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  • #16




    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.
    Click to expand...


    I agree with your concern that tax laws could change, but it is hard to speculate on how the tax code will look in 30 years.  For that reason, I try to take advantage of any breaks that I have now.  If tax-free qualified expense reimbursement is shut down for high earners, that would be far more detrimental to you than a change in cap gains taxes because now the whole receipt would be taxed at ordinary income levels.  Much better to take the cash now tax free if there is any significant risk of that happening in the future.

    Comment


    • #17




      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.
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      I fail to see what is inflammatory about pointing out that the vast majority WCI members will benefit from paying HSA qualified medical expenses out of pocket and deferring tax-free distributions to accumulate the largest possible HSA balance for retirement qualified medical expenses. The vast majority if not virtually all forum members with HSAs will themselves and/or their spouses outlive their HSA balances. Thus rendering the fundamental premise of your argument specious.

      You didn't mention in your prior response that you were referring to real returns. Not withstanding the likelihood of 6% real returns, you also neglected one significant point. If you are going to use real returns, then the nominal investment returns need to be biased against the correct inflation. Healthcare inflation has and will likely continue to rise at a significant faster rate than core inflation. So you need to factor that real increase into the projected retirement qualified medical expenses.

      Finally, even though it will be a distinct minority of white coats who will find themselves with 30+ years of HSA eligibility. Lets even assume for sake of argument that in a perfect combination of events the HSA balance is too large. It is not an all or nothing proposition. A significant proportion of those compounded earnings from the unreimbursed receipts will have been distributed as tax-free disbursements rendering the net average ordinary tax liability of any non-qualified taxable distributions far lower than the actual marginal tax rate.

      Comment


      • #18
        I already said what I thought was inflammatory.  You claimed my math was mythical.  My PhD is in physics.  Rest assured, I take math very seriously.  If I am saying the math backs up what I am saying, I have actually done it.

        You then moved the goal posts and said my logic and analysis was fundamentally false because OP didn't really mean Stealth IRA, he meant tax-free qualified withdrawals.  We can all speculate on what OP meant by saying Stealth IRA, but Stealth IRA has a meaning that is actually well defined on this very site.

        To quote WCI:

        • But even if you don’t need it for health care, you can treat it just like a traditional IRA once you hit age 65.  But it is even better than a traditional IRA for two reasons:  First, there is no income limit on deducting your contributions.  The contributions are deductible even if you make a million dollars a year.  Second, the contribution limit can be higher than the $5000 limit on traditional or Roth IRAs-$6150 ($3050 for individual coverage) for 2011.


        Most people probably don't know that saving receipts and treating an HSA like a "stealth" traditional IRA is likely a bad decision for most high income earners based on the current tax code.  Furthermore, saving receipts is not riskless.  The tax code could change (no more tax free deductions for high income earners, no more carry forward of prior year receipts, etc.) or you could lose receipts.  Plowing ahead with receipt saving without understanding the risks or the benefits is a bad idea.

        I agree that healthcare costs have outpaced inflation, but I highly doubt that it will continue like that in the future. How will anyone retire if you need $500k-$1M saved just for medical expenses.  69% of Americans have less than $1k of savings.

        Your last point is off base because I am making the point about IRA-type withdrawals, not tax-free withdrawals. In the following example, the assumption is that the earnings from the investment will not be used for qualified health expenses.  If they are, then the amount should be reduced from $5,000 in the example until the returns would not be expected to be used for future health expenses.

        If you have $5,000 in medical expenses this year you can either (i) use $5,000 of cash from you taxable account to pay the expenses and leave the HSA money untouched or (ii) withdraw the $5,000 from the HSA to pay the expenses and invest the $5,000 in your taxable account.

        • Withdrawing from HSA and Investing in Taxable

          • Un-taxed Principal - $5,000

          • 30 year gains at 5.5% - $19,920

          • 30 year gains after 15% cap gains tax rate - $16,932

          • Total After Tax Amount - $21,932





        • Savings Receipts and using HSA as Stealth IRA

          • Un-taxed Principal - $5,000

          • 30 year gains at 6.0% - $23,717

          • 30 year gains taxed at 33% ordinary income - $15,891

          • Total After Tax Amount - $20,891




        So there are the numbers on this situation.  In this example, you are $1,041 better off by withdrawing from the HSA today rather than saving receipts to invest tax free for use as a stealth IRA.

        Comment


        • #19
          We will just have to agree to disagree.

          Just because a person "can" take non-qualified HSA distributions >= age 65, pay ordinary income taxes and pay no penalties does not mean they "should" when they have substantial opportunity for future qualified tax-free HSA distributions.

