch up contribution on a family plan. Here's a source I've found to be reliable in the past, so I would trust this: https://thefinancebuff.com/hsa-contribution-limits.html

[monarda]

Does any of this change when you're over 59.5? I am.

I'm maxing 403b, nearly maxing HSA, everything leftover goes to 457b and traditional/Roth IRA combination up to what I can afford.

I expect where things go matters less at my age? Or the same as everyone else?

Over 55 you can contribute an extra $1000/year to an HSA. If you have a family plan and both spouse's are over 55 it's an extra $2000. Nothing happens over 59.5. You're no longer eligible once you're on medicare, but you can pay medicare premiums from an HSA. At 65 you can withdraw for any reason without paying a penalty, but you will pay income tax unless the withdrawals are supported by qualified expenses, so it's best to use the HSA for medical expenses unless you're in the unlikely position of having a huge HSA that won't get used up during retirement between medicare premiums and out of pocket expenses.

The automated thing through HR says that my max contribution for next year is $3800. That already includes the extra $1000? I signed up for $3600 ($300 a month), but I have 3 days to change if I want.

The full year contribution limit for a single HSA is $3550 ($7100 family) so $4550 ($8100 family) with the age 55 catch up. Any amount your employer contributes to your HSA counts against the limit, so that might explain the difference, but it would be worth checking. It's best to contribute through payroll deduction since this usually avoids FICA tax on the contribution, but you can always contribute the rest to hit your limit directly to the HSA any time until your tax filing deadline.

Note that it seems I (and the article I got it from) was wrong about both spouse's getting a catch up contribution on a family plan. Here's a source I've found to be reliable in the past, so I would trust this: https://thefinancebuff.com/hsa-contribution-limits.html

OK that adds up. Employer contributes $750, and I can contribute up to $3800, making the $4550.
Thanks!

[MDM]

Note that it seems I (and the article I got it from) was wrong about both spouse's getting a catch up contribution on a family plan. Here's a source I've found to be reliable in the past, so I would trust this: https://thefinancebuff.com/hsa-contribution-limits.html

When you wrote "If you have a family plan and both spouse's are over 55 it's an extra $2000" that was correct, assuming the addition of the word "total" at the end.  Using "each" at the end would not be correct, but I assumed you meant total. :)

[terran]

Note that it seems I (and the article I got it from) was wrong about both spouse's getting a catch up contribution on a family plan. Here's a source I've found to be reliable in the past, so I would trust this: https://thefinancebuff.com/hsa-contribution-limits.html

When you wrote "If you have a family plan and both spouse's are over 55 it's an extra $2000" that was correct, assuming the addition of the word "total" at the end.  Using "each" at the end would not be correct, but I assumed you meant total. :)

No, I meant each because that's what the article I came across (I think from Kiplingers) when double checking amounts said, but that was wrong. I think spouse's with two separate individual policies or one family and one individual policy would each get their own separate catch ups for $2000 total. https://thefinancebuff.com/hsa-contribution-limit-two-plans-mid-year-changes.html seems to confirm that, and The Finance Buff is usually a reliable source.

I think I've seen that an adult child on a parents HSA plan can open their own HSA in addition to the parent's. HSA rules can be funny.

[MDM]

I think spouse's with two separate individual policies or one family and one individual policy would each get their own separate catch ups for $2000 total.

Even spouses covered by one family policy each get the $1000 catch-up, provided each is 55 or older.  In short, "covered by HDHP and 55 or older" means that person gets a $1000 additional HSA amount - and that amount, if used, must go into that individual's HSA.

I think I've seen that an adult child on a parents HSA plan can open their own HSA in addition to the parent's. HSA rules can be funny.

True.  One can refer to https://www.irs.gov/pub/irs-pdf/p969.pdf:

To be an eligible individual and qualify for an HSA, you must meet the following requirements.
•You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
•You have no other health coverage except what is permitted under Other health coverage, later.
•You aren’t enrolled in Medicare.
•You can’t be claimed as a dependent on someone else’s...tax return [for that year].

So, not only can a non-dependent child covered under a parent's HDHP contribute to his or her own HSA, because it is family coverage the child may contribute the family maximum.

[freya]

Whether you pay medical bills from the HSA vs paying out of other after-tax dollars depends on your situation.

If you are close to retirement, expect to pay ZERO income taxes in retirement, and will be able to completely Roth-convert your tax-deferred accounts prior to taking Social Security income, then the HSA is probably less important and you can use it to fund current medical expenses if you wish.  This is pretty much only available to married couples with low expenses (say, no more than $25K/year).

