However, none of this is discussed in open enrollment meetings. However, I am also making another assumption that wasn’t addressed, so I wonder if you would comment. Safe travels to Scotland when you head that way. Mrs, Pie, But using these plans as a back door to higher retirement asset levels seems like a distortion of the health insurance market that only benefits a few. Now just check your email to confirm! Every December, I withdraw almost the entire balance from my employer-sponsored HSA and then send it to a low-cost one. I don’t think receipt production is a controversial issue–any IRS audit requires production of receipts; the HSA receipts are just a subset of that. I’m about to enroll in an HDHP and I’ll be setting up an account on my own, but my employer is fairly progressive. In year 1, I incur a qualified medical expense of $500. That seems to be handled automatically via the W2, since the employer makes those contributions on your behalf. (You are allowed to make withdrawals for excess contributions without penalty up until tax deadline in case you make a mistake, same for prior-year contributions. could only do the 6750 limit. Premiums here are $2400/year with a $6000 deductible. I scan and keep all receipts in a special folder in my Google Drive, plus keep a record of health expenses and reimbursements in an Excel Spreadsheet. My annual income is around $300K currently. In 30 years (to compare to other couple above) you have: HDP: $8252 – $3172 initial cost = $5080 (gained, as long as it’s used for healthcare). We are perfectly positioned for this because we have a nice size emergency fund (not to mention spending less than we earn each month) to cover such things. For US, is this a healthcare.gov search? Straight from the mouth of the beast – “The deduction allowed and interest earned on Health Savings Accounts(HSA). So, now your total cost of healthcare this year is $2400 and you’re getting a federal tax savings on your $2400  investment (but paying state income tax on this.). Anybody know the answer for the following scenario? Do you have an idea how to run the math? I’m interested in moving the $ to an investment account, but I don’t know which administrator is best. I preserve the original tax exemption, but put it in a future tax exemption investment account without having to use it later for a medical expense. However, I’m not sure if it is worth it because I currently expect to max out the HDHP plan deductible of $1400/year for every year due to ongoing medical costs. Do you agree that an HSA is the ultimate retirement account? This is now well over $3,000 per year, that amounts to $750+ in tax savings. It sounds like you are in a pretty solid financial situation. HSA contribution: $6900 HSA contribution, 3% growth, in 30 years: $16,748. Lucky for me, I can just use the ATM to withdraw a few hundred $ a day and then make a single deposit to the good HSA. After figuring this out via doing my taxes, my wife found the IRS publication that did spell this out. But with high transaction cost brokerage accounts like TD ($10 per trade), I try to just buy Vanguard ETF’s since they are free to trade in TD. But what about medical expenses that were incurred after you stoped contributing to the HSA? The HSA custodian doesn’t care what you do with the money but just make sure you keep the receipts in case you get audited. You can roll over $500, at least. Otherwise, I’m not sure they offer better savings than a lower deductible account and saving that money to put into the market. Yup. I did not re-run your numbers, but the math in the article assumes that you always make the full HSA contribution each year, and pay for medical expenses out of money that you would have put into a taxable account or used to buy beer. See Notice 2004-2, Q&A 31 and also Notice 2004-25, for transition relief in calendar year 2004 for reimbursement of medical expenses incurred before opening an HSA. He doesn't have a seven-figure startup. I see that to be eligible, the minimum deductible for a family is $2,500 Thanks Brooklynguy! If you contribute through payroll deduction, you also save on Social Security and Medicare tax (7.65% this year)! Thanks for the tips. 