If you think the rules are wrong then contact your congressperson. Exactly. I don’t like to have anything weighing on my mind, like medical expenses from years ago that I’ll need to withdraw from my HSA at a later date for. We have always lived below our means, saved way more than we spend, and this year I finally took the time to put together spreadsheets to show her how what we do now will change our lives both now and the indefinite future. Anyway… My employer will contribute $1000 to my HSA, and then I was going to contribute a small amount each month in addition. So I have two options, (A) withdrawal the money from my HSA and pay the bill, or, (B) pay out-of-pocket and withdrawal the money from the HSA later. You could also look at the tax savings as an inflation hedge, down payment on your annual premiums, etc. HDHP: $16547 (*includes $6900 investment), PPO vs HDHP investments in 30 years (at 3% interest) – WITHOUT FEES ADDED, IF USED FOR QUALIFYING MEDICAL EXPENSES (TAXED OR NOT TAXED), PPO: $19945 ($3937 in cap gains tax, CA) If you go to the doctor a lot, let’s say 20 times a year per family, you just spent $40 on going to the doctor in fees. The lab rat for this experiment is a 30-year old single person who: 1. Keep up the great Blogs! After reading this post, however, I’m going to look into maxing my contribution out completely. Since this was a small purchase further pursuing this with the IRS was not feasible, yet one would think if this was challenged in the court the taxpayer would win. She did say, however, “unless my specific plan precludes that” — though it isn’t clear if that is my employer’s ins. I think the calculation is accurate if you have no more money that you can invest. My employer offers a Fidelity HSA and they pay the annual fee so I’m able to invest in low-cost index funds without paying any fees. For this reason, I think the best overall strategy is tax diversification. And, they are kicking in $500 a year. Thanks for your site; learning a lot of good things on here. HSA is great, but there’s potential risk not covered in this article. Like a Traditional IRA, your contributions to the HSA are pre-tax contributions and your contributions are allowed to grow tax free. http://www.mrmoneymustache.com/2013/03/07/how-about-that-stock-market/ Never knew this was possible because I thought the HSA had to be used before the following year’s tax period, which is April, else you will lose it. Jeremy from GoCurryCracker.com actually linked to that IRS notice in his comment on the How to Hack Your HSA article. Can I use the supplement premium also? HSA account holders can contribute pre-tax dollars to the account and can then withdraw money from the account, tax free, when paying for qualified medical expenses. Has anyone else run into this? You scrounge up the funds to put in the $2400 ($200 per month) into your account this year, which will be augmented by the employer’s contribution up to your max of $3400. I found an HSA account with Health Savings Administrators that offers Vanguard funds, and is linked to from Vanguard’s website. I also will take advantage of the reduced taxes. It is an interesting additional savings vehicle for those who have maxed out other accounts since at very worst it would be an extra $5k and change more you can save in a tax advantaged traditional ROTH like plan than otherwise, even if you never have a medical bill to pay. Hi Ross, I don’t have any experience with that company but it seems many readers have recommended them so they may be a good option. ”, Taken from https://www.bogleheads.org/wiki/Health_savings_account#Inherited_HSA. Thks anyway. Can I wait until the HSA has enough fund to reimburse the 3000 or am I limited to reimburse only 2000 for that expense? I never had any knowledge on this subject and got an excellent crash course. What is the advantage of this conversion? I’m guessing that will hit my 2017 taxes — and I’m not clear yet if gains will be taxed as long term capital gains or income. Thanks for the reply Hin. Please sub-title this article “And potentially worst retirement account”. If your health plan is HSA eligible but your employer can’t help you set one up, I’d take a look at Health Savings Administrators. MF calls the HSA the “Ultimate Retirement Account” because it’s triple tax advantaged, Not taxed in, growth not taxed, and distributions not taxed. PK :ƒ(R META-INF/PK Ò î˜N:ÿ® META-INF/container.xml]ŽË Â0 E÷‚ÿ f+5º“Ð ® ü‚˜Nk0™ M*ú÷Æ ¥¸œáÞsnÙ¼¼ O ¢eª`¿Ý @2ÜZê+ SW ©×«Ò0%m ‡¿p®SÌÉ ëh£"í1ªd ¤–Íè‘’šbj†@F Q Ì©³ ãt. I was working under the assumption that all retirement accounts would be maxed out so what you proposed isn’t an option in that scenario. First off, I can’t take credit for this – I learned about this fantastic idea from a Mad Fientist article titled HSA – The Ultimate Retirement Account. I know I’ll have a bunch of money in the HSA, but I’d like to consider that another FI vehicle