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Use HSA funds versus paying cash and allowing HSA to grow

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  • #31




    I dont think it will be hard to put that kind of money in the future to use for a healthcare expense, even if you didnt keep receipts, etc…At some point something may happen that takes 30 years of compounding and eats a giant chunk of it up easily. Not really concerned about a too large for healthcare balance.
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    Exactly my thought.  Assuming a high deductible plan, it has the chance of being eaten up fast before you satisfy the deductible.  (Although my HSA balance is getting big enough to support several years of family deductibles!  One of those "good" problems to have.)

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    • #32







      Let me know what I messed up!
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      I won’t say that you messed up exactly, but I will say that your assumption of a 1% tax drag is about double what it should be, and your estimate of $1,500 average out of pocket expenses is extremely optimistic. In my 18-month experiment, we spent $5,000 a year out of pocket (we have 2 kids), and our tax drag is under 0.6% and will likely drop by 10 to 30 basis points when I retire.

      That is some nice spreadsheet work, though, and it’s great to have that skill. And if you don’t mind the saving, scanning, and planning to cash in decades down the road, you can come out ahead. For me, I’ve found it to more trouble than it’s worth, but that’s just me. Like the WCI post I linked to above, it’s about minimizing the time spent on finances, and this is one area I’m glad to recapture some time.

       

       
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      I actually pay out my medical expenses as they occur because (i) I don't want to deal with the receipts and (ii) who knows if they will change the tax treatment when someone puts through $200k worth of medical bills from 30 years ago.  Those are risks I don't want to take. Prior to today, I had never thought about deferring cashing in on the receipts before.

      I don't think you will be paying $5k per year every year.  I have three kids.  In 2015 I paid $7000, mostly because we had a child in late December 2014, and a lot of those expenses hit in 2015.  I only spent $800 last year.  This year will be more because my oldest is getting braces.

      I agree the tax drag assumption on the taxable account is probably high.  I should probably state the other assumptions are that I assume the HSA balance is withdrawn at a 33% tax rate after 30 years, and I assume that the taxable account balance is withdrawn at a 15% long term capital gains tax rate after 30 years.  I assume the $45k in medical expenses are withdrawn after 30 years tax free.

      There was a glitch in the other version I posted which overstated the capital gains tax in the taxable account.  The actual benefit of paying out of after-tax dollars versus your HSA is only $2.8k in my example, rather than $10k previously mentioned.

      If the difference between taxable return and tax-free return goes to 50 bps, it is actually preferable to pay out of your HSA because you are converting long term capital gains taxes at 15% to 33% ordinary income tax.

       

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      • #33
        Has anyone had any new insights or practices on this?

        It seemed like a no-brainer to me to save receipts but going back through this thread to find that WCI/PoF both changed gears gave me pause.

        I'm being more than a little dense but I'm having a hard time understanding why people are saying that paying med expense from HSA is an immediate 45% tax break. I understand that it is but if you save receipts aren't you just getting that PLUS the tax free growth? With a long time horizon, an aggressive allocation, and ability to painlessly cash-flow year to year expenses I'm still having a hard time seeing the counter-argument to the save receipts/let it grow strategy.

        Nb: at this point my HSA "owes" me about $6500 and has a balance of about $11,000. I could easily find something to do with $6500 but I don't "need" it in any real way.

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        • #34




          Has anyone had any new insights or practices on this?

          It seemed like a no-brainer to me to save receipts but going back through this thread to find that WCI/PoF both changed gears gave me pause.

          I’m being more than a little dense but I’m having a hard time understanding why people are saying that paying med expense from HSA is an immediate 45% tax break. I understand that it is but if you save receipts aren’t you just getting that PLUS the tax free growth? With a long time horizon, an aggressive allocation, and ability to painlessly cash-flow year to year expenses I’m still having a hard time seeing the counter-argument to the save receipts/let it grow strategy.

          Nb: at this point my HSA “owes” me about $6500 and has a balance of about $11,000. I could easily find something to do with $6500 but I don’t “need” it in any real way.
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          I don't understand that reasoning, either. I am saving my receipts to be used when my cash flow is lower and my medical expenses are higher. If you believe annual backdoor Roth contributions are worthwhile, why wouldn't you believe the same for HSA's?
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #35
            wisdom over in this current thread on bogleheads:

            rule of thumb for using HSA funds?


            quote there from @spiritrider

            Generally speaking




            • If you are maximizing all available tax-advantaged retirement accounts, you should pay all qualified medical expenses out of pocket and save proof. By doing this you are expanding your tax-advantaged account space.

            • If you are not maximizing your tax-advantaged retirement accounts, you should use the HSA to pay all qualified medical expenses. This allows you to "realize" the tax savings from the HSA contributions and increase your other tax-advantaged contributions. Effectively you are exchanging your HSA balances with strings attached to tax-advantaged balances without strings attached, always a good thing.


            This assumes that you have available savings rate and do not need the HSA distributions just to pay the qualified medical expenses. Also, the latter take quite a bit of discipline to offset the distributions with additional tax-advantaged retirement contributions.

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            • #36
              I agree 100% with Johanna and her point about the Backdoor Roth.

              Both WCI's and PoF's reasoning is abount the hassle factor and the small relative tax benefit. However, I think the hassle factor of saving proof is overblown. The tax benefits are about still about 60% that of a Backdoor Roth.

              I'm sure the relative tax benefit is much smaller for WCI and PoF than me. Their choices may be good for them with very high incomes/portfolios. To each their own. I will continue my strategy and continue to promote it for the rest of us.

