Monkeying around with an HSA as an investment?

[KBecks]

Hi Friends,

I am very tempted to write two posts about this, one here and one in Investor Alley but I will try to stay focused.

Here is the thing I am considering, and that also makes me nervous.

My husband has an HSA at his work.  He can contribute something like $6k a year??

Apparently there is a scheme where you can:
1) max out your HSA
2) pay your medical bills out of pocket
3) invest your HSA like a retirement account and let the balance pile up
4)  take the money out of the HSA in retirement and get the benefit of the tax-(free?)(deferred??)  savings.

Here is what makes me afraid.

1) I suck at keeping track of paperwork.  If i need to save my paid-with-regular-dollars receipts for years,  I am afraid I will suck at that.

2)  It's a scheme to use the product not as intended.  Makes me nervous.


Anybody here doing this?  I have some minor medical bills to pay and I have been frozen with indecision on what to do with this!  Aaaaaaaaaaa!!!!!!!!!  Need to get this figured out and get on with life.


Small note, our balance is not yet high enough to invest in anything.  There are some small fees for investing the cash balance in investments.  I would probably choose solid stocks to stash my HSA money in.

[slappy]

This is definitely my understanding of how an HSA could work, and the benefit of having one.  I believe that once you hit age 65, you can withdraw the money for non medical needs and pay regular income tax on it, similar to an IRA.  I have heard that if you keep your medical receipts, you can use those to withdraw the money tax free, even if it is not in the year you incurred those expenses.  I'm 30+ years away from 65, though, so I assume they will make changes in that time frame.  Hopefully someone else will come along and confirm or deny our understanding of how everything works.  :)

[Apocalyptica602]

I also am paranoid about losing track of paperwork over the years / them closing the 'loophole' (whether this could be considered a loophole is up for debate). My compromise here is I just contribute the max to the HSA and pay my medical expenses as they come up out of it.

It's still tax free directly from payroll deductions, and since I max the HSA and luckily I've had way less medical bills than 6k per year I'm still accumulating gains that I don't have to worry about tracking closely.

[KBecks]

My family is 5 people and while we are not high maintenance, we have things like dental, eyeglasses and one expensive prescription that adds up pretty fast.  We do have enough cashflow to fund the HSA and pay the med bills out of pocket but I'm scared. :(

[2Birds1Stone]

It's TOTALLY worth it.

Just scan/upload the receipts once a quarter or year and throw them on a flash drive and keep a copy of the folder in the cloud (Google Drive, Drop Box, etc)

[Racer X]

I am doing this.  Unfortunately my employer just started offering an HSA this year, and I'm likely to retire within a year or so.  As such, I probably won't get any great benefits from it.  But I think the concept is sound.  Contribute the money, and pay the medical deductibles from your own pocket.  This obviously only works if you have a bit of a savings from which to do so.  I think my plan's max is $3500 a year, so you'd in theory need to be able to come up with $3500 out of savings.  But assuming you can swing that - and I would guess most FIRE oriented people could - then the money in the HSA is invested and grows over time.  Then in theory, when you retire and your tax rate is much lower, withdrawls from the "investment" HSA account have a lower tax hit.  I'm sure there's every possibility that the tax laws will change sometime in the next 2 to 50 years, but for now I think it works.

[Much Fishing to Do]

You don't even have to do this perfectly for it to be worth it.  Say you lose all your receipts, you still got the deduction and only pay taxes after the fact so its like a 401k after retirement.  If you hang on to just the big bills you'll probably cover most of it.  Frankly, I don't even keep up with the receipts at all.  Healthcare in old age is expensive even with Medicare and I expect I'll have no problem spending it down on using it to pay current health related bills. If you're someone who will fund this to the max for a lifetime and can grow it to some huge sum then obviously keeping the reciepts becomes important.

[KBecks]

OK, that helps.  I imagine we will fund it for 5-10 years.  So that is $30k - $60k.  It is hard to know the future employment for sure, that is a long time to go.  My goal is to stay healthy in old age!  Yes!  Really. 