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). As I see it, going this route would save an immediate $7,200 (thus, funding one’s Emergency Fund, 529, Joint Taxable Account, et al). BTW, no option to subscribe to comments? Our retirement date is Jan 2025. While a lot of the structure for HSA parallels the IRA, I don’t take for granted that the rollover follows that, vs. a 401(k). He doesn't have a seven-figure startup. I am only starting my HSA in my 40’s, so I do expect that my medical expenses late in life will soak it up, anyway. a. Since I learned about HSA’s I wanted one. Great article, very interesting. I think it’s mathematically best to build up a large balance in case you eventually have high medical costs, then you really get the full benefit of the tax savings after it has compounded and grown. Make sure you only put as much money into an FSA that you can certainly use that year. We are in the process of planning our early retirement. Thanks for stopping by and I hope you return to full health very soon :). I incurred some qualified medical expenses around 4000$ in July 2016 and I paid it using my credit card as I did not have sufficient funds in my HSA. More info about investing your HSA funds over at The Mad FIentist. there’s no vesting for HSA Funds like 401k or pension plans. You do not receive this extra tax break if you do not contribute through your paycheck at work. Curious about your thoughts. Like Matt, I too can confirm that HSA contributions are not added back into SS/Medicare wages on my W2. He said that since our company has a self-funded insurance program (employee and company contributions are used to pay for the claims employees file), adding an HSA would lead to what’s known in the industry as a “death spiral” for the existing traditional plan (which would remain in place in order to offer employees a choice). Years 2, 3, 4, and 5, I contribute $1000 each year and I have no further medical expenses. But in the case as discussed here, where medical expenses in retirement do not take up the full HSA, then I am running a “medical expense surplus” each year, that will also eat into the investment growth of the money I leave in the account each year. This becomes a bigger issue if you say, get a new job in Nov and enroll in an HDHP that starts in Dec. You could theoretically make a single $3350 contribution in the month of Dec into an HSA. Therefore, after the age of 65, an HSA is nearly identical to a Traditional IRA but it’s still better because your withdrawals for medical expenses are still completely tax free! Let’s say I am able to contribute $1000 annually to my HSA (that is, $1000 pre-tax). He didn't catch a lucky break. It’s kinda like betting on horses. I’d say this strategy is more useful for the “standard retirement” side of the equation rather than the “early retirement” side. Hi Andy, you can make post-tax contributions to your HSA and then get those taxes back when you file your tax return so I’d say it’s still worthwhile. My employer gives me free health insurance. Even before 2016, I don’t have the #’s, but we would have came close similar to this year, or even hit the Out of pocket max each year. The files sort perfectly in the order in which you will likely reimburse yourself from your HSA account in the future. But it was worth it at the end. Brandon walks us through advanced retirement account strategies you may have heard of, such as the Backdoor Roth, Roth Conversion Ladder, and the coveted Mega Backdoor Roth. Monthly Cost (Annualized): $1030(*with employer coverage and contribution), HSA contribution: $6900 Show Notes. Wow, chris. If we are all on the same family policy for 2015 I calculate the limit is $7650 (6650 plus 1000 for over 55). I establish the HSA account on 1-1-17 and contribute $500 each of those two years to the HSA for a total of $1000 in contributions. Maybe back in 2016 this was not true, and that’s why no one mentioned it. Here’s a graphic explaining how future early retirees can take full advantage of an HSA (descriptions about each step are below): Maximize the Benefits of a Health Savings Account. Great post by the way…new to your blog but have really enjoyed everything I have read so far. Hi Dan, I mentioned both the IRA aspect and the FICA avoidance aspect in the post. Our high deductible plan has a max family deductible (my husband and kids are all covered on my plan) of $3000 for in network and we have had no reason to go out of network. You are free to change your health plan as often as you’d like but you can only contribute to your HSA when you are enrolled in a HDHP. The bank my employer chose (UBM) only offers high expense ratio, actively traded funds. Looking for opinions regarding the clause that the medical expense has to occur “after the HSA was established”. Good luck getting everything set up! An HSA allows the money to be carried over forever. Summing Up the HSA. b. HSA administrator might charge international transaction fee when using HSA debit card for medical expenses abroad But I am very comfortable that I will rack up lifetime total medical bill for my family that will allow me to apply this trick to its fullest potential. Early retirees can potentially enjoy completely tax-free retirement savings by getting the benefits of both Traditional IRAs and Roth IRAs with the Roth Conversion Ladder strategy! I found out I have 22 mutual funds I can choose from, including 2 vanguard index funds. If you depart the company before year-end, you don’t owe any make-up payments to cover excess expenditures. If after 65, you can use HSA for non-medical expenses, but will be taxed. It’s