Comments on: Using Your HSA as a Retirement Investment Vehicle

By: goofy

goofy — Sat, 28 Jan 2012 23:18:38 +0000

I am thinking that using the HSA for immediate (pre-retirement) med/dent/prescription expenses may be of more benefit than leaving it all there hoping for investment gains.
Here’s why. Let’s assume a tax rate of about 25% or more, when you combine fed & state income taxes. How much does a ’safe’ investment accrue, maybe 5% or so annually.

So, $1200 in med expenses, you save $300 in taxes, whereas the 5% is $60 earnings. Of course this accrued. Year two pays 5% of $1260, which is $63, etc.

In my mind, put the maximum in ($3050 or $4050), but pay current expenses.

By: gerard

gerard — Sun, 01 Jan 2012 15:47:10 +0000

It’s amazing to me how many of my co-workers have no understanding that by taking a little risk with their medical expenses, they can save a lot of money. Usually the savings in insurance premiums is enough to fund the account with money to pay for the deductible.

Another advantage is that with a hd account, there can technically be no copays. I got zapped with high copay charges when I went on a regular plan for a short period and they did not count as out of pocket. HD spending is all applied to maximum out of pocket.

By: Curious

Curious — Mon, 07 Nov 2011 05:38:27 +0000

But also on page 8, it defines “qualified medical expenses” as those defined in 502.

By: Nickel

Nickel — Thu, 29 Sep 2011 18:52:51 +0000

Tom: Read the Introduction section on page 2. That publication talks about including your medical expenses as itemized deductions on Schedule A, and thus isn’t relevant to this discussion. Publication 969 is the one that talks about HSAs:

http://www.irs.gov/pub/irs-pdf/p969.pdf

See page 8. You can receive distributions for qualified expenses incurred after the HSA was established.

By: Tom

Tom — Thu, 29 Sep 2011 18:27:28 +0000

IRS publication 502 dated March 03, 2011 (Page 3) asks “What Expenses Can You Include This Year?” and goes on to answer by saying, “You can [only] include medical and dental expenses you paid this [calendar] year, regardless of when the services were provided.”

So unless I’m missing something that completey kills the idea you recommended, does it not?

By: Nathan

Nathan — Sat, 02 Jul 2011 03:56:24 +0000

Paul, you’re missing the loophole. If you incur qualified medical expenses throughout the years, pay for them out of pocket, and file claim for these in retirement….there’s your tax-free (like Roth) distributions. They would have to be justified with past qualified (and unreimbursed) medical expenses. The tradeoff is the tax-free, compounded growth.

Great planning idea.

By: Paul

Paul — Thu, 02 Dec 2010 15:07:10 +0000

After age 65, I don’t think these funds can be withdrawn tax free like a ROTH. I believe they are taxed like a traditional IRA as income, but not subject to the 10% (moving to 20% in 2011) penalty.

By: Jonathan

Jonathan — Sat, 27 Feb 2010 15:44:18 +0000

What I noticed about HSA accounts listed in Texas was very poor earning potential. At least that is the case with the ones I found online. Plus, the ones with better earning potential (relative of course) also had higher fees, $3-$5 per month as opposed to “only” $25 per year. Throw into the mix, I can find an affordable HDHP, then the HSA is out. So, until I can lose the weight to be able to even get a policy, no HSA’s for me!

By: Ben

Ben — Sat, 27 Feb 2010 02:37:13 +0000

Nickle, very interesting discussion on the savings benefits of HSA accounts. I happen to be someone in the very high income category who can afford to pay for my annual medical expenses out of pocket without dipping into my HSA account. I did not recognize the benefits that this account affords.

I would be very interested to learn more about some recommended HSA custodians that are considered low cost providers. Thanks for the great information.

By: Anthony

Anthony — Fri, 26 Feb 2010 18:15:27 +0000

Oops… I also want to say:

I didn’t know that my company’s HSA custodian was just preferred and not required. I will have to start exploring options!

I am with ACS|BNY Mellon. I don’t like the investment options that they have. I am curious if anyone has recommendations on HSA custodians with good investment options.

By: Anthony

Anthony — Fri, 26 Feb 2010 18:12:05 +0000

FCN has already talked about ONE of the TWO great reasons why I have an HSA: the great tax benefits. You get the tri-facto: pre-tax contributions, tax-free distributions, and tax-free interest/growth.

The SECOND great reason for me: My company contributes $100/month on my behalf. Great deal!

In any case, I am stockpiling money in my HSA for my older years. Not retirement, but the inevitable increased health problems as I age. In the short-term, my HSA acts as an emergency fund for any medical emergencies. I have not been able to max out my contributions, but for the last two years, I’ve built a nice $3000 HSA medical cushion.

By: Funny about Money

Funny about Money — Fri, 26 Feb 2010 13:35:17 +0000

That was the pitch I was given when I was sold an MSA, an early version of the HSA. Terms were the same as you describe.

Problems were as follows:

At the time, we had a limited number of choices of banks that were allowed to administer HSAs. Their fees were exorbitantly high. You had to figure out where you could invest the money, and then you had to manage the investments yourself…and you STILL paid fees that ate up returns. Thus as an investment vehicle, it was a bit of a rip.

Second, unless you’re extravagantly lucky or extravagantly affluent, few people can pay medical bills out of pocket.

Third, the amount we were allowed to deposit in the HSA was less than the annual deductible. Thus if you got sick or hurt in the first 18 months or so after buying into the plan, you would quickly consume every penny you’d set aside.

