Author Topic: HSA Clarification  (Read 550 times)

DadJokes

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HSA Clarification
« on: July 02, 2019, 10:30:45 AM »
Anytime anyone talks about HSAs, they give one piece of advice: pay medical expenses out of pocket and leave the HSA invested.

However, that appears to be the same decision you make when choosing between a traditional & Roth IRA/401k. You are forgoing tax savings now for tax savings in the future. If you have the discipline to actually invest the difference, what additional benefit does the HSA provide?

seattlecyclone

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Re: HSA Clarification
« Reply #1 on: July 02, 2019, 10:47:56 AM »
I think the advice about keeping your HSA invested and paying for medical expenses out of post-tax funds mainly applies to people who are able to max out all of their available tax shelters for the year.

Suppose you're already maxing out your 401(k), IRA, HSA, etc. and you tend to have a bit more left over each month to invest in taxable. If you have a medical expense in this situation you're choosing between paying the bill from your checking account (and foregoing taxable investment growth) or paying the bill from your HSA (and foregoing tax-free HSA growth). This doesn't seem like much of a contest to me. I'll keep the HSA invested.

wageslave23

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Re: HSA Clarification
« Reply #2 on: July 02, 2019, 10:49:15 AM »
By leaving the money in the HSA (invested) it will grow tax free.  If you take it out and invest the money, you will be taxed on future dividends and capital gains.

EvenSteven

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Re: HSA Clarification
« Reply #3 on: July 02, 2019, 10:52:02 AM »
Anytime anyone talks about HSAs, they give one piece of advice: pay medical expenses out of pocket and leave the HSA invested.

However, that appears to be the same decision you make when choosing between a traditional & Roth IRA/401k. You are forgoing tax savings now for tax savings in the future. If you have the discipline to actually invest the difference, what additional benefit does the HSA provide?

I disagree with the bolded as an analogy. You aren't realizing any extra up-front tax benefit by spending from the HSA. You get the tax savings up-front either way, you just get the extra tax savings on earnings with an HSA.

A better analogy would be if you have to pay a medical bill, should you pay from a regular taxable account, or should you withdraw from a Roth IRA to pay for it?

DadJokes

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Re: HSA Clarification
« Reply #4 on: July 02, 2019, 01:04:26 PM »
AB
Income130k130k
Nonmedical Expenses60k60k
Medical Expenses5k5k
401k/457b/IRA52,90558,586
HSA deducted7k7k
AGI70,09564,414
Tax5,0954,414

What do their investments look like after year 1?

AB
Traditional52,90558,586
HSA7k2k
Total59,90560,586

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%?

AB
Traditional1,279,3461,416,745
HSA169,27548,364
Total1,448,6211,465,109

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.

AB
Total Withdrawn69,41469,781
Traditional64,41467,478
HSA5k2,304
AGI64,41467,478
Tax4,4144,781
Effective Tax Rate6.36%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.
« Last Edit: July 02, 2019, 02:56:17 PM by DadJokes »

EvenSteven

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Re: HSA Clarification
« Reply #5 on: July 02, 2019, 02:37:46 PM »
I see what you mean now. If you have unused tax advantaged space, the question would be to keep it in the HSA (which would act like a Roth) or move it to a traditional 401K.

I think the usual advice is to keep it in the HSA when choosing between paying from a taxable account (meaning tax advantaged space is all used up) and keeping it in the HSA. In that case it isn't a choice between Roth and traditional, it is a choice between Roth and regular taxable.

In the case you outlined I think you're right that it would be like choosing between Roth and traditional, so you should just be looking at marginal in and marginal out to make your decision.

Most people have far less tax advantaged space than your example, so paying from a taxable account is like giving you extra Roth space every year.

MDM

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Re: HSA Clarification
« Reply #6 on: July 02, 2019, 03:01:32 PM »