instead of a use for health care (since it can’t be used for premiums anyway…?). Even if they take out the HDHP money for non healthcare use and pay the 20% fee in 30 years and income tax on this amount (Let’s say 25% income tax plus 13% state) = $2387.60  you are still ahead of the $1789 if you invested in a taxable account. And no one talks about that either! (Pass through for taxes). My HSA provider also has online storage for documentation, so I keep up with that for reference in the future. It sounds like you are in a pretty solid financial situation. While it seems as if this is a given, the taxpayer in this case did not have written proof to show the IRS that it was indeed a requirement and had to pay tax on that money. They don’t know what they are talking about. I had an FSA last year. Annual cost of family plan is $4,800 with $3,500 deductible. Thanks! it could only be used for dental and vision expenses. Roth, founder of Get Rich Slowly (you know, back when it was good) Mr. Money Mustache – The original MMM himself, always ready to punch you in the face if you make a poor financial decision I have a question about saving receipts and timing of withdrawals. I have an HSA. Since you’re a smart Mad Fientist reader though, I suggest you disregard the medical aspect of the account and simply think of it as a special retirement account that you are able to contribute to when you are enrolled in a high-deductible health plan. Thank you for getting in touch. I didn’t realize that if you saved your receipts, you could withdraw money at any time. I would recommend that you always at least keep your deductible (typically $3-6K) in cash and invest amounts more than that. Would they accept them without a fight? Email Address. In other words, the HSA turns into the equivalent of a Traditional IRA once you hit 65. Except with the HSA, you are reimbursed $200 post-tax dollars, without actually having lost the additional $134, saving you $80 post-tax. It’s ridiculous. If you keep funds in cash from then on, it seems likely that the HSA would be treated like a bank account, i.e. (I am now leaving it untouched) I do take advantage of deductions in years when I top 10%, so I have to track that. I’ve never thought to do that in the past, I’ve always just suffered through hours of frustrating reading instead, but I can definitely see myself using that service in the future. If you go to the doctor and pay him $200, you can take $200 out of your HSA at any time, tax and penalty free, to pay for that expense. An example of this in recent history is that you were allowed to use 529 plans to pay for a student’s computer (i.e. Wish I had found you sooner. I just thought it might be worth clarifying that when you look at which accounts are available for access during early FI….this one will depend greatly on what kind of qualifying medical expenses you have made over the years. HSAs are Super IRAs. Am I missing anything in the comparison? Saying all that though, if you actually spoke to the IRS about this, I definitely believe what you’re saying. The money in these accounts is able to grow tax free. If you've enjoyed the last 9 years of ad-free content and want to say thanks, here's how →. But the difference gets to grow tax free. It can only be used for health-related expenses and it has contribution limits that are set by the IRS. You’re absolutely right, Geoff. I briefly looked into HSA Bank & HSA Administators (transferring my HSA dollars there) but the fees & hassle etc don’t seem to make sense for a fairly small HSA balance (~$7000 at the moment). So 1 out of 3 of the tax advantages is gone. It comes down to choice and control. That leaves ‘off years’ as savings years for us. It’s always nice to hear when something I’ve written helps someone save a considerable amount of money so I really appreciate the comment. But, I plan this to happen all in the same year so we max out our out of pocket. He's retiring in his thirties. My company does not offer payroll deduction contributions to an HSA administrator. I’m probably losing out on a few hundred dollars here and there, assuming the market goes up. Do you agree that an HSA is the ultimate retirement account? The payment is discounted amount the insurance co has contracted to pay your doctor, until your deductible is met. I suppose that takes care of my question, though it still makes me wary for keeping the receipts for the next 30 years. Having a baby in a year or two is more reason to use the HSA this year, because all of it will roll over. But I have never thought, or been told by anyone how I could benefit from it, until I read this article. If we are talking about early retirement here, i think it is important to note this strategy works much better if one has higher medical expenditures. ”. An HSA is basically a savings account for health expenses. This is perfect! This is if you don’t use your actual health insurance