Here is an article on HSAs.  I feel like I'm still getting my head around it:

https://en.wikipedia.org/wiki/Health_savings_account#Withdrawals

[Jack]

Posting to follow, and hoping somebody will suggest a really good records-keeping scheme.

Healthcare in old age is expensive even with Medicare and I expect I'll have no problem spending it down on using it to pay current health related bills. If you're someone who will fund this to the max for a lifetime and can grow it to some huge sum then obviously keeping the reciepts becomes important.

The other advantage to keeping receipts is that you can use them to get penalty-free (and tax-free) withdrawals for living expenses between early-retirement age and age 65, when you would otherwise need to be living on investments in taxable accounts and/or the Roth pipeline.

[charis]

Why can't you just request yearly invoices from your health care providers?  Seems simple enough to me - the invoices would reflect the bills and payments you've made.  Scan and upload the invoices once a year and keep the paper in a file somewhere.

[MoneyRx]

As far as keeping receipts- Many health insurance companies keep track of your records online and you should have easy access when needed. If your insurance company does not do this currently, it will be coming shortly, and you will definitely not be needing to rely on paper receipts for the next 50 years.
Also, if you use a debit/credit card to pay for the purchase, it is tracked there as well. This may not be enough of a "record," but you will at least know what you paid and when you paid it so it can be easier to track down.

I have posted on this before, but for me I think it is easier to just use the HSA how it was intended. Keep in mind, HSA administrators have somewhat high fees and require you to keep a minimum balance before investing, which detract somewhat from the appeal of spending after tax dollars to keep money in the HSA. Personally, I max the HSA out every year and invest what I have over the minimum balance. The amount you have invested is still "invested like a retirement account" like the OP stated as long as you don't spend every dollar you put in each year. When I have healthcare expenditures, I spend it out of the HSA.   

[Indy007]

I'm currently doing this as well, although my medical bills are so small now that I don't bother saving the receipts. I'm treating it more as a retirement account and just plan on using it to pay medical bills in retirement.

[kite]

Math is not hard.
You write the number on a piece of paper and stick it in a file for later.  Insurer's EOB statements will contain 90% of it. 
Add annually, and keep a running tally. 
Keeping up to date on that annual, running total gives you the knowledge of how much emergency funds you can put your hands on for any reason at all between now and retirement age.  I fund the HSA ahead of 401k, Roth and any other investment because it is the Trifecta of retirement goodies. 

The "How it was intended" things baffle me because I find withdrawals each time we have an expense to be too complicated and laden with fees.  My intention is to wait and do it all at once at ER.   

[charis]

I have posted on this before, but for me I think it is easier to just use the HSA how it was intended. Keep in mind, HSA administrators have somewhat high fees and require you to keep a minimum balance before investing, which detract somewhat from the appeal of spending after tax dollars to keep money in the HSA. Personally, I max the HSA out every year and invest what I have over the minimum balance. The amount you have invested is still "invested like a retirement account" like the OP stated as long as you don't spend every dollar you put in each year. When I have healthcare expenditures, I spend it out of the HSA.

You can move HSA money to a lower fee administrator.  I have one that has a minimum balance requirement but no fees and I'm invested in free vanguard ETFs.  There is a one time transfer free to the investment account, but I only do it once a year anyway so it's very inexpensive and takes a few minutes of my time annually. 

[johnny847]

For those of you who have kids, here's one thing to keep in mind:

Per IRS Pub 969, upon the death of the holder of an HSA, a surviving spouse may assume the HSA as his or her own if the spouse is the beneficiary.[8] The rules for a non-spouse beneficiary, however, are more complicated.[9][10][11][12]

Per Pub 969, when the HSA account holder dies, "the account stops being an HSA, and the fair market value of the HSA becomes taxable to the beneficiary in the year in which you die. If your estate is the beneficiary, the value is included on your final income tax return. The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death."

