I have a HSA account that I keep some cash in for small expenses and the rest is invested. From what I've read, consensus says to never touch that HSA money and let it grow until I can withdraw it at retirement.
Now I have some medical bills that need to get paid. In the ideal situation, I'd pay these bills with non HSA funds and reimburse myself later when I'm 65? Is the thinking that when I'm 65 I can use that money in 30 years after it's "grown" (hopefully)?
If I do it this way that pretty much depletes my emergency fund. I know technically that's what the emergency fund is for, but isn't the HSA is meant for medical expenses? What would I be losing from just paying the bills from the HSA account now instead of using my credit card?
I realize that the potential $20 cash back rewards I can get on the transaction. What else am I losing out on if I just go ahead and pay with HSA funds now and not having to submit receipts for reimbursement?
Is it worth it to not use my HSA money?
byu/heelaburd inpersonalfinance
Posted by heelaburd
18 Comments
It’s a matter of good, better best.,
It is good to lower your out of pocket with a PPO if you need a lot of care.
It is better to do a HSA. Use the money the same year and at least not paying taxes on it.,
It is best to cash flow medical and invest what you can.
Better is not bad and perfect is the enemy of good.
In your case I would use your HSA, your emergency fund is for emergencies.
You basically lose tax free growth for the next 30 years. If this will crush your cash reserves it’s probably better to just use your hsa
> In the ideal situation, I’d pay these bills with non HSA funds and reimburse myself later when I’m 65?
You don’t have to wait until 65. You can withdraw from HSA any time after you incur the qualified medical expense.
65 is just the age where the 20% penalty goes away for *non*-medical withdrawals.
>If I do it this way that pretty much depletes my emergency fund. I know technically that’s what the emergency fund is for, but isn’t the HSA is meant for medical expenses?
If you spend $X from your regular emergency fund for QME, you can swap out $X in investments in HSA to cash, and this portion becomes your emergency fund. Remember you can withdraw up to QME from HSA any time after you incur the expense.
>What would I be losing from just paying the bills from the HSA account now instead of using my credit card?
>
>I realize that the potential $20 cash back rewards I can get on the transaction
You should always use CC if it doesn’t cost more and you will pay in full. This has nothing to do with using HSA or not. Why wouldn’t you take advantage of the rewards and the better fraud protection of a CC?
In case it is still not clear enough: Do not use the HSA debit card; do keep it locked. Fraudulent or erroneous transactions in a tax-advantaged account is a bigger headache to resolve.
>What else am I losing out
Undisturbed tax-free growth
>if I just go ahead and pay with HSA funds now and not having to submit receipts for reimbursement?
You do not need to submit receipts. Just withdraw.
In an ideal situation, you’re right that never touching that HSA money is best. But many people are not in that situation. My family has enough medical expenses that we just use it as a passthrough to guarantee we’re paying pre-tax for it all.
>I realize that the potential $20 cash back rewards I can get on the transaction.
Uh, just pay with the credit card and reimburse yourself from the HSA if you are going to use HSA funds to pay for it. No reason not to milk the cashback.
Use your emergency fund and save your medical receipts. You can withdraw from the HSA in an emergency penalty-free if you have receipts to back it up. Ideally, you leave the HSA funds invested long term, keep saving your receipts, and take advantage of the triple tax advantage.
You can pay yourself back whenever. But there is no tax on the growth so keeping it longer is ideal.
You can drain your emergency fund and then pay yourself back next week if an emergency occurs.
Just keep your receipts.
> What else am I losing out on if I just go ahead and pay with HSA funds now and not having to submit receipts for reimbursement?
The funds can be invested for 1 year, 5 years, 10 years, till retirement, when it converts to a retirement account.
Let’s say you pay $5k out of pocket, instead of using HSA funds, this means you still have $5k in your HSA, and if you invest that in an index fund, it could become $7k in 5 years and $10k in 10 years, and $30k by retirement.
That 5k medical expense is an IOU to your HSA whenever you want it, but if we take the 10 year example, you are taking $5k from a $10k balance, instead of $5k from a $5k balance. Or if you wait till retirement, it’s just like any other retirement funds, after you get through all your “IOU’s” / medical receipts.
My HSA has a minimum cash allotment. Everything over that minimum is invested. So yes, for me, I am not planning on using it until I retire or desperately need a cash influx, & then will submit 10-30 years of medical expenses & reimburse myself tax free. The longer you wait on doing that, the better off it will be usually.