much… one trip to the emergency room and your numbers suddenly won’t look so good. So just another way to get “bonus” money from my company above and beyond my salary. I just changed to the high deductible plan at work and the HSA that goes along with it.I will not be able to max out my 401k and IRA contributions next year, as this is only my second year of work and I don’t make/save enough to do that. – front load and max-out 401(k) You could compare those numbers with the amount you will hypothetically pay in working years on medical bills (that you will reimburse yourself for in the future tax-free). I have four kids so I probably won’t be able to delay all of my reimbursals, but certainly some. They must be wired differently than the rest of us. I use them through my employer and I’m pretty happy with their service. So let’s just quickly recap the major features of the HSA: Ability to deposit money pre-tax. But lets say instead you paid it from your HSA with pre-tax money and then use the $200 of post-tax money (that you would have used in the author’s example) to invest in a Roth IRA. Go Curry Cracker on February 3, 2015 at 6:02 am . This is great, but even for the cheapest Bronze plan to qualify for an HSA monthly premiums are over $500 for us. (at most, .7%). Since HSAs only let you put $3400 into them a year, it is def possible to get to the point where leaving $5k in the savings account isn’t a big deal – but my HSA account is only $7k so I moved it all over to investments. Employees begin to receive fewer benefits in relation to their costs from the traditional plan, and more switch to the HSA or else onto their spouse’s plan. The $200 out of the checking account is coming from the most flexible, least strings account he has. That will cut into your growth a bit. So you could sign up for the HDHP and still use both accounts to fund expenses if you wanted to, but you would have to know beforehand that you are going to definitely reach the deductible. Were you thinking that you’d have to just pay 2.35% on the entire $300,000? For someone in a lower tax bracket who isn’t seeing that much in tax savings via a HDHP (since you only save the money from your top tax bracket), it may actually be a scam. It’s kinda like betting on horses. Thanks to your blog, my wife and I have made two major changes in our investment approach – Otherwise, I’m not sure they offer better savings than a lower deductible account and saving that money to put into the market. He's retiring in his thirties. Hello Mad Fientist, I’ve never used a self-directed HSA before and I’m wondering what other’s experience have been? My DH can get an HSA through his employer this year (literature wit details will be distributed beginning of October during open enrollment). I just looked through it now though and to me it still seems ambiguous. With an fsa, you can spend your entire annually elected amount on day 1 of the year. Next, I would speak to your employer to see if you could automatically contribute to an HSA through a payroll deduction (this will allow you to save on FICA taxes). In 2019 and all later years, I have a different job that does not offer the HDHP/HSA option. Powered by ConvertKit FI Spreadsheet. Personally I say spend it now and get the tax break sooner is better than later. I likely won’t start taking money out of my HSA until I stop contributing to it. In year 1, I contribute $333 and do NOT withdrawal any money from my HSA. ... Mad Fientist 8 years ago This was a great series, Joanna! It has been an awesome strategy for my family. Considering your support for what you refer to as front loading this seems a bit counter to your usual tactics. Most 401k’s only offer 7-15 investments (and half or more are the utterly worthless target date funds), but you can invest in literally anything on the market with your IRA (since you can shop around). Steve, only gains are taxed, not withdrawals. I Scan all my receipts, medical docs, any correspondence and load it to google drive. If your average lab rats medical expenses are $200/year and he is contributing $3000/year, then the amount you can’t touch until 65 is going to be growing quite rapidly, while the amount that “becomes roth ira” is much much smaller. We were able to sign up and contribute to one through Select Account online though. law at the time of contribution). Hi Mad Fientist — I’m following you over from 20somethingfinance where I saw your comment there about HSA distributions using old medical receipts (the same as your article here discusses). For sure someone’s footing the bill right? Either that or this really needs to be labeled as a strategy for growing the “old-man” fund. 3. This is her number one concern, and I would love to appease her worries with any insight you might be able to provide. This year she took a new job which offered no HDHP and we had about $500 left in the HSA (we paid all sorts of medical expenses