See the linked referenced above for more clarification on the above terms from Pub 969. Although there is some ambiguity regarding the language around payment of the decedent's medical expenses, one matter appears to be clear: unlike an inherited IRA, an inherited HSA (to a non-spouse) ceases to become a tax-advantaged account, and it appears that reimbursable medical expenses of the decedent that had not been reimbursed no longer can be reimbursed (although unpaid expenses can still be paid and deducted). Hence, from an estate planning perspective, an HSA has no more value to a non-spouse beneficiary than an equal amount of taxable income, and much less value than an equal amount of cash. Therefore an HSA holder should carefully balance the desire to leave HSA funds un-reimbursed in order to compound tax-free, versus leaving behind substantial HSA balances being inherited with significant undistributed tax-free amounts. Even for a spouse HSA beneficiary, it is unclear whether the surviving spouse (who becomes the HSA holder) may distribute the undistributed expenses of the decedent.

In light of these inheritance disadvantages, "Those with both Roth IRA accounts and HSA accounts with unreimbursed qualified medical expenses, should distribute those tax-free HSA dollars before touching the Roth accounts. Also, upon turning 65 they should make distributions for Medicare Part B premiums, and other qualified medical expenses (co-pay, co-insurance, dental, vision. etc...). Tax-free HSA dollars should always be spent before Roth dollars."[13] If you wish to continue to enjoy the tax-free compounding benefits of the HSA, but want to ensure that the balance does not become taxable income upon death, then consider the following advice:

"To minimize this potential tax liability, as with retirement benefits, HSA owners may wish to consider naming a charitable beneficiary or name a low-income tax bracket beneficiary to receive the taxable income that is accelerated by death."[14]

Source.

[KBecks]

I wonder how it's taxable.  The estate tax has an exemption under $5.45 million.  Are we talking about the full amount being taxed at the recipient's income tax rate?   I'm Googling for the average effective tax rate.  We will guesstimate that at around 20%. 

So it would make sense to try to liquidate the health savings account entirely before other retirement vehicles.  I think I can do that.

[johnny847]

I wonder how it's taxable.  The estate tax has an exemption under $5.45 million.  Are we talking about the full amount being taxed at the recipient's income tax rate?   I'm Googling for the average effective tax rate.  We will guesstimate that at around 20%. 

So it would make sense to try to liquidate the health savings account entirely before other retirement vehicles.  I think I can do that.

I believe what it means is subject to estate tax, which may be at a 0% rate, depending on whether you've used up your estate tax exemption or not.

[CATman]

If your HSA administrator offers the option you can choose to invest all or some of the HSA in mutual funds. I looked and we have some pretty low cost options. I look at it as another pre-tax vehicle for saving. It just has the upside that I can withdraw that money early if I have qualified medical expenses.

[thepokercab]

I also do this.  My HSA balance in my investment account has been piling up for a few years while I just pay out of pocket and then save all of my receipts. 

The other thing I do is use medical expenses as an excuse to open up a rewards credit card.  I had a procedure last year where the out of pocket was $1200 bucks.  Got a BofA Travel Rewards Card put all of it on that and got my $200 bonus.   

[KBecks]

Hmm. Perhaps getting a credit card just for medical expenses would be a good way to keep track of stuff.

[Nickels Dimes Quarters]

I'm not sure where you got the idea that keeping an HSA as an investment wasn't its intended use. It's a healthcare rainy day fund, but if you don't need it for years, yes, it grows and is a terrific investment. However, if something terrible happens and I need it, then it is available for me. That's good for the government to give people an incentive to be self-sufficient. There isn't anything evil here.

I switched to the HSA during 2015 and fully funded it, on track to do the same this year. Next year, I will have enough to park it in Vanguard.

Of course I keep medical receipts because for tax purposes, if expenses are high enough (and I keep my AGI pretty low) I may qualify for the deduction. You never know. Keep an envelope for the tax year, add as you go then I file it in the drawer with my tax return.