I’ve been using some of the money in my HSA because I’m not entirely convinced that policy won’t change and I will be able to reimburse from old receipts 30 years from now. I also don’t feel like worrying about keeping track of receipts for 3 decades. I know people say to back them up, but what if the external hard drive gets destroyed, or there’s a massive error with the cloud?
Maybe I wouldn’t if I was 5-10 years away from retirement, but 30 years is a hell of a long time and so much can happen.
$100 in an HSA has more potential future value than $100 taken out of some other source. That’s the reason you often see the “pay with other money, let HSA funds sit”. The longer they grow tax free, the more future money you have available.
That being said, using your HSA balance today to handle today’s medical expenses is a completely valid use for it. I consider my HSA as a supplement to my emergency fund, and do use its cash for medical bills. I just try to keep my contributions higher than that spending to grow over time, just slower than if it wasn’t drawing from the HSA. If your non-HSA emergency can handle this bill, and would get rebuilt in a reasonable (to you) timeframe, keeping your HSA balance to grow for that higher future value is a better call. But if your budget would be too tight, you could also use a credit card to pay (for the cash back) then draw money out of your HSA against that bill to handle the next card statement.
To cover one possibly incorrect assumption, you do not have to wait until age 65 to reimburse for past medical expenses. That’s allowed at any time, as long as the expense happened at a time you already had an HSA. The age 65 rule is a separate thing. That’s when withdrawals without matching medical expenses are not hit with the extra 20% penalty. You will owe regular income tax on it, but that effectively makes your HSA withdrawals the same as a qualified distribution from a Traditional IRA. So an HSA can act to double-up your ability to build up a nest egg for regular retirement spending.
You also do not have to submit receipts to your HSA for any sort of reimbursement. That’s 100% your money and they have to let you access it whenever you want. The alignment of withdrawals vs. medical expenses is between you and the IRS. The vast majority of the time you just put an annual total expense amount on your tax return, no receipts go with that, the IRS sees that’s at/above your total withdrawal, and everything’s fine. But if an audit is triggered (return has any flags or just a random selection) then you’d be required to provide documentation of medical expenses justifying what you put on your return. That’s when receipts would be necessary.
If you’re spending any money on healthcare qualified expenses, increase your contribution and spend on healthcare while growing the rest.
while a good plan in theory, i often forget where i put my phone down about 30x a day.
The odds of me keeping a medical receipt in submittable condition for 20+ years and then remembering to cash that in for some HSA funds is astronomical.
You can use receipts to reimburse yourself from the HSA at any time. One option would be to pay the bills out of your emergency fund, and keep the money in the HSA as cash until you build the emergency fund back up. If you have an emergency during that time, you can pull the cash out of the HSA at that time with the receipt, but if you end up not having an emergency in that time, you don’t lose the HSA tax free space. I have a few thousand dollars of unreimbursed medical expenses sitting as receipts that I could use at any time to pull that amount out of the HSA, but haven’t needed to do so yet. The money is there in the HSA and accessible if I need it, but in the meantime it just keeps growing tax free.
I pay medical bills from my HSA. Is it maximizing the benefit? No. Is it easier? Heck yea. Also gives a peace of mind — like I question less whether I need the special mammogram upcharge or the fluoride treatment not covered by insurance. It’s money earmarked for medical expenses, so I shouldn’t sweat it.
I leave enough in the employer HSA to cover deductible if necessary and move the rest to fidelity to invest it.
If you are using it to keep spare dollars in your walllet, use your wallet. Budget for co-pays, small prescriptions, and even tho occasional lab work.
If you’re using it to avoid debt or payment plans, use your HSA. Use this for larger or uncovered visits or prescriptions that fall outside of budgeted amounts.
If you can let it ride and use it later, that’s better, but don’t add stress or pressure trying to get every dollar right.
I contribute the max to my HSA every year (already maxing 401K employer match, getting some in a Roth 401K, other savings, etc.) and the way I do it is if the expense falls within my normal monthly budget like an office visit, prescriptions, etc then I pay out of pocket. The big expenses that would fall under the emergency fund category I pay with the HSA. Think things like MRI, outpatient procedures, etc.
I’ve been doing it this way for almost 10 years and my HSA grows every year. Sure I’m not going to have the max possible when I retire but I think it is a happy middle ground.