| A | B |
Income | 130k | 130k |
Nonmedical Expenses | 60k | 60k |
Medical Expenses | 5k | 5k |
401k/457b/IRA | 52,905 | 58,586 |
HSA deducted | 7k | 7k |
AGI | 70,095 | 64,414 |
Tax | 5,095 | 4,414 |
What do their investments look like after year 1?
| A | B |
Traditional | 52,905 | 58,586 |
HSA | 7k | 2k |
Total | 59,905 | 60,586 |
Person B, who pays medical expenses out of the HSA, pays $681 less in taxes and has $681 more invested as a result. What does that look like after 15 years at 6.5%?
| A | B |
Traditional | 1,279,346 | 1,416,745 |
HSA | 169,275 | 48,364 |
Total | 1,448,621 | 1,465,109 |
After 15 years, person B has $16,488 more than person A. What happens during withdrawal phase? I am assuming that both still have $5k in medical expenses. Person A withdraws that full $5k from the HSA and never pays taxes on HSA withdrawals. Due to the smaller balance, Person B chooses to withdraw funds proportionally to the balance of the overall portfolio (3% HSA 97% traditional) and also doesn't pay taxes on the portion that is withdrawn from the HSA.
| A | B |
Total Withdrawn | 69,414 | 69,781 |
Traditional | 64,414 | 67,478 |
HSA | 5k | 2,304 |
AGI | 64,414 | 67,478 |
Tax | 4,414 | 4,781 |
Effective Tax Rate | 6.36% | 6.85% |
By paying out-of-pocket, rather than out of the HSA, person A is electing to pay the 12% marginal tax rate on medical expenses today to save less than 1% on taxes in retirement.
Obviously, a lot of variables go into anything predicting that far into the future, but any benefits that could be realized seem so minuscule that it just doesn't seem to matter whether medical expenses are paid out-of-pocket or via the HSA.*
*Assuming the tax savings are invested.