Spend HSA cash funds?

[pdxvandal]

I understand the value of not spending the investment portion of an HSA.

However, I have a mandatory cash portion (~1.8k) that is linked to an HSA debit card, so all qualified medical expenses are deducted from that. Is there any big advantage in paying for a minor medical procedure out of pocket when I already have the cash funds ready to spend in the HSA? If it were somehow deducted from the investment account, I would definitely pay out of pocket.

Thanks and happy holidays.

[seattlecyclone]

What are the rules for future contributions to the account? Will you have to bring the cash portion back up to the mandatory minimum before you're allowed to invest the surplus? If that's the case, you might be better off paying out of pocket.

It really depends on the rest of your financial picture though. You can think of an HSA like an extra special IRA that's tax advantaged on both ends. That's better than a traditional or Roth IRA so you should prefer increasing your HSA to increasing the other accounts. But if you aren't maxing out all of your available tax-advantaged accounts, it's not that much worse to withdraw from the HSA and contribute cash to your IRA than it is to leave your money in the HSA and pay cash for medical procedures instead of putting it in your IRA.

If you are maxing out your retirement accounts, definitely pay for medical expenses with taxable funds first. Save the HSA for after you're retired and have spent down your taxable accounts.

[pdxvandal]

Thanks for the quick feedback.

I need to have a minimum of $2,000 in the cash portion before investing in index funds ($200 shy at the moment although already have $1,400 in the investment portion now). I'm putting in 3.3k in there next month.

I don't have access to a 401k, so I'm dropping 5.5k in a TIRA next month as well.

I may just save the receipt and pay out of pocket for this one (~$250).

[Rural]

I'm interested to hear what people think here. I've been using mine for medical expenses, but I wonder if I should do out of pocket instead?

[sirdoug007]

Pay out of pocket and keep your receipts for later!  There is no better tax deferred account and having that money invested is key to the benefit.

http://www.madfientist.com/ultimate-retirement-account/

[wtjbatman]

To be fair, it's not the only "key to the benefit". It's still completely tax advantaged*. For example, say you contribute $1000 pretax. It's even better than contributing $1000 to a 401k, because there's no FICA taken out. It's straight $1000 saved with zero tax burden. Then you go to the doctor, and get a bill for $1000 (how convenient!). You reimburse yourself (or pay the medical bill with the provided debit card linked to your HSA account, or whatever), withdraw the $1000 tax free, and pay the bill with the $1000. At no point did you pay any taxes. That's still a hell of a nice deal! Even if you never invest the money, and just keep paying your medical bills with it, you're still gaining a tremendous tax advantage over time.

*Depending on the state you live in.

[lackofstache]

My wife has a chronic disease which eats up pretty much everything we put into the HSA each year. So we use it as a tax qualified way to pay those bills rather than investing & paying out of pocket. We don't currently max both IRA's, but do fund them & do put into my SIMPLE to get the employer match. If we maxed out IRA's and were looking for further tax incentives, I'd consider paying out of pocket. In your situation I think it makes more sense to pay out of pocket since you're already maxing your IRA & have no 401(k) or equivalent.

[wtjbatman]

I'm in a similar position as the OP, but even worse off.  There is no investment option.  All HSA funds are in cash and linked to a normal checking account.  Because I can't make a return on my money, and because of inflation, I hope to spend the HSA money, out of the HSA account, as soon as I get it.

Let me know if you disagree with this strategy.   

As for the OP: I think you should be paying for minor medical expenses using the cash portion of your HSA.  With inflation, I don't see any benefit of paying those out of pocket when inflation will continue to nibble at the cash-portion of the HSA...

Keel in mind that, unlike with a 401k, you can transfer the money to a different HSA provider at any time. Pick one with good investment options, boom, you're all set.