That said, one advantage was that when doctors learn you’re paying in cash, you can sometimes negotiate fees downward.

By: Stacey

Stacey — Tue, 23 Feb 2010 16:39:00 +0000

We plan on having a baby within the next three years, and my health plan isn’t the greatest. We’re stashing the max in my husband’s HSA every year and plan to use those funds to pay for maternity care.

The best part about an HSA, in our case: My husband has a HDHP through work, but I don’t. We can use his HSA to save for my health expenses!

After the baby arrives, we’ll probably start using the HSA as a beefed-up emergency fund/retirement vehicle.

By: nickel

nickel — Tue, 23 Feb 2010 00:08:54 +0000

Hildebrand: I will likely put something together in the next few days on qualified expenses, but in the mean time you can click through the IRS link in the article above for a summary.

Regarding your other question… Assuming the distribution isn’t for qualified expenses, I believe that taxes would be due on the full amount distributed after 65 (including principle) because the contributions were deductible going in.

By: Frugal Babe

Frugal Babe — Mon, 22 Feb 2010 23:34:51 +0000

We switched to an HSA qualified health insurance plan in 2007, and have been maxxing out our HSA ever since. In 2008, we withdrew funds to cover our deductible when my husband had knee surgery, but since then we’ve left it alone, and saved receipts. We’ll finish our 2010 contributions next month (a little ahead of schedule thanks to a tax refund), and plan to just let it keep growing. We absolutely think of it as another retirement account.
Hildebrand, you can check out IRS publication 502 to see what’s considered qualified expenses. Also, since the money you put into an HSA is tax-deductible, everything (principle and growth) is taxable for retirement purposes if it’s liquidated for reasons other than medical expenses (it’s very similar to a traditional IRA, except that you can take money out for medical expenses without paying taxes or penalties)

By: Hildebrand, The Insurance Warden

Hildebrand, The Insurance Warden — Mon, 22 Feb 2010 22:27:49 +0000

Concentrated investment into an HSA looks appealing, but would you provide a couple of answers?

What constitutes a ‘qualified’ medical expense? Does therapy for mental wellbeing qualify?

And by your final bullet-point am I to understand that the entirety of the HSA could be liquidated to supplement a retirement, so long as income taxes are paid on every dollar beyond the principle?

By: Rae

Rae — Mon, 22 Feb 2010 20:21:27 +0000

My employer doesn’t offer a HDHP, sadly, but my partner caught on to this one a while ago and has been doing the same thing (although he doesn’t pay everything out of pocket; he does get reimbursed on occasion). It helps that he has very few medical expenses, but more than once I’ve heard him expounding on the idea of using his HSA as a great additional retirement vehicle. AFAIK, he’s been maxing it out every year and has withdrawn maybe $200 to date.

By: Early Retirement Extreme

Early Retirement Extreme — Mon, 22 Feb 2010 18:55:46 +0000

I do the same thing starting my HSA+HDHP a year ago.
While the cash flow is negative in th beginning, the earnings from the HSA can quickly exceed health insurance if the tax deduction doesn’t do it already; hence for anyone with $3000 to spare each year, it is a quick way to eliminate health insurance cost. Especially for those who start early e.g. build up their HSA before premiums start growing significantly.

By: Blaine Moore

Blaine Moore — Mon, 22 Feb 2010 18:19:22 +0000

I opened an HSA this year, mostly so that my health costs would be pre-tax rather than post tax. My insurance plan isn’t very good and doesn’t cover much anyway, so I was happy when this became an option.

I never considered using it as a retirement vehicle, but I think for the time being I’ll use it as it was meant to. Perhaps in the future I can change my priorities around.

By: daddy paul

daddy paul — Mon, 22 Feb 2010 16:20:47 +0000

Good read, good topic!
Health Savings Accounts are excellent vehicles. With the job market the way it is today you may or not have the ability to contribute to a HSA for an extended period of time but you can spend it tax free on medical expenses for life. This account lets you save up for kidâ€™s braces, crowns, and the like. I maxed out my account for a year and a half. It took five years but it all got spent. Not only did I make money on the savings Uncle Sam and the State footed the bill for a hefty portion of the expenses since the money was spent tax free. If you reach 65 then you have an investment similar to an IRA. This is a great way to make the most of your money.

By: Ryan B

Ryan B — Mon, 22 Feb 2010 15:47:37 +0000

I think you’ve got the right idea. I’ve been contributing to an HSA and paying mostly out-of-pocket for medical expenses since around 2000 (technically an MSA back then). There have been periods where I wasn’t covered by a HDHP and had to suspend contributions, but left the HSA alone.

Last year I was able to add a new baby to my HDHP and qualify for higher contribution limits. Now the balance is climbing and I think of the HSA as a medical emergency fund in the short term. Long-term I hope it will be the primary method of paying for medical expenses in retirement.

The greatest concern I have is that sometime during the next 33 years congress puts an end to these plans.

By: Floridian

Floridian — Mon, 22 Feb 2010 14:48:47 +0000

The CPAs caught onto this one really quick! I went to a presentation on the exact same subject a little over a year ago. Good for you for figuring it out without the help of a CPA

By: Mr. GoTo

Mr. GoTo — Mon, 22 Feb 2010 13:35:49 +0000

I agree. With proper investment choices inside the HSA account, using an HSA for retirement investing is better even than a Roth IRA because no taxes are paid either going in or out of the account. For this reason, I haven’t used any of my HSA account to reimburse medical expenses in three years. My account is now well into five figures.