Otherwise, the HSA is absolutely your most valuable type of account (just behind 401K employer match), and you should preserve it at all costs.  Make the full contribution each year and invest it all.  The Fidelity HSA is your best option as it allows first dollar investing with no fees, and avoids having to fiddle around with two accounts.  (I recently had an eye-opening problem getting money out of one of those dual-institution account setups, and I absolutely do NOT trust any of them as a result.)

In retirement, you will want to use it judiciously to stay under income caps for various credits & benefits.  Even if you don't keep your medical receipts you'll have plenty of places to put the money.   A lifetime of HSA savings would probably be wiped out by 15-20 years of Medicare and supplemental/prescription premiums alone, especially if health insurance costs continue to rise at 2-3x rate of inflation.

[Anoushka]

Whether you pay medical bills from the HSA vs paying out of other after-tax dollars depends on your situation.

If you are close to retirement, expect to pay ZERO income taxes in retirement, and will be able to completely Roth-convert your tax-deferred accounts prior to taking Social Security income, then the HSA is probably less important and you can use it to fund current medical expenses if you wish.  This is pretty much only available to married couples with low expenses (say, no more than $25K/year).

Otherwise, the HSA is absolutely your most valuable type of account (just behind 401K employer match), and you should preserve it at all costs.  Make the full contribution each year and invest it all.  The Fidelity HSA is your best option as it allows first dollar investing with no fees, and avoids having to fiddle around with two accounts.  (I recently had an eye-opening problem getting money out of one of those dual-institution account setups, and I absolutely do NOT trust any of them as a result.)

In retirement, you will want to use it judiciously to stay under income caps for various credits & benefits.  Even if you don't keep your medical receipts you'll have plenty of places to put the money.   A lifetime of HSA savings would probably be wiped out by 15-20 years of Medicare and supplemental/prescription premiums alone, especially if health insurance costs continue to rise at 2-3x rate of inflation.

I'm realizing I'll have to fiddle around with two accounts one way or the other, because HSA Bank makes you open a TD Ameritrade account to invest. Do you think it makes more sense to just open a Fidelity HSA and periodically transfer the funds from HSA Bank?

[MDM]

Do you think it makes more sense to just open a Fidelity HSA and periodically transfer the funds from HSA Bank?

Yes.

[freya]

Do you think it makes more sense to just open a Fidelity HSA and periodically transfer the funds from HSA Bank?

Yes.

Ditto.  Once you leave that employer you can bid goodbye to HSA Bank.

You'll have to decide if HSA Bank's monthly fee is worth keeping $5,000 in the account at 0% interest.  On average, that gives up $350/year (7%), which is $30/month, so you're technically better off paying the fee and doing frequent transfers.

[slappy]

Whether you pay medical bills from the HSA vs paying out of other after-tax dollars depends on your situation.

If you are close to retirement, expect to pay ZERO income taxes in retirement, and will be able to completely Roth-convert your tax-deferred accounts prior to taking Social Security income, then the HSA is probably less important and you can use it to fund current medical expenses if you wish.  This is pretty much only available to married couples with low expenses (say, no more than $25K/year).

Otherwise, the HSA is absolutely your most valuable type of account (just behind 401K employer match), and you should preserve it at all costs.  Make the full contribution each year and invest it all.  The Fidelity HSA is your best option as it allows first dollar investing with no fees, and avoids having to fiddle around with two accounts.  (I recently had an eye-opening problem getting money out of one of those dual-institution account setups, and I absolutely do NOT trust any of them as a result.)

In retirement, you will want to use it judiciously to stay under income caps for various credits & benefits.  Even if you don't keep your medical receipts you'll have plenty of places to put the money.   A lifetime of HSA savings would probably be wiped out by 15-20 years of Medicare and supplemental/prescription premiums alone, especially if health insurance costs continue to rise at 2-3x rate of inflation.

Am I imagining it, or is one of the bills circulating through Congress right now including language that would remove the ability to pay Medicare premiums with HSA dollars? I thought it was the SECURE Act, but a quick google search of that didn't give me anything. Anyone know what I'm talking about or is it all in my head?

[freya]

Am I imagining it, or is one of the bills circulating through Congress right now including language that would remove the ability to pay Medicare premiums with HSA dollars? I thought it was the SECURE Act, but a quick google search of that didn't give me anything. Anyone know what I'm talking about or is it all in my head?

Interesting, I looked it up.  The bill doesn't have much traction, but it would allow Medicare recipients to continue HSA contributions in exchange for barring use of HSA funds to pay Medicare premiums.  Currently, you can deduct Medicare premiums but not Medigap policy premiums.

Just in case, it's a very good idea to save receipts.  Does anyone happen to know if annually exporting the accounting from your insurance company, showing how much you paid for various charges, is sufficient?