          You seem to think that some semantic purity to the made up term "Stealth IRA" is the only thing that matters. Instead of the sound financial reasons why it is not the optimal option.

          WCI started this website for the financial benefit of the members. Your PhD in Physics and mathematical skills are not really relevant when, you are making a fundamentally specious argument to justify your recommendation. Especially when that recommendation is detrimental to the vast majority of the WCI community.

          Comment


          • #20




            We will just have to agree to disagree.

            Just because a person “can” take non-qualified HSA distributions >= age 65, pay ordinary income taxes and pay no penalties does not mean they “should” when they have substantial opportunity for future qualified tax-free HSA distributions.

            You seem to think that some semantic purity to the made up term “Stealth IRA” is the only thing that matters. Instead of the sound financial reasons why it is not the optimal option.

            WCI started this website for the financial benefit of the members. Your PhD in Physics and mathematical skills are not really relevant when, you are making a fundamentally specious argument to justify your recommendation. Especially when that recommendation is detrimental to the vast majority of the WCI community.
            Click to expand...


            What are you talking about?  It is seriously perplexing that you have made and continue to make statements about how damaging and detrimental my point of view is to the WCI community.  WCI and POF either are currently or are seriously considering cashing in their receipts now as opposed to saving them.  Others on the board also cash out receipts as the expenses are incurred.  Maybe I am in the minority on this board, I don't know.  Certainly HSA issues are not specific to doctors.

            I am not making any specious arguments.  It is clear cut.  If you are going to use all of your HSA for qualified health expenditures, you are better off keeping your receipts.  If you are going to take non-qualified distributions, in many cases it may be better to cash them out now depending on your tax situation.  Why is this so controversial to you?

            Comment


            • #21
              Since when can couples put in $13k a year into their HSA?

              Comment


              • #22




                Since when can couples put in $13k a year into their HSA?
                Click to expand...


                You are right, I typed that too quickly.

                Comment


                • #23
                  Assuming qualified withdrawals it turns out the HSA advantage is measurable but not immense. A married couple can assume a lot of future health care expenses. The biggest drawback to the HSA-as-retirement account approach is the immediate taxation when inherited by a non spousal beneficiary. That should give us all pause, especially single investors.

                  Taking into account all factors, I've opted for option 1. Our HSA is a negligible part of our portfolio and is 100% invested in a low cost total international stock index fund. However every now and then I get tempted to stop with the receipt-keeping and just empty the whole thing (we've had enough qualified health care expenses in the last few years that we could do so without penalty). My stack of receipts is 2 feet high.

                  Comment


                  • #24
                     


                    So there are the numbers on this situation.  In this example, you are $1,041 better off by withdrawing from the HSA today rather than saving receipts to invest tax free for use as a stealth IRA.
                    Click to expand...


                    Fun to see someone else down the rabbit hole of trading barbs.

                    The math as presented works as presented because it's math, but the scenario seems to miss a couple things, but I could be mistaken in a few things.  I'm honestly curious here, so please correct any misunderstandings I have.

                    • You seem to assume any future tax changes would favor a taxable account.  While I've no idea what will happen, at the moment HSA's seem to be gaining momentum to be more broadly available and able to be funded at a higher level, so they are unlikely to lose tax favored status anytime soon if they want people to use them.

                    • But then even if we stick with current tax rates, I am not sure why we are using 33% -- as WCI and others always point out, using current tax brackets, most of us should be in a LOWER bracket at retirement than we are now.

                    • You indicate that the whole receipt thing is fraught with issues -- sure, saving any document for long periods is fraught with issues.  But a lot of people make it to death without losing a birth certificate or social security card.  My receipts are saved on Dropbox and then uploaded to ConnectYourCare.  It is NOT difficult to save receipts.  It takes no more effort to "save" the receipts then to actually use those same receipts to get the money out immediately.  I still have to electronically submit those receipts to CYC to access my money immediately, which means I've scanned it into my computer and put it on Dropbox and then uploaded it to CYC.  So uploading them and then NOT withdrawing isn't really an effort issue, it's more a matter of do I think Dropbox and CYC will fail on the same day without chance of recovery of any documents.

                    • I'm not sure how you chose $5k as the expenditure amount as a lot of people will have more than $5k/year in expenses in years they fund an HSA.  You're specifically talking about high earners, and if you're on a HDHP that qualifies for an HSA, then by definition your deductible must be at least $2,700 for a family, but in most cases is far higher.  A high earner (your scenario) who is self-employed using an HDHP/HSA may have a deductible of $8k or $10k or higher.  They can easily rack up that much in costs a year before hitting the deductible, so if paying out of pocket they could actually accrue as much in health care expenditures as they do in HSA contributions AND growth.  I hit my out of pocket max in both 2015 AND 2016, but I'm fortunate that my OOP max is only $5500 (less than my HSA contributions).  But once I am paying for braces, I'll be racking up qualified expenditures that don't count towards those numbers, so I could easily pay more out of pocket than I contribute to the HSA.