out of the account including the entire deductible of my LDHP twice). One thing you will want to consider is the maximum out of pocket costs on the HSA vs the HDHP but the main thing for me is the difference between the use it or lose it nature of the HDHP and the keep it forever for the HSA. (This is all assuming Jeff’s example tax rate of 40%.). This is mentioned in the language in IRS Pub 969 (talking about “Qualified Medical Expenses” for HSAs), and IRS Pub 502 defining when a “Qualified Medical Expenses” is good for: “You can include only the medical and dental expenses you paid this year, regardless of when the services were provided.”, I erroneously thought the same as you a few years ago and a quick call to the IRS help line set me straight then: 1-800-829-1040”. I think that’s $6500 this year plus $6900 next year added to the account. You just paid $334 pre-tax dollars right now and in exchange, you’ll get $200 pre-tax dollars in the future……. Are you that organized? I have health insurance through Kaiser at my company. Plus they offer investing (through TD Ameritrade) for $2.50/month (no minimum required). You would actually be losing out on a lot of money to use this over a more traditional Roth. Ben, I carry a balance on my HSA and I’m saving receipts so I can reimburse myself in a few year. Site title of www.madfientist.com is Mad Fientist - Financial Independence and Early Retirement. I’m maxing out my HSA account and I’m not using any of the money for yearly healthcare expenses.. – 1.45% of $83,000 Glad this article stuck in your memory and was eventually useful to you :), Holy crap MF, this is an awesome post! I work for a company that the health insurance plan appears to qualify as a HDHP but we don’t offer an HSA Option. In that case, you’re better off as you found. While HDHPs are usually best for people with low medical expenses, sometimes they can actually be a good option for people with very high medical expenses as well. This administrative fee might be necessary to cover the cost of running an HSA account, but if that’s the case, is it even worth it? Still, because you’re investing in the market, what goes up can come down. Thanks, David! Between you, jcollins, and MMM, I have a full notebook of “Worthwhile Financial Shit” that has me on the path of FI. Looks like the long term benefits are close to outweighing the cost, still undecided. In your example you pay $200 with post-tax dollars out of pocket. Any gains thereafter I would not count as these…, How are you calculating RSUs as part of the $750k? I recently quit my job where I did have an HSA account. However, I am also making another assumption that wasn’t addressed, so I wonder if you would comment. I personally wouldn’t spend more money just to have access to an HSA but if they are similar in cost, I’d likely go with the HDHP. Yup. Our retirement date is Jan 2025. For most of the population, an HSA is simply a savings account for medical expenses that provides some tax benefits. Assuming that you also would invest the $200 of the taxed dollars, why is that a better decision? If you make $300,000 a year, for example, you would have to pay 7.65% on the first $117,000, 1.45% on the next $83,000, and 2.35% on the final $100,000. THE BENEFIT OF A HEALTH SAVINGS ACCOUNT Made most famous in the FIRE community by The Mad Fientist, the Health Savings Account, or HSA is known to be THE ULTIMATE retirement savings vehicle for the “low consumer of health services”. Withdraw (from HSA) money for eligible medical expenses I don’t want to end up 20 years later with a pile of “receipts” that don’t cut the mustard. Few things to consider if you wish to retire abroad and have funds in HSA – You only need to be enrolled in an HDHP when you contribute to an HSA. Hi Nancy, it sounds like it may make sense to use your HSA to immediately pay for your medical expenses, since you don’t have any good investment options within your HSA. use the $7,000 to reimburse myself, or pay the $10,000, and keep the $7,000 in the HSA each year. It has grown to over $55k today in my investments. Seems rather complicated. This article seems to refer to using the HSA to pay for medical expenses not only from the past that you have not yet withdrawn, but also from medical expenses you incur after retirement. Hopefully none of us have any medical expenses and the HSA will simply be another Traditional IRA for us all :). My family is currently spending more than what the HSA can cover in a year. My employer matches up to $1,800 a year but the overall limit is $6,450. Do you have any sort of employer 401(k) match? Glad I stumbled across this article. Here’s an example of how it works from Brandon over at "The Mad Fientist": "The contribution limit for 2018 is $3,450 for individuals and $6,900 for families. Meanwhile you will have an additional tax advantaged savings vehicle. 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