NDQ

[MoonShadow]

Here is what makes me afraid.

1) I suck at keeping track of paperwork.  If i need to save my paid-with-regular-dollars receipts for years,  I am afraid I will suck at that.

I don't keep records either, there really isn't any need.  If in the future, you need the money for current expenses, but don't have receipts, just start paying your medical expenses with it as it is intended.  The older you get, the greater a portion of your expenses this will be anyway.

2)  It's a scheme to use the product not as intended.  Makes me nervous.

Um, this is how the account was intended to be used.  Save for medical expenses now, use it on medical expenses later.

Anybody here doing this?

I am doing this, yes.  I don't keep paper receipts, although I occasionally take a screenshot of the claims that have been made against my account at least once each year.  It doesn't capture the random things that I would have to submit a claim manually for, but that's a minority of qualified expenses anyway.

[KBecks]

Now that I am learning more, I may choose a different provider than the one my husband's company has partnered with.  Sounds like fun.  The one we currently have, HSA Bank, requires a $5000 cash balance at all times to avoid fees (and the surplus could be invested at either of two firms: Devnir or TD Ameritrade).  So I might shop around.  Anyone have a favorite?

I appreciate this conversation and I'm building more of a comfort level with the HSA.  Yay.

Actually now that I look at this matrix I might prefer the one we have.
http://20somethingfinance.com/best-hsa-account/

[rtrnow]

Now that I am learning more, I may choose a different provider than the one my husband's company has partnered with.  Sounds like fun.  The one we currently have, HSA Bank, requires a $5000 cash balance at all times to avoid fees (and the surplus could be invested at either of two firms: Devnir or TD Ameritrade).  So I might shop around.  Anyone have a favorite?

I appreciate this conversation and I'm building more of a comfort level with the HSA.  Yay.

Actually now that I look at this matrix I might prefer the one we have.
http://20somethingfinance.com/best-hsa-account/

When I looked around, HSA Bank and HSA Administrators wore the best. I was looking specifically to invest in Vanguad funds. I went with HSA Bank like you and maintain the 5K balance. I don't mind the 5K balance. I just count that as my emergency fund. Since I have plenty of non-reimbursed medical expenses, I can get that money penalty free for any reason at this point. I chose HSA Bank bc the other option only had Vanguad admiral share funds and I didn't have enough cash for that. Overall no complaints with HSA Bank.

As for tracking expenses, I scan receipts annually and keep a running Google doc of total expenses.

[charis]

I have an HSA at Elements that I like because I can avoid the fees by keeping $2500 in cash and moving the rest to a TD Ameritrade account where I am invested in Vanguard index funds.

[sirdoug007]

Do it!  Paying absolutely no taxes (no income tax AND no payroll tax!) is the best deal out there.

Read this, it's pretty convincing.  http://www.madfientist.com/ultimate-retirement-account/

Don't worry about tracking small expenses.  You can always pay medical costs in retirement out of the account.  And once you are 65 you can take out the money for any reason but it will count as income just like a traditional ira/401(k) withdrawal.

[h82goslw]

Am I the only person on here whose company uses a bank where the HSA fund sits and earns .1% and there is no option to invest the money? This is the first year we went to an HSA from an FSA but I don't max it out because I can't invest it. I just put the money in there and do not plan on using it for years to come. 
I know there are options where one can use an external bank but then I lose out on reducing the income taxes taken out of the weekly check.  Is there a way around that? 

[charis]

Am I the only person on here whose company uses a bank where the HSA fund sits and earns .1% and there is no option to invest the money? This is the first year we went to an HSA from an FSA but I don't max it out because I can't invest it. I just put the money in there and do not plan on using it for years to come. 
I know there are options where one can use an external bank but then I lose out on reducing the income taxes taken out of the weekly check.  Is there a way around that? 

My employer uses a bank that has terrible investment options.  Once a year, I transfer most of the funds to another HSA which has good investment options.  That is the way around it.

