HSA treatment

[Bott1637]

New option for an HSA from employer next year and was wondering how people treat their HSA.  I plan to employ the "pay cash and keep the receipts" method to let the account grow as the stealth IRA.  For those that do this, which of the following is how you treat the money in your HSA?

1. As part of your overall asset allocation for retirement spending

2. Separate from your overall asset allocation but with a similar allocation breakdown

3. Separate from your overall asset allocation but with more/less risk

 

[jfoxcpacfp]

Fwiw, we go with option 1 if the HSA is intended for long-term goals.

[jhwkr542]

My wife and I started our HSA this year. Since it's such a small amount, we just throw it in a total stock market fund to start. Once it gets big enough, it'll be option #1 probably since it is triple tax advantaged. Between my 401k, my wife's 403b, 457b, and pension, HSA, and backdoor Roths, balancing across all of these accounts becomes a nightmare.

[GXA]

We have been "paying cash and keeping receipts" for years.  The best (and maybe only) low cost investing option I have in my HSA is an S&P 500 index fund which is where all the money goes.  Nice bonus retirement account - pretax on the way in and tax free on the way out!

[Lithium]

I do option 1 and put everything in low-cost bonds.  The reason that some prefer to use the HSA for their bond allocation is to maximize the likelihood that it will all go toward health care expenses, which is the only way you can spend it tax free.  Not a reason to buy more bonds or crappy bond options, but if you have them in your overall investing plan and good options in your HSA, you can take advantage of them.

Then again, if health care costs keep soaring, the number of people who don't exhaust their HSA on health care expenses by age 80 is going to be pretty tiny regardless.

[Donnie]

You should cash out the receipts now and invest in taxable. I’ll show you the math at some point, or you could just trust me

[VagabondMD]

Donnie wrote:

You should cash out the receipts now and invest in taxable. I’ll show you the math at some point, or you could just trust me

Click to expand...

That's what I do.

[docnews]

Option 1.

Healthcare costs is one of the top reasons people delay retirement. I think its safe to say it will be used to help you retire.

[spiritrider]

Yes Donnie, please show us this mythical math that moving assets from a tax-fee account to a taxable account is beneficial. Inquiring minds want to know.

[Donnie]

I already posted it in another thread. The receipt allows you to withdraw an amount tax free either now or later, so there is no difference in taxes on the receipt amount depending on when you withdraw it. The gains on your investment will be taxed at either cap gains (taxable) or ordinary income (HSA as IRA). If you keep the annual tax drag to 50bps or less between taxable and tax free, it can actually be worse to invest in HSA because you are converting cap gains taxes to ordinary income taxes. 50bps of annual tax savings isn’t enough to overcome the 15%+ difference in tax rates between the two.  Of course everyone’s tax situation varies, but this is why people should do the math rather than repeating things they hear without thinking about them.

[spiritrider]

Your evaluation is fundamentally false based on a faulty assumption. It assumes that HSA growth from those receipt amounts will be withdrawn as non-qualified distributions after age 65 subject to ordinary income tax.

Nothing could be further from the truth. You neglect the overwhelming qualified medical expenses you will see in retirement. Current estimates are that someone retiring today will have $250,000 in out of pocket healthcare expenses before they die.

Tax-free distribution for qualified medical expenses will include: Medicare Part B and D premiums including IRMAA (white coats will likely be in the higher tiers) currently can be as high as $500/month/person. Out-Of-Pocket expenses for medical, dental, vision and hearing care/products. All of which increase with age. Medigap premiums are not qualified, but you can self-insure a high-deductible plan to shift the non-qualified premiums to qualified co-pays and co-insurance. Not to mention, the 800lb. Gorilla, Long Term Care (LTC). You can anticipate significant cost for LTC insurance and/or self-insure.

For the average person/spouse, it will be virtually impossible for their HSA balance to out-live them/their spouse. Your recommendation and the assumption it is based on is fundamentally flawed.