actually a rather complicated tax situation in CA that no one explains well… and I’m unsure if even I’ve been filing my taxes right with my HSA all these years! BUT, those funds will be taxed as income, just like a 401k. But, man, do you really trust the government will have the same rules around HSAs in 30-40 years? My wife was at her last job for about two years. Instead, I am able to leave that $200 in my HSA to grow tax-free until I decide to withdraw it! Since I am already maxing out my other tax-advantaged accounts and have ample savings, a $200 payment isn’t going to break the bank so there’s no rush to get paid back from my HSA. Plus they offer investing (through TD Ameritrade) for $2.50/month (no minimum required). I’m currently following in your footsteps and I’m getting paid to get a Master’s degree. Pretty much a no brainer. I have been struggling to find an HSA administrator that has reasonable fees for an investment account. High Deductible Health Plans (HDHPs) definitely aren’t for everyone so I agree HSAs are useless for people who are better off with another type of insurance plan. So you need to at least gain that much in its tax-deferred growth in order to break even on the tax-deferred advantage. Your contributions to these accounts are pre-tax contributions. He breaks these concepts down so they’re easy to understand and put into practice. Years 2, 3, and 4, I contribute $1000 each year and I have no further medical expenses. Don’t forget to use your ability to make that one-time funding distribution from your IRA as soon as you can. I’m looking to utilize the HSA for early retirement, but unsure of the tax advantages and how to set one up through an S-Corp. Really good article, thanks TMF. Contribute max to HSA (tax savings plus if payroll withholding, don’t pay SS/medicare taxes on the amount (about 7% savings) I actually had an emergency appendectomy at the end of last year so I put the $2k+ that I owed on my Chase Ink Bold card and I’ll use the points I earned from that transaction for some travel at some point (one of the benefits of getting your appendix out, I guess)! I already have the 401k and IRA’s maxed. Invests $30,000 per year into taxable investing account 7. My employer offers to contribute $1k into the HSA if we choose HDHP in addition to whatever we contribute to the HSA, which is a nice little sweetener. One then changes insurance to HDHP and has not yet paid the bill. If I were to return to the US, I would very much like to have cash in an HSA to use to offset the (much higher) cost of medical care. Sorry, just saw your reply today. However I think the this particular idea is for people who have maxed out their other retirement vehicles, contributed max to 401K, and IRA’s and are looking for more ways to etch out a couple of extra pennies. When you get down to it, this article basically describes a way to game the health insurance system to avoid taxes; no criticism of individuals who choose this is intended; I’d do it as well if I could. You have to elect to invest that into an investment account for growth correct? 2. These dividends are not taxable on the IRS side. Every company I have been with just asks me to fill out the form with a voided check to the HSA account at my credit union. All of those small amounts are contributed to your HSA by either your employer or the provider. The good news is that when you do need to pull out $2k from your HSA, you probably will have expenses in that tax year as well, and once you are 65 you can use them for Medicare premiums, which we will all have someday! He is older and planning to enroll in Social Security Income at FRA which auto enroll in Medicare Plan A. You have to pay that bill regardless. 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. That’s great you also have two Vanguard index fund options to choose from. For instance, I am in Vanguard Total Stock Market Index Fund which is my only low cost option. Hold on to those receipts for later. Mad Fientist. Hopefully you can convince your company to offer a High Deductible Health Plan so that you can open up an HSA somewhere. could you have a individual plan for Spouse A and contribute $3,350. This allows us to avoid employee/employer FICA taxes (15.3%) and employer FUTA tax. My question is if I roll over the account, does that reset the start date and nullify my old receipts? Bankruptcy is so far off my radar that it’s not something I personally worry about. [See: Mad Fientist and Betterment] There is no clear-cut answer for Roth vs. Hey Jim, check out this IRS bulletin (see the answer to question #19). Has anyone confirmed “officially” whether the money an employEE contributes to their HSA is exempt from FICA taxes? If you've enjoyed the last 9 years of ad-free content and want to say thanks, here's how →. Looks like the long term benefits are close to outweighing the cost, still undecided. And since the HSA