                    • If you truly have only $5000 in expenditures to make tax free, AND you are somehow in a 33% bracket, then the math favors the taxable account (but I think those are assumptions that may not be accurate).  I'm too lazy to run the #'s and you seem like a #'s person, but what would the breakeven point in healthcare expenditures be to make the returns equal? Off hand it doesn't seem like a big change -- roughly $6k in expenditures (and thus tax free withdrawals) and the rest at your 33% ordinary income tax rates is about even


                     

                    So while I do see scenarios where the math favors a taxable account, it really seems like you could make assumptions that are equally or more valid that could dramatically favor the HSA.
                    An alt-brown look at medicine, money, faith, & family
                    www.RogueDadMD.com

                    Comment


                    • #25
                      Well...I'm definitely not a math guy, but I'm saving my HSA for health expenses in retirement.  At least that's my plan.  I'm already part-time and dropping even more soon-- Given that my monthly income is going to be squeezed, I'm saving receipts in case I need emergency access to that cash earlier.  However, why not wait til retired and use it for a new hearing aid or that hospital co-pay?

                      Donnie, you're right that it is incredible to think of people retiring if they need $0.5-1M saved up for medical expenses.  It's one of the elephants in the room of American healthcare.  Folks think it is ridiculous that healthcare costs 20% of GDP until they are the one on the gurney at which point no expense should be spared.

                      Spiritrider, I've often wondered if those expenses listed in the studies is stuff that can be avoided (such as having a good grip on medical futility with the family on board, a solid POLST, etc).

                      Comment


                      • #26





                         
                        Click to expand...



                        Responses below.

                        • You seem to assume any future tax changes would favor a taxable account.  While I’ve no idea what will happen, at the moment HSA’s seem to be gaining momentum to be more broadly available and able to be funded at a higher level, so they are unlikely to lose tax favored status anytime soon if they want people to use them.  My base assumption is that nothing changes in the tax code.  I think it is hard to know what changes will have been implemented when most of us are retired.  Most laws have inertia, so I err on sticking with what we have now.  I tend to agree with you that cap gains tax treatment seems more at risk than HSA withdrawal treatment though.



                        • But then even if we stick with current tax rates, I am not sure why we are using 33% — as WCI and others always point out, using current tax brackets, most of us should be in a LOWER bracket at retirement than we are now.  25-30% is the break even point depending on the assumed returns.


                         

                        • You indicate that the whole receipt thing is fraught with issues — sure, saving any document for long periods is fraught with issues.  But a lot of people make it to death without losing a birth certificate or social security card.  My receipts are saved on Dropbox and then uploaded to ConnectYourCare.  It is NOT difficult to save receipts.  It takes no more effort to “save” the receipts then to actually use those same receipts to get the money out immediately.  I still have to electronically submit those receipts to CYC to access my money immediately, which means I’ve scanned it into my computer and put it on Dropbox and then uploaded it to CYC.  So uploading them and then NOT withdrawing isn’t really an effort issue, it’s more a matter of do I think Dropbox and CYC will fail on the same day without chance of recovery of any documents. Agreed.  It's not that hard to keep your receipts, but it is annoying and certainly there is risk of losing them.  I also think that IRS may take another look at receipt hoarding when folks withdraw very large amounts annually using old receipts.  Because HSAs are relatively new, I doubt anyone has tested this in full yet.


                         

                        • I’m not sure how you chose $5k as the expenditure amount as a lot of people will have more than $5k/year in expenses in years they fund an HSA.  You’re specifically talking about high earners, and if you’re on a HDHP that qualifies for an HSA, then by definition your deductible must be at least $2,700 for a family, but in most cases is far higher.  A high earner (your scenario) who is self-employed using an HDHP/HSA may have a deductible of $8k or $10k or higher.  They can easily rack up that much in costs a year before hitting the deductible, so if paying out of pocket they could actually accrue as much in health care expenditures as they do in HSA contributions AND growth.  I hit my out of pocket max in both 2015 AND 2016, but I’m fortunate that my OOP max is only $5500 (less than my HSA contributions).  But once I am paying for braces, I’ll be racking up qualified expenditures that don’t count towards those numbers, so I could easily pay more out of pocket than I contribute to the HSA.  I just chose $5k as a dollar amount to illustrate the point.  Likely the correct thing to do is a mixture of savings receipts and withdrawing if your HSA is getting larger than you think will be necessary for future medical needs.  


