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Posted by Will Trice on August 20, 2008, 8:55 pm
rick++ wrote:
> The general tax rule is "accelerate deductions,
> defer income" - which appplies to a concept of
> money that depreciates with time. When applied
> to HSAs, that suggests spending tax-deducted
> HSA dollars when you need to.
I don't think spending HSA dollars leads either to a tax deduction or
deferred income, does it? Adding to the account does, but taking out
does not. If you have enough medical expenses for them to be
deductible, would spending from an HSA increase your taxes? Or do you
get to double-dip?
-Will
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Posted by pomegranate-man on August 20, 2008, 8:35 pm
> once you are on Medicare, can you still have an HSA qualified
> insurance coverage (like Medicare plus or some such thing) and still
> contribute to HSA?
Somebody enrolled in Medicare cannot contribute to an HSA, according to IRS
publication 969 (2007), page 3.
Once enrolled, I stopped contributing, but am using up the amount that had
accumulated already.
OTOH, there's something new in publication 969 called a "Medicare Advantage
MSA." There don't seem to be any offered yet where I live, and nobody I've
contacted seems to know about it. It might fit your need if you can find
out anything about it.
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Posted by Tad Borek on August 21, 2008, 2:27 pm
Gil Faver wrote:
> What is your thinking about not using money in an HSA for medical expenses
> if you can afford to pay from your other resources, to allow the HSA to
> build up. Assume a healthy, well off person, 50 years old, little medical
> expenses or needs. If they pay what little medical expenses they will have
> out of pocket, their HSA will continue to build in value.
I could see an argument for leaving dollars in an HSA for someone
nearing retirement, whose retirement assets were far behind. It's
another tax-advantaged place to accumulate wealth, after you've maxed
out 401ks, IRAs, etc. A forever-unused HSA eventually becomes, in
effect, a traditional IRA in terms of its tax rules. You can withdraw
the money for non-medical purposes, paying tax but no penalty on the
distribution.
And if the medical expenses are so high that they're deductible, that
could be another scenario where you pay with after-tax money. Rarely
happens though.
Absent that...well you're missing out on a benefit of the HSA, which is
paying bills using before-tax dollars. In exchange you're able to leave
money invested tax-deferred, but on balance I think "immediate benefit"
wins out on this one. The medical expense is certain, the future
earnings in the account (relative to inflation, especially) is
uncertain. There's already more "contribution capacity" in tax-deferred
accounts than most people make use of. And if you aren't maxing out your
401k because you spent $500 in after-tax money instead of drawing $500
out of the HSA, so you can preserve the HSA...well, that makes no sense.
I also think of HSA funds as slower-growth than the typical long-term
tax-deferred dollar, because of account fees, somewhat limited
investment alternatives, and here in CA, the lack of a state tax benefit
(CA still doesn't recognize HSAs, only MSAs). Plus, even if you go with
one of the companies with decent investment alternatives, until the
account is really large, it's a good idea to invest it relatively
conservatively in case you need to draw it all down over a couple-few
years. Conservatively may mean "money treading water vs. inflation" --
another argument for spending it now from the account.
-Tad
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Posted by Will Trice on August 22, 2008, 1:52 am
Tad Borek wrote:
> Absent that...well you're missing out on a benefit of the HSA, which is
> paying bills using before-tax dollars. In exchange you're able to leave
> money invested tax-deferred, but on balance I think "immediate benefit"
> wins out on this one. The medical expense is certain, the future
> earnings in the account (relative to inflation, especially) is
> uncertain.
But a retiree is likely to have medical expenses also, no? So the money
in the HSA would still potentially be completely tax exempt.
-Will
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Posted by Mark Freeland on August 23, 2008, 6:39 pm
> Tad Borek wrote:
>
>> Absent that...well you're missing out on a benefit of the HSA, which is
>> paying bills using before-tax dollars. In exchange you're able to leave
>> money invested tax-deferred, but on balance I think "immediate benefit"
>> wins out on this one. The medical expense is certain, the future earnings
>> in the account (relative to inflation, especially) is uncertain.
The expense is certain and must be paid for now. The question is thus which
pocket does the payment come from - taxable account or HSA account? The
question assumes, and the OP implied, that one isn't going to spend the
other pocket's money elsewhere, for now. See more below.
> But a retiree is likely to have medical expenses also, no? So the money
> in the HSA would still potentially be completely tax exempt.
More than potentially. My understanding is that so long as you have medical
expenses after opening the HSA _and_ you don't use the expenses for tax
deductions, then you can withdraw from the HSA tax free up to the amount of
accumulated medical expenses at any time.
It doesn't seem to matter if you have the expenses in 2008 and withdraw the
HSA money in 2025, using the 2008 expenses to offset the HSA withdrawal.
Yes, it sounds weird, but so far, I haven't found anything that contradicts
this.
See, e.g.
http://retirees.dowcorning.com/hr/Benefit_Information/2008/docs/Under%2065%20July%2093%20or%20later/All%20FQA's%20for%20HSA,%20CDHP-Retirees.doc,
or http://www.capeschool.com/download_courses/ConsDrivnHC_web_text.pdf (p.
28/41). Not the best citations in the world, but with the IRS being as
clear as mud, authoritative sources are hard to find.
If correct, then keeping money in the HSA becomes a no-brainer. The two
choices for, say, a $100 medical expense this year are:
1) Pay $100 out of the HSA, and keep $100 in a taxable account
2) Pay $100 out of post-tax dollars, and keep the $100 in the HSA.
Then, in 2025 (or whenever), you have (1) $100 + growth in a taxable
account, subject to taxes; or (2) $100 + growth in a nontaxable account,
probably tax-free. (Your expenses through 2025 or whenever will have to
match not only the original $100, but the growth of that investment.)
Mark Freeland
nNeEwTs@nyc.rr.com
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