[h82goslw]

Am I the only person on here whose company uses a bank where the HSA fund sits and earns .1% and there is no option to invest the money? This is the first year we went to an HSA from an FSA but I don't max it out because I can't invest it. I just put the money in there and do not plan on using it for years to come. 
I know there are options where one can use an external bank but then I lose out on reducing the income taxes taken out of the weekly check.  Is there a way around that? 

My employer uses a bank that has terrible investment options.  Once a year, I transfer most of the funds to another HSA which has good investment options.  That is the way around it.

I had no idea that was an option.  Too bad I can't change my allocation until January 1.  Will definitely be setting up another account. Thank you! 

[charis]

Am I the only person on here whose company uses a bank where the HSA fund sits and earns .1% and there is no option to invest the money? This is the first year we went to an HSA from an FSA but I don't max it out because I can't invest it. I just put the money in there and do not plan on using it for years to come. 
I know there are options where one can use an external bank but then I lose out on reducing the income taxes taken out of the weekly check.  Is there a way around that? 

My employer uses a bank that has terrible investment options.  Once a year, I transfer most of the funds to another HSA which has good investment options.  That is the way around it.

I had no idea that was an option.  Too bad I can't change my allocation until January 1.  Will definitely be setting up another account. Thank you! 

This does not effect my allocations at work all at.  I guess I am not explaining it well.  Google transferring funds between HSAs.

[MoonShadow]

Now that I am learning more, I may choose a different provider than the one my husband's company has partnered with. 

I considered this also, but the problem with doing this is that, in order for the HSA to avoid payroll taxation (income tax is easy) those contributions must be withheld by your employer.  And your employer is not obligated to do that for any HSA provider.  An alternative is to keep the one your employer uses, and transfer from that HSA to a better investment HSA periodically, but then you are back to needing to keep good records on your own.

[MoonShadow]

Am I the only person on here whose company uses a bank where the HSA fund sits and earns .1% and there is no option to invest the money? This is the first year we went to an HSA from an FSA but I don't max it out because I can't invest it. I just put the money in there and do not plan on using it for years to come. 
I know there are options where one can use an external bank but then I lose out on reducing the income taxes taken out of the weekly check.  Is there a way around that? 

My employer uses a bank that has terrible investment options.  Once a year, I transfer most of the funds to another HSA which has good investment options.  That is the way around it.

I had no idea that was an option.  Too bad I can't change my allocation until January 1.  Will definitely be setting up another account. Thank you!

Um, why not?  The HSA isn't like an FSA.  There isn't any core reason you can't change your paycheck contributions.  And if they just wont let you, you can still contribute to any HSA account out of pocket & take the income tax deduction (but not the payroll tax deduction) so long as all of your HSA accounts collectively don't exceed your annual contribution limit.

[charis]

Now that I am learning more, I may choose a different provider than the one my husband's company has partnered with. 

I considered this also, but the problem with doing this is that, in order for the HSA to avoid payroll taxation (income tax is easy) those contributions must be withheld by your employer.  And your employer is not obligated to do that for any HSA provider.  An alternative is to keep the one your employer uses, and transfer from that HSA to a better investment HSA periodically, but then you are back to needing to keep good records on your own.

How so?  My employer's HSA doesn't keep records of my health care costs, so why would it matter?

[MoonShadow]

Now that I am learning more, I may choose a different provider than the one my husband's company has partnered with. 

I considered this also, but the problem with doing this is that, in order for the HSA to avoid payroll taxation (income tax is easy) those contributions must be withheld by your employer.  And your employer is not obligated to do that for any HSA provider.  An alternative is to keep the one your employer uses, and transfer from that HSA to a better investment HSA periodically, but then you are back to needing to keep good records on your own.

How so?  My employer's HSA doesn't keep records of my health care costs, so why would it matter?

In the case of transfering HSA funds to another HSA, you have to keep track of the transfers personally, and have to be able to sort it out on your taxes.  This may or may not actually be difficult, I don't know, but it would complicate IRS reporting.