balance is not high, I don’t think I can make a good return doing active trading with a high fee and low balance. I created a paper file to keep all the paper receipts in chronological order, but I fully expect them to be faded and unreadable in a few years. I use them through my employer and I’m pretty happy with their service. For 3 or 4 years we didn’t touch the HSA, but last year when I was diagnosed with Cancer and we reached our Deductible in January – we were able to dip into the HSA (which had over $12000) and pay the $4000. Cost is $9,600 annually. I may be wrong but in my company provided HSA it only pays a small amount of interest, similar to a savings account. Awesome article! I believe they tax the gains on investments once realized. Nick (and MF), Thanks for this great information. Am I understanding this correctly? Would love to hear an experienced and educated response from someone on this. The distribution from your Traditional IRA would be considered taxable income and your HSA contribution would decrease your taxable income so they should cancel each other out. Your graphic revisions have gotten clearer and clearer. 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. Ok, so for arguments sake, let’s look at a more typical HSA scenario. Only the amount you spent when paying for the original medical expense would be tax free. Having read this article several times in the year. In some cases, the out-of-pocket maximums for high-deductible health plans are actually lower than they are for traditional plans so I bet you save even in the years you have to max out. I found an HSA account with Health Savings Administrators that offers Vanguard funds, and is linked to from Vanguard’s website. It sounds like a really good deal… and it is… except HDHPs have “high deductibles” and, even more troubling, HSA plans typically have very high fees that eat into any growth you see unless you are a wise investor (AND have access to good investing options, rare in typical employer-sponsored HSA accounts.). Too much work and risk for me. My question is if I go HSA this year it will cost $930/month (~$11,000/year) just so that I can put $7000 into HSA saving, or we could go without HSA and pay ~$8/month with ACA and a high deductible, again non-HSA provider. Because the contribution limits are so small, the risk of having a large percentage of your portfolio in an HSA is also small so it’s probably not that big of an issue. Article by Mad Fientist Guess where your drinking water come from! Like you point out, the best strategy is to let that money grow tax free, and save those receipts! Our coverage year is July 1 – June 30 so I can make changes in a few months. In the best case, if I don’t go to the doctor at all, I save $1865! 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. what is the break even point where the fees are worth it, and do you know of an administrator that doesn’t charge fees this high? Married couple, 1 child. A health savings account is an incredibly valuable tool in an early retiree’s arsenal, especially if you are already maxing out all of your other tax-advantaged accounts. So I got an individual HDHP PPO last year and set my self up an HSA and maxed it out. Has anyone else run into this? You only need to be enrolled in an HDHP when you contribute to an HSA. Great article! I can’t think of a single situation when someone who has $6,900+ in their t-IRA wouldn’t choose a rollover instead of regular contributions. MF – question for you (couldn’t find this in any other comments, but may have missed and if so, apologies)…. For most of the population, an HSA is simply a savings account for medical expenses that provides some tax benefits. When you pay for a medical expense out-of-pocket rather than with HSA funds, you are effectively converting those HSA funds that you didn’t use from a Traditional IRA to a Roth IRA contribution (which can be withdrawn immediately, tax and penalty free). Hi Ryan, it’s safe to keep your money in there as long as you want (see this IRS document). 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. Yes, this is my absolute favorite investment vehicle. It has been an awesome strategy for my family. What I love about the Mad Fientist is that he’s a retired Software Engineer. So even in the case where the HDHP deductible is reached every year, is still seems like a good idea to go this route. Adam says: HSA’s are a super-account that can only be used for qualified medical expenses. Definitely be sure you have an HDHP before you open an HSA! Ok, Let me summarize the HSA tax free withdrawal and see if I understand . You would get tax deferred growth but you would miss out on the huge benefit of not taxed going in, tax deferred growth and no tax going out. That’s exactly what I propose in the article (see the last three paragraphs in the Example section). 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