This is why I dislike the term Stealth IRA. No one should be thinking about taking non-qualified HSA distributions after 65. You should be using other tax-deferred accounts first to preserve the HSA balance for tax-free distributions for qualified medical expenses. One the other hand, nobody should take Roth distributions before tax-free HSA distributions for unreimbursed qualified medical expenses. It is better to deplete the encumbered tax-free asset before the unencumbered one.

[Donnie]

spiritrider wrote:

Your evaluation is fundamentally false based on a faulty assumption. It assumes that HSA growth from those receipt amounts will be withdrawn as non-qualified distributions after age 65 subject to ordinary income tax.

Nothing could be further from the truth. You neglect the overwhelming qualified medical expenses you will see in retirement. Current estimates are that someone retiring today will have $250,000 in out of pocket healthcare expenses before they die.

Tax-free distribution for qualified medical expenses will include: Medicare Part B and D premiums including IRMAA (white coats will likely be in the higher tiers) currently can be as high as $500/month/person. Out-Of-Pocket expenses for medical, dental, vision and hearing care/products. All of which increase with age. Medigap premiums are not qualified, but you can self-insure a high-deductible plan to shift the non-qualified premiums to qualified co-pays and co-insurance. Not to mention, the 800lb. Gorilla, Long Term Care (LTC). You can anticipate significant cost for LTC insurance and/or self-insure.

For the average person/spouse, it will be virtually impossible for their HSA balance to out-live them/their spouse. Your recommendation and the assumption it is based on is fundamentally flawed.

This is why I dislike the term Stealth IRA. No one should be thinking about taking non-qualified HSA distributions after 65. You should be using other tax-deferred accounts first to preserve the HSA balance for tax-free distributions for qualified medical expenses. One the other hand, nobody should take Roth distributions before tax-free HSA distributions for unreimbursed qualified medical expenses. It is better to deplete the encumbered tax-free asset before the unencumbered one.

Click to expand...

Haha.  Comical response.  You deride me for "mythical math" and then later for "fundamentally false [math] based on faulty assumptions."

The math is not mythical and the stated use in the OP is a Stealth IRA, so I used no false assumptions, thanks.  You are imposing new assumptions, which is fine, but different from the stated HSA use in the OP.  In the case laid out in the OP, it is worse to save receipts to use as a stealth IRA than to cash out such receipts and invest them if the purpose of the HSA is for use as an IRA.

That's it.  Plain math.  Not controversial.  You have no idea what the health insurance situation is for OP or what OP's specific costs will be, so who knows whether your advice is accurate or not.  And by the way, a couple investing $13k per year at 6% in their HSAs will have over $1M in their HSAs after 30 years, so yes, even in your example there could easily be non-qualified HSA distributions.

[spiritrider]

I'm glad you find likely reality comical.

The problem is when you make a fundamentally flawed analysis/recommendation that can cause real harm to most forum members, that is not funny at all.

I think it is likely that the OP used the term "Stealth IRA", because that is the term he has heard for paying out of pocket and deferring reimbursement to allow the account to grow for retirement. I don't mean to speak for the OP and they can respond, but it is very likely they intend for the HSA to be primarily for it's intend purpose, especially in retirement when you really need it.

Your final paragraph is also flawed. You use a 30 year projected future HSA balance without also projecting what that Individual will have in qualified medical expenses starting retirement in those same 30 years. If a person retiring today can expect $250K, don't you think that will also be significantly higher in 30 years.

I stand by my rebuttal.

[Donnie]

6% real return, friend.  5% real is $860k, more than the $500k you say is necessary.   It is you who is giving bad advice, making assumptions not in the OP, and dispensing with inflammatory comments that detract from a logical debate.

[Lithium]

it’s a pretty big gamble to sacrifice eligibility to take out tax-free HSA withdrawals (on gains) on the assumption that LTCG will still get better tax treatment than unqualified HSA expenses several decades from now. But if you assume there are no health care expenses to worry about it makes sense.

I guess one could argue that it’s a gamble to assume that the traditional receipt saving strategy for qualified expenses won’t be shut down by regulation at some point either, but I’d rather take my chances with that.