HSA - Invest long-term. Withdraw before you die

Somebody recently shared this idea with me. You may already know about it, but it was new to me.

Fund your HSA to the max every year and do not withdraw anything. Invest the funds for long-term growth.

Keep track of all your medical expenses each year and reimburse yourself for those expenses way, way, way down the road.

I kinda do a version of this. I only reimburse out of the HSA every few years. Wish I was getting better growth/income on the HSA, tho.

I heard of this strategy some time ago.
I have a worksheet going back to
2008 that has all my medical expenses.
I've reimbursed myself through 2012.

Ah, what it is to be young, healthy or both.

This got discussed at NCPE some years ago. It works on paper, until the paper starts getting faded. My wife and I have an FSA and my wife has just started a new job. The paperwork I got with my new card made it crystal-clear that they do ask for receipts on a regular basis, even if you use the card at a qualifying merchant. The wording was much stronger and more prominent than I have seen it in the past. Perhaps a sign of things to come?

I thought you didn’t even need to spend it on medical if you waited until age 65 to withdraw? But even if that is wrong, healthcare costs for seniors is very expensive so it’s doubtful you’d need to go back to all theses old receipts from years ago. You’ll sadly be spending enough in the future to use it all.

Aye, Gr8ful, at 65 it can be used as, essentially, a traditional IRA with no RMD requirement ever. Additionally, one can claim the distributions as medical expenses and enjoy the distribution tax-free. The trick is to actually have medical expenses. 65 is quite young for a lot of people. So if one wishes to enjoy tax-free income, it may be necessary to keep quite old receipts that are acceptable to the custodian.

I have ongoing battles with a couple of HSA/FSA custodians, who seem to take pleasure in denying claims on the flimsiest of grounds. Not saying any of this is a bad idea but if there are problems with current claims, imagine how much harder it would be with years-old claims if the custodian takes a notion to be awkward. I had grief over routine dental expenses a while back. It was easy enough to get what I needed from the dentist’s office, because I’d only had the work done a couple of weeks previously. What if they insist on more fulsome paperwork for expenses incurred years ago?

My point is that, if one wishes a distribution for expenses incurred years ago, there may be a tax cost and, depending on age, a penalty.

Custodians of FSA accounts approve claims, but HSA account custodians do not. For HSA, you have to have your own records in case the IRS wants to see them.

Joan, an HSA custodian turned off my wife's card because they considered the expense not eligible. Should it happen? No. Does it happen? Yes, and there is very little one can do about it.

Get a new custodian

That is a very good point, lckent. As it happens, my wife and I have drained that account (they never turned off my card, just my wife's) so we got the money anyway. In our circumstances, moving custodian would, I imagine, have meant that the balance minus the disputed expense would have been transferred. The fact that they didn't turn my card off is surprising, as I sit here typing this, but I'm not going to complain.

I have had arguments with HSA and FSA custodians regularly over the years, on a variety of topics and, until the idea of "authorized" establishments came on the scene, it was exhausting to argue with them, especially if it was an FSA in the grace period. My wife has just changed jobs so we will find out, in due course, what the new lot are like to deal with.

This is something I learned about many years ago (about 10). I now have near 70K in my HSA.

I encourage my clients to do it as well if they can.

My investment profile is 30 percent fixed income, 70 percent growth. Yes, it's volatile but Im OK with it.

The strategy that Wiles mentioned is legitimate and is what makes the HSA so attractive.

You can only use medical expenses that are incurred after opening the HSA.

There are references to FSAs above...those plans are "use it or lose it" plans (or there is a small amont of carryover). HSAs are different. Also, the client cannot contribute to their HSA if they have a FSA.

My understanding is that after 65, the HSA can be used for anything without incurring a penalty, but if not used for medical expense, including qualified medical expense reimbursements, the amount becomes taxable much like an IRA. I think this is what others are referencing as well.

Just to confirm, there is no time period for reimbursement? I'm 40 and I max out my HSA every year invested in the Vanguard index 500 mutual fund. If I begin saving all my medical receipts going forward and retire at age 65, I can withdraw it tax-free because I am reimbursing myself 25 years of medical expenses?

Yes, provided the receipts are still legible.

Damn!! I like this idea and have never thought about doing it!

I track my qualified expenses in a spreadsheet and reimburse regularly.

I've heard of this strategy. And think it's worth mentioning to clients because it is valid in select scenarios. But I don't think it makes much sense, for most people, to pay now with after-tax dollars then reimburse years or decades later from the HSA. You can't adjust the expenses for inflation. What was $100 in 2023 will be a pittance in 2053.

The HSA is there to pay medical expenses and that's what I use it for, although the balance still trends up as I max it out each year and am relatively young.

Aye, but if one invests in investments that generate income and/or growth greater than inflation, one is ahead. You're right though. It doesn't make much sense for most people. Either you use up the money. more or less, as it goes in or you get sick unexpectedly and have to liquidate investments in the HSA to pay for it.

My wife and I put away the maximum for a few years and we are old enough for the top-up. It took us several years to go through the money but if my wife hadn't worked for the hospital system we would have gone through it much, much quicker. Her several hospital stays cost as much as some people pay for an emergency room visit.

I track my qualified expenses in a spreadsheet and reimburse regularly.

I've heard of this strategy. And think it's worth mentioning to clients because it is valid in select scenarios. But I don't think it makes much sense, for most people, to pay now with after-tax dollars then reimburse years or decades later from the HSA. You can't adjust the expenses for inflation. What was $100 in 2023 will be a pittance in 2053.

The HSA is there to pay medical expenses and that's what I use it for, although the balance still trends up as I max it out each year and am relatively young.

But you invest the funds within an HSA with the expectation that it would beat inflation.. You are going to have medical expenses at some point, and it's not taxable if used for medical expenses, so it's ROTH-like.

In my state, HSA accounts are not exempt property, as many who are sued and/or enter bankruptcy are surprised to find out. Therefore my general advice, which is modeled around that, is to prioritize tax advantaged accounts that are exempt property (401k, IRA, etc) and pay down any debt above the risk-free rate. If you do that and still have funds left over, maxing out an HSA may be the move, although I don't like the idea of deferring tapping the account and counting on it as a backup IRA or retirement medical fund for the reason already stated. At least that is my position until the applicable law in my state changes. Obviously, fund it and use it for expenses. And funding an HSA is obviously a wiser choice than funding a taxable brokerage account (generally).