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Use HSA funds versus paying cash and allowing HSA to grow

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  • MPMD
    replied










    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.
    Click to expand…


    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.ment
    Click to expand…


    I couldn’t disagree more. I literally despise the term stealth IRA and have expressed that to WCI. The practice of paying qualified medical expenses out of pocket and deferring distributions is to build a retirement Health Savings Account. To pay the vast qualified medical expenses you will have in retirement, not an extra pre-tax retirement account.

    One of my favorite expressions for financial matters is; “just because you can do something does not mean you should do something. You can take non-qualified HSA distributions after age 65 without paying the 20% excise tax penalty, but you will be wasting future likely tax-free distributions for current taxable distributions.

    Most people vastly under estimate medical expenses in retirement. 2018 projections are that a couple retiring at age 65 will have $280K (2018 dollars) in medical expenses during their retirement. This does not include over-the counter products, (dental, vision and hearing) products/services and LTC or insurance. You will need proportionally more if you plan on retiring early.

    It will be the rare individual who runs out of life before they run out of tax-free HSA distributions. An individual should almost never take non-qualified taxable distributions distributions from an HSA before all other sources of income.
    Click to expand...


    I'm curious why you quoted my stuff on here? I don't think I'm advocating a stealth IRA.

    I am NOT trying to do any kind of stealth IRA at all. I don't have any plans to take non-qualified distributions.

    This is my decision process (please help me see where I'm wrong)

    1. Money goes into my HSA pre-tax and with a small match

    2. I am easily able to cash-flow medical bills and save receipts

    3. Every year that I add to the receipt pile is a year that I am (hopefully) getting tax free growth in my HSA

    4. I will withdraw from my HSA only under one of 3 conditions

    a) a future but immediate w/d for a medical expense

    b) health care needs in retirement

    c) some portion of my saved receipts for a future purchase where cash is needed

    5. On a short time horizon (I've been doing this for 2 years) it's kind of a push

    6. On a long time horizon (retirement) I could end up with some serious growth in my HSA tax free

    Leave a comment:


  • RogueDadMD
    replied
    The purpose of deferring is to let it grow by investing the $, giving you more money to use later.

    What one does with the investment returns is not prescribed. If you are able to use saved receipts and pull it out without taxes or penalties then you realize the tax benefit regardless of whether you actually spend the money on healthcare or a boat.

    Money is fungible in that as long as you get the tax benefits the rest doesn’t matter — it’s just semantics.

    If you defer using the $ for qualified expenses but then don’t invest for the medium term to let it grow then there isn’t a point in storing the cash within the account. But I disagree that it should only be used for retirement if you don’t use it right away.

    Leave a comment:


  • spiritrider
    replied







    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.
    Click to expand…


    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.ment
    Click to expand...


    I couldn't disagree more. I literally despise the term stealth IRA and have expressed that to WCI. The practice of paying qualified medical expenses out of pocket and deferring distributions is to build a retirement Health Savings Account. To pay the vast qualified medical expenses you will have in retirement, not an extra pre-tax retirement account.

    One of my favorite expressions for financial matters is; "just because you can do something does not mean you should do something. You can take non-qualified HSA distributions after age 65 without paying the 20% excise tax penalty, but you will be wasting future likely tax-free distributions for current taxable distributions.

    Most people vastly under estimate medical expenses in retirement. 2018 projections are that a couple retiring at age 65 will have $280K (2018 dollars) in medical expenses during their retirement. This does not include over-the counter products, (dental, vision and hearing) products/services and LTC or insurance. You will need proportionally more if you plan on retiring early.

    It will be the rare individual who runs out of life before they run out of tax-free HSA distributions. An individual should almost never take non-qualified taxable distributions distributions from an HSA before all other sources of income.

    Leave a comment:


  • MPMD
    replied




    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.
    Click to expand...


    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.

    Leave a comment:


  • RogueDadMD
    replied
    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.

    Leave a comment:


  • jacoavlu
    replied




    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.
    Click to expand...


    OP started this thread in Feb 2016

    Leave a comment:


  • snowcanyon
    replied
    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.

    Leave a comment:


  • saildawg
    replied
    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.

    Leave a comment:


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

    Leave a comment:


  • jfoxcpacfp
    replied


    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.
    Click to expand...


    lol, doesn't bother me at all. I must be missing something   .

    Leave a comment:


  • MPMD
    replied




    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.
    Click to expand...


    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.

    Leave a comment:


  • Tim
    replied


    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.

     

    Leave a comment:


  • spiritrider
    replied
    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.

    Leave a comment:


  • jacoavlu
    replied
    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.

    Leave a comment:


  • jfoxcpacfp
    replied




    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.
    Click to expand...


    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?

    Leave a comment:

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