Using HSA to fund Roth IRA

[Neverstop]

It occured to me the other day while thinking about funding my Roth IRA that a great way to do so would be to make a qualified withdrawal from my HSA and then deposit the completely tax free money into a post tax retirement account. By mid year I should be able to make a qualified withdrawal of about $1k. Does anyone else do this or am i completely over looking something?

[Nothlit]

I'm not seeing what benefit this would have... Seems like you're just shuffling money from one tax shelter to another.

[Neverstop]

Instead of contributing money that has been taxed at 22.65% I can contribute money that has not been taxed at all

[powskier]

Then you still have to have $1K worth of medical expenses that you pay for with taxed money. If you don't have $1K worth of medical expenses that $1K gets taxed. You are back where you started.

[Neverstop]

I will thats what im saying.

[charis]

If you will have 1K in medical expenses, there is no point in moving to the ROTH because you can withdraw tax-free directly from your HSA without needlessly moving it to another account first.

[Capyy]

I didn't know you could do this.

What if you don't incur the medical expenses?

My HSA is overfunded right now - I can contribute tax free to my roth??

[charis]

I didn't know you could do this.

What if you don't incur the medical expenses?

My HSA is overfunded right now - I can contribute tax free to my roth??

You shouldn't do it.  It doesn't make any sense.

[Capyy]

I don't understand why not. Isn't it not paying any tax on the money compared to paying tax?

Assuming you don't end up needing the cash for medical expenses.

[MDM]

...make a qualified withdrawal from my HSA and then deposit the completely tax free money into a post tax retirement account. By mid year I should be able to make a qualified withdrawal of about $1k.

This could make sense, but it would take special circumstances that don't appear applicable to you.

For example, if you assume you will never have medical expenses that exceed your HSA assets, then this would move some HSA money into a Roth account.  It works only if you have cash available to pay the qualifying medical expense.

Also, note that Medicare premiums after age 65 do qualify as medical expenses for tax-free HSA distributions.  That's a decent amount (at least ~$1500/yr) by itself, without counting any prescription drugs, emergency room visits, etc.  You already have qualifying medical expenses (otherwise the highlighted part of the quote wouldn't apply).  For most people, medical expenses increase as they age....

[cincystache]

I wouldn't do this.

In order to take the money out to begin with you need to have a qualifying medical expense. You can just keep your receipts and then pay yourself back out of the HSA account down the road. No need to take it out now and put it in a Roth account, you don't save any taxes by doing this.

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

above website is good reading for how to maximize the usefulness of an HSA account for early retirement.

[seattlecyclone]

I don't see this as a great idea, but it's not necessarily a bad one either.

Suppose you have some money in an HSA and you have a $1,000 medical bill. As long as you keep that receipt, you have the right to withdraw $1,000 tax-free from your HSA at any time.

You could do that, take the $1,000 out of your HSA, and then deposit $1,000 into a Roth IRA (assuming you meet the income requirements to do so). At that point, you would then have the right to withdraw $1,000 tax-free from your Roth IRA at any time.

Either way, you have $1,000 in a tax-sheltered account that you are free to withdraw at any time. The difference is in what happens to the growth on the $1,000 while it's in the account.

In the case of the HSA, any part of the balance can be withdrawn tax-free at any age if you have medical expenses corresponding to each tax-free withdrawal. If you are fortunate enough to remain healthy and you wish to access the growth on your $1,000 without a corresponding medical bill, you'll pay tax at your current marginal rate (at any age) plus a 20% penalty (if under age 65).

How does this compare to the Roth IRA? Earnings in your Roth IRA can be removed tax-free at age 59½ regardless of medical expenses. Before that, you'll generally be taxed at your current marginal rate on these distributions, plus a 10% early withdrawal tax.

Which one is better? Depends on when you expect to need the money and what you forecast your medical expenses to be. Prior to 59½, withdrawing from the HSA is better if you have medical bills (since it's completely tax-free in this case), but the Roth IRA is better otherwise (because the penalty for non-qualified withdrawals is only 10% instead of 20%). After 59½, the Roth IRA wins out because it's tax-free whether you have corresponding medical bills or not.