[Secretly Saving]

I solved the receipts problem with Evernote.  LOVE IT.

[charis]

Now that I am learning more, I may choose a different provider than the one my husband's company has partnered with. 

I considered this also, but the problem with doing this is that, in order for the HSA to avoid payroll taxation (income tax is easy) those contributions must be withheld by your employer.  And your employer is not obligated to do that for any HSA provider.  An alternative is to keep the one your employer uses, and transfer from that HSA to a better investment HSA periodically, but then you are back to needing to keep good records on your own.

How so?  My employer's HSA doesn't keep records of my health care costs, so why would it matter?

In the case of transfering HSA funds to another HSA, you have to keep track of the transfers personally, and have to be able to sort it out on your taxes.  This may or may not actually be difficult, I don't know, but it would complicate IRS reporting.

I do it once a year. It's not complicated. They send you a form, I did my taxes.

[big_owl]

I was excited to have a lot of money in my HSA....then this year I had some medical problems and it got wiped out in several months.  If you are going to use that money for some other investment then make sure you have another source for inevitable medical problems...

[KBecks]

I was excited to have a lot of money in my HSA....then this year I had some medical problems and it got wiped out in several months.  If you are going to use that money for some other investment then make sure you have another source for inevitable medical problems...

Very good point and hope you are doing better. 

[big_owl]

I was excited to have a lot of money in my HSA....then this year I had some medical problems and it got wiped out in several months.  If you are going to use that money for some other investment then make sure you have another source for inevitable medical problems...

Very good point and hope you are doing better.

Thanks for the kind words.  I'll say that it's a process, but there is light at the end of the tunnel. 

Even with excellent health insurance I'm still in over $300/mo out of pocket just for one type of my (many) antibiotics.  At first it was ok to just swipe my HSA card for every medication and doctor visit or test.  Thousands of dollars later the HSA is gone and it's a lot tougher to have to swipe my normal CC for all this crap. 

[Altons Bobs]

We're not doing this. We just pay with our HSA debit card and keep the receipts. We do have an investment account in our HSA that we utilize since we don't have many medical expenses. I'm good at keeping receipts, I'm just not good at finding them. So I'd rather take the tax savings now instead of having to keep track of the receipts for reimbursement later and potentially lose the receipts.  Too much trouble, not worth my time for that little gain, if any.

[msilenus]

Here's how I handle the paperwork.

Early every year, I start from a spreadsheet that shows all the services that were billed to my insurance in the previous calendar year.  My HSA administrator makes this easy. If it didn't, I'm sure I could call up my insurer and get the list.  If my wife were on the HDHP as primary she'd probably have to call separately because of HIPPA to get her records.  (She's not.)

The IRS says I need to show proof of payment for these items (they have some specific rules for what qualifies, which I recommend looking up.)  So I work down the list, saving individual credit card statements (as files) and/or check images.  I note in the spreadsheet which file documents payment for that expense, and how much the actual payment was if there's any discrepancy.  As an expedient, I handle pharmacy separately: just walk in and ask for an invoice showing amount paid for the previous calendar year.  I take that home and scan it.

I zip up all these files (spreadsheet + card statements + check images + pharmacy statement) and e-mail the zip to my webmail account with a subject like "HSAReceipts 2015."  The message body has the sum total of the payments and any other notes I might have.  I have a mail filter which will dump this message into a folder.

The process makes it easy to be sure I'm not missing any documentation, and makes it clear to future me exactly how much I can pull out tax free, in readily-documented chunks.  The whole thing takes about two hours.

[Jack]

Even with excellent health insurance I'm still in over $300/mo out of pocket just for one type of my (many) antibiotics.  At first it was ok to just swipe my HSA card for every medication and doctor visit or test.  Thousands of dollars later the HSA is gone and it's a lot tougher to have to swipe my normal CC for all this crap.

At least you should have a maximum out-of-pocket limit that will limit your costs eventually (hopefully one lower than the Federal maximum).