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              • #37


                Sounding like a broken record here, but why would any 28 year old want bonds in a portfolio for money you don’t plan to use for 20, 30, 40+ years?
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                I fully agree that statistics are a great basis for comparing returns. From a behavioral standpoint, please discard the following:

                Why 1926? Things aren't the same. Yes they are. This time its different. No it's not. Past performance is not indicative of future results .......

                Risk is an individual preference that is both capacity and tolerance AND need. Yes, some 28 year olds are uncomfortable with volitility that can be reduced.

                Having an Investment Policy Statement is important. Following it is important as well.  https://www.whitecoatinvestor.com/how-to-write-an-investing-personal-statement/

                Not many folks use records from 20, 30, or 40 years ago, broken of in mint condition. Not many IPS are the same. The answer to the question is simply "because they are most comfortable with it." Yes, its not the maximum growth potention but if it meets they goal, that is the most important thing.

                I greatly respect Johanna's experience and advice. My point is no allocation is perfect but that a choice of including bonds in some form is NOT a mistake just based on age. There is alot more to it.

                 

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                • #38




                  I agree 100% with Johanna and her point about the Backdoor Roth.

                  Both WCI’s and PoF’s reasoning is abount the hassle factor and the small relative tax benefit. However, I think the hassle factor of saving proof is overblown. The tax benefits are about still about 60% that of a Backdoor Roth.

                  I’m sure the relative tax benefit is much smaller for WCI and PoF than me. Their choices may be good for them with very high incomes/portfolios. To each their own. I will continue my strategy and continue to promote it for the rest of us.
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                  The hassle factor I just simply do not get and it doesn't apply to me. I have a system that takes me <1 min/receipt and I'm already heavily using cloud document services so it's just added to my current workflow that I already use for everything else in my life.

                  Just seems like every month you cash flow healthcare you are allowing compounding tax free interest in the account and that this is an account where you can have the maximal risk tolerance as it is so advantageous. I mean ************************ with you could almost view this as an e-fund couldn't you? Like I said I have $6500 now that I can tap at any point that I want to.

                  Sorry if people feel like this has been hashed out, I just generally feel like when I'm disagreeing w/ WCI/PoF I must be missing something and I'm trying to explore that.

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                  • #39


                    Sorry if people feel like this has been hashed out, I just generally feel like when I’m disagreeing w/ WCI/PoF I must be missing something and I’m trying to explore that.
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                    lol, doesn't bother me at all. I must be missing something   .
                    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                    • #40
                      I use a limited-purpose FSA for optical and dental and save my HSA funds. Does your job offer this?

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                      • #41
                        Another point that I haven't seen made is that you can pay out of pocket on credit card (cashback or rewards) and then reimburse yourself immediately.  This does require saving receipts (but not for long term at least).  With a 7k bill you could easily meet a minimum spend on credit card bonus that can be worth up to $500+.  That could be worth it for minimal effort.

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                        • #42
                          OP should really check with his job re: limited use FSA, which would render the HSA discussion moot in this particular circumstance. If that's not available, different story.

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                          • #43




                            OP should really check with his job re: limited use FSA, which would render the HSA discussion moot in this particular circumstance. If that’s not available, different story.
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                            OP started this thread in Feb 2016

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                            • #44
                              I think the concept of an HSA as a "stealth IRA" has distorted the issue a little. I don't view it that way as it artificially constraints when/how I can use the $.

                              The benefit of keeping the receipts to me is so I can use it for things OTHER than healthcare when necessary.  Assuming I've invested a portion and let it grow, I now have additional $ I can access anytime I want for other purposes with no tax/penalty, with also a side benefit of having more $ to cover ongoing healthcare costs if I have a really expensive ongoing need.

                              If in 10 years I need $5k extra to pay some college tuition or something, the HSA could be for that.  If I have an opportunity for a new investment opportunity and all my regular cash is spoken for, the HSA could be for that.  Using it as a Stealth IRA is a good technique, but it's certainly not the only way to use it.

                              Saving the receipts is not time consuming at all.  If something happens to them then as the naysayers say, I can just use big healthcare expenses in the future to withdraw the money. It's not so much time to do that I'll feel it wasted if I can't use it.

                              If I have such a large net worth that I really don't care about the tax benefit that's fine, but that's simply a choice of giving away $ because you can, no different than people do for any # of other things.  If the tax laws change then so be it but that has ALMOST happened to 529s and many other things.
                              An alt-brown look at medicine, money, faith, & family
                              www.RogueDadMD.com

                              Comment


                              • #45




                                I think the concept of an HSA as a “stealth IRA” has distorted the issue a little. I don’t view it that way as it artificially constraints when/how I can use the $.

                                The benefit of keeping the receipts to me is so I can use it for things OTHER than healthcare when necessary.  Assuming I’ve invested a portion and let it grow, I now have additional $ I can access anytime I want for other purposes with no tax/penalty, with also a side benefit of having more $ to cover ongoing healthcare costs if I have a really expensive ongoing need.

                                If in 10 years I need $5k extra to pay some college tuition or something, the HSA could be for that.  If I have an opportunity for a new investment opportunity and all my regular cash is spoken for, the HSA could be for that.  Using it as a Stealth IRA is a good technique, but it’s certainly not the only way to use it.

                                Saving the receipts is not time consuming at all.  If something happens to them then as the naysayers say, I can just use big healthcare expenses in the future to withdraw the money. It’s not so much time to do that I’ll feel it wasted if I can’t use it.

                                If I have such a large net worth that I really don’t care about the tax benefit that’s fine, but that’s simply a choice of giving away $ because you can, no different than people do for any # of other things.  If the tax laws change then so be it but that has ALMOST happened to 529s and many other things.
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                                I agree with this with the caveat that if you're not leaving it alone for a while the benefits you'll accrue will be minimal.

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