                         

                        • If you truly have only $5000 in expenditures to make tax free, AND you are somehow in a 33% bracket, then the math favors the taxable account (but I think those are assumptions that may not be accurate).  I’m too lazy to run the #’s and you seem like a #’s person, but what would the breakeven point in healthcare expenditures be to make the returns equal? Off hand it doesn’t seem like a big change — roughly $6k in expenditures (and thus tax free withdrawals) and the rest at your 33% ordinary income tax rates is about even. It is 25-30% depending on returns and tax drag on those returns.


                        Anyway, this all started in another thread on HSAs where the same debate was going on.  People were discussing saving receipts, letting the investments grow tax free, and making IRA-type withdrawals in retirement.  The thread had not been numbers based, which was annoying to me since the numbers can be figured out, and certainly they should be an input into financial decisions. 

                        When I ran the numbers, it surprised me that for typical tax brackets, returns, and tax drags used in sites like this, the HSA was worse if you are making IRA-type withdrawals than withdrawing from HSA and investing in taxable.  I had never seen that point written anywhere in any writings about HSAs. 

                        It's fine with me if you all agree with Spiritrider.  Hoarding receipts is not a bad decision, and you are not giving much up if you do end up having to make an IRA-type withdrawal.   I still think that understanding that it may not be the best move from a financial perspective is an interesting point that folks should understand as they hoard though. 

                        Comment


                        • #27
                          I think the general point of pointing out the math may not work as well as everyone thinks is a great one.  However the assumptions need to be understood and it may be hard to generalize.

                          Re: the IRS and receipts, idk how this works in the background.  When I upload receipts to CYC and want to withdraw money, I can access the money instantaneously.  I assume CYC must be verifying I am uploading real receipts somehow, however what is the IRS told?

                          The IRS certainly is not manually verifying anything.  Sure, in an audit the IRS may ask for the receipts, but outside of that I assume it's CYC's job to ensure I am providing receipts that are of qualified medical expenses.  The IRS may get notice via whatever form of how much was withdrawn, but as you said, I guess idk if someone withdrawing a large amount (not sure what that would be) would trigger an audit.
                          An alt-brown look at medicine, money, faith, & family
                          www.RogueDadMD.com

                          Comment


                          • #28


                            The IRS certainly is not manually verifying anything.  Sure, in an audit the IRS may ask for the receipts, but outside of that I assume it’s CYC’s job to ensure I am providing receipts that are of qualified medical expenses.  The IRS may get notice via whatever form of how much was withdrawn, but as you said, I guess idk if someone withdrawing a large amount (not sure what that would be) would trigger an audit.
                            Click to expand...


                            A large w/d w/n trigger an audit but might be questioned in the course of an audit. HSA receipts are one area that I think technology can take more time than not. I stuff receipts into a large manila envelope until it's full then on to the next. Considering that I am 95% certain they will never have any use and I am spending far more than my HSA will ever grow to, I have no desire to take the time to scan and save.
                            Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                            • #29
                              I have only $10k in saved receipts and $20k in the account at the moment. Invested in equities in a bull market helps of course, but I have no idea how much I'll use later or when.

                              Scanning into Dropbox and uploading is slower than an envelope, but provides some backup. However I did just say people manage SS cards and birth certificates that way so it work so. . Difference is I won't have to upload 1000 pieces of paper when I really need the money -- it'll all be ready to be withdrawn. Seems unlikely I can just hand someone 25 years of paper receipts and walk away with a ton of HSA cash without some difficulty.
                              An alt-brown look at medicine, money, faith, & family
                              www.RogueDadMD.com

                              Comment


                              • #30




                                I have only $10k in saved receipts and $20k in the account at the moment. Invested in equities in a bull market helps of course, but I have no idea how much I’ll use later or when.

                                Scanning into Dropbox and uploading is slower than an envelope, but provides some backup. However I did just say people manage SS cards and birth certificates that way so it work so. . Difference is I won’t have to upload 1000 pieces of paper when I really need the money — it’ll all be ready to be withdrawn. Seems unlikely I can just hand someone 25 years of paper receipts and walk away with a ton of HSA cash without some difficulty.
                                Click to expand...


                                Of course, you're a lot younger than I  but I still doubt I'd take the time to do it. I'm not making an argument, just providing an alternative for those who balk at HSAs because of the trouble of filing receipts. If I were to be audited, I'd also just hand the whole mess to the agent with a smile and let them sort it out.
                                Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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