[erutio]

There is no point in doing that.  You are missing the math here.

Money is fungible, so if you withdraw $1k for medical expenses and then turn around and put that into the Roth IRA, you still have the $1k medical expenses you paid for with after tax money. 

So you end up either paying for your $1k medical expense with after-tax money or fund your Roth with $1k of after-tax money. 

Either way, you still get the tax advantages of the HSA and the Roth, but using them together doesn't magically create additional tax advantage.

[msilenus]

I max out both, and wouldn't recommend missing tax shelter space to do this trick.  But if I had to choose, then I would use this maneuver.  I claim the money in a Roth has better future-proofing than money in an HSA using receipt tracking:

• Reduced record keeping burden.  You need to keep records for less time and are thus less likely to lose them.
• Improved audit outlook.  You're using the HSA in the way it was intended.  It's reasonable to speculate that the IRS is more likely to apply ordinary levels of scrutiny to your return during any audit.
• Reduced legislative risk.  If the HSA-documenting trick is rightly seen as a loophole.  If it's ever closed, you don't care as much.  You've already taken your chips off of that table.
• The $1k that you put in the HSA, withdrew to reimburse health expenses, and then funneled into a Roth for tax deferred growth and tax free earnings, are still getting all the key tax properties.

Generally speaking, I think it's correct to favor states where your account structures don't look exotic, so long as you aren't giving up anything by getting there.

[JLee]

I don't see this as a great idea, but it's not necessarily a bad one either.

Suppose you have some money in an HSA and you have a $1,000 medical bill. As long as you keep that receipt, you have the right to withdraw $1,000 tax-free from your HSA at any time.

You could do that, take the $1,000 out of your HSA, and then deposit $1,000 into a Roth IRA (assuming you meet the income requirements to do so). At that point, you would then have the right to withdraw $1,000 tax-free from your Roth IRA at any time.

Either way, you have $1,000 in a tax-sheltered account that you are free to withdraw at any time. The difference is in what happens to the growth on the $1,000 while it's in the account.

In the case of the HSA, any part of the balance can be withdrawn tax-free at any age if you have medical expenses corresponding to each tax-free withdrawal. If you are fortunate enough to remain healthy and you wish to access the growth on your $1,000 without a corresponding medical bill, you'll pay tax at your current marginal rate (at any age) plus a 20% penalty (if under age 65).

How does this compare to the Roth IRA? Earnings in your Roth IRA can be removed tax-free at age 59½ regardless of medical expenses. Before that, you'll generally be taxed at your current marginal rate on these distributions, plus a 10% early withdrawal tax.

Which one is better? Depends on when you expect to need the money and what you forecast your medical expenses to be. Prior to 59½, withdrawing from the HSA is better if you have medical bills (since it's completely tax-free in this case), but the Roth IRA is better otherwise (because the penalty for non-qualified withdrawals is only 10% instead of 20%). After 59½, the Roth IRA wins out because it's tax-free whether you have corresponding medical bills or not.

If you're financially able to contribute the maximum to your HSA and IRA, though, you'd be losing $1k in tax-advantaged space.

[seattlecyclone]

Sure, that whole thing was assuming you can't afford to max out all of your tax shelters. In that case, taking money out of the HSA to put more into the IRA could be a fine plan if you expect your HSA to grow faster than your medical expenses.

[MustacheAndaHalf]

Think of this as two separate steps:
1) You can take $1000 from savings and put it in a Roth IRA.
2) Separately, you could later take $1000 from your HSA based on medical receipts.  It's tax free money to spend or invest in taxable accounts.

The two are not related, which is why I put them in the opposite order.  I can't comment on the two in combination because there really isn't a combination here.  You have $1000 tax free, and separately you might make a decision to contribute to a Roth IRA.  Both could be good decisions, but they aren't really related.