This is something that I am wrestling with and still have some time to decide on. If I decide to fully fund my HSA each year after I'm done working using investment income (this is possible from what I've seen, correct me if I'm wrong) then the time I have to work gets extended by 2 years, minimum. This is no small sum of time to someone that isn't exactly thrilled about going to a job each day.
Do you think its worth it to keep working so you can continue funding an HSA after you have reached FI for everything else?
Funding an HSA in Retirement
Re: Funding an HSA in Retirement
What? No.cmonkey wrote:Do you think its worth it to keep working so you can continue funding an HSA after you have reached FI for everything else?
You can fund an HSA using whatever funding source you want as long as you meet all of the following criteria:
* covered by a high deductible health plan
* not covered by another health plan
* not eligible to be claimed as a dependent on another person’s tax return
* not entitled to Medicare benefits
But an HSA is just a pretax account that you can stash up to $3,350 per year in as a single or $6,650 for married/family (2015) and experience tax-free growth (like a Roth IRA). You can put the same amount + 25% in a regular brokerage account that you've earmarked for your health expenses (or the same amount exactly in a Roth IRA, assuming you haven't maxed yours out already) and you'd walk away with the same amount saved in the end, plus or minus a few dollars of taxed growth. If you're worried about taxes and it's in a regular brokerage account, just spend the first few years after you've retired rolling that money $5k at a time into a Roth and paying taxes on it as you go. Problem solved.
The only way this math changes IMO is if your employer is funding your HSA for you (mine did that). And in that case, the question can be reworded as, "Do I work two years longer so my employer will give me an extra $6,700 or $13,300?" Which is silly. If you're even leaning that way, just stay until you've accumulated an extra $15k beyond your original goal in your brokerage account.
Am I missing something?
Re: Funding an HSA in Retirement
I'm talking about funding on an annual basis for the rest of my life. So if my FI point is 15K/year spending, then your target income level in retirement is 22K/year. The extra 7K would be funneled into the HSA each year.
Re: Funding an HSA in Retirement
Let me see if I have this right: 2 extra years of earned income will provide enough investment income to allow you to contribute to an HSA for the next x years.
HSA Benefits:
During your FI years, the HSA contributions would offset certain types of income. So, where is your FI income coming from? If your FI income is from qualified dividends and LT capital gains, you likely won't have any federal tax liability, making the HSA deduction worth less, depending on your state income tax.
Second, is a HDHP the most economical choice once you reach FI? The cost savings of choosing Medicaid over paying for an HDHP might outweigh the HSA benefits.
HSA Benefits:
- Income tax deduction for contribution
- Avoid FICA tax on contribution (if deducted from paycheck)
- Investment gains accumulate tax-free
During your FI years, the HSA contributions would offset certain types of income. So, where is your FI income coming from? If your FI income is from qualified dividends and LT capital gains, you likely won't have any federal tax liability, making the HSA deduction worth less, depending on your state income tax.
Second, is a HDHP the most economical choice once you reach FI? The cost savings of choosing Medicaid over paying for an HDHP might outweigh the HSA benefits.
Re: Funding an HSA in Retirement
The income is coming from qualified dividends and interest income in Lending Club so half is taxable. Ultimately still below taxable levels with deductions and exemptions though so the deduction wouldn't work.
Investment options are great, I have it all in dividend aristocrats in Fidelity.
I haven't done the math other than assuming a much smaller premium with a HDHP.
One other benefit is that I believe HSAs are treated as an IRA once you reach a certain age and so withdrawals would be allowed penalty free. So it also qualifies as a retirement account of sorts.
Investment options are great, I have it all in dividend aristocrats in Fidelity.
I haven't done the math other than assuming a much smaller premium with a HDHP.
One other benefit is that I believe HSAs are treated as an IRA once you reach a certain age and so withdrawals would be allowed penalty free. So it also qualifies as a retirement account of sorts.
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IlliniDave
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Re: Funding an HSA in Retirement
The other popular thing to do, assuming you have an HSA now is to pay healthcare expenses out of pocket, save your receipts, then get reimbursement later, so it's like a withdrawal without taxes, much less penalties.
I plan on contributing up to age 65 anyway, but I wouldn't work two more years for that privilege. There's a good chance I'll be doing SEPP distributions out of my 401k along with collecting distributions from taxable accounts, so what I'll probably do is just move a portion distributions from already invested assets into the HSA each year, and get a deduction on my taxes. With low income that deduction won't be much, but every little bit will help at that point.
I plan on contributing up to age 65 anyway, but I wouldn't work two more years for that privilege. There's a good chance I'll be doing SEPP distributions out of my 401k along with collecting distributions from taxable accounts, so what I'll probably do is just move a portion distributions from already invested assets into the HSA each year, and get a deduction on my taxes. With low income that deduction won't be much, but every little bit will help at that point.
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jacob
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Re: Funding an HSA in Retirement
Wait what?! Can I save receipts from 2016 and cash them out from the HSA in 2020?IlliniDave wrote:The other popular thing to do, assuming you have an HSA now is to pay healthcare expenses out of pocket, save your receipts, then get reimbursement later, so it's like a withdrawal without taxes, much less penalties.
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IlliniDave
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Re: Funding an HSA in Retirement
As long as you have an HDHP/HSA-eligible plan and fund the HSA in 2016 (or prior), that is my understanding.jacob wrote:Wait what?! Can I save receipts from 2016 and cash them out from the HSA in 2020?IlliniDave wrote:The other popular thing to do, assuming you have an HSA now is to pay healthcare expenses out of pocket, save your receipts, then get reimbursement later, so it's like a withdrawal without taxes, much less penalties.
Edit to add: and as long as you did not claim the expense in question as part of a deduction.
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jennypenny
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Re: Funding an HSA in Retirement
Yup. It's essentially our emergency fund now since I have enough in receipts to drain the entire thing if I needed to.jacob wrote:Wait what?! Can I save receipts from 2016 and cash them out from the HSA in 2020?IlliniDave wrote:The other popular thing to do, assuming you have an HSA now is to pay healthcare expenses out of pocket, save your receipts, then get reimbursement later, so it's like a withdrawal without taxes, much less penalties.
I don't think it's counted as income either, which would make it a good way to increase available cash without increasing official income in retirement, especially if you're aiming for a specific income level for ACA.
Re: Funding an HSA in Retirement
That is interesting. How long can you save receipts/cash out later?
Re: Funding an HSA in Retirement
Theoretically forever. Subject to the HSA rules/laws/regulations not changing.
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jennypenny
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Re: Funding an HSA in Retirement
From IRS Notice 2004-50: Health Savings Accounts—Additional Qs&As
Q-39. When must a distribution from an HSA be taken to pay or reimburse, on a tax-free basis, qualified medical expenses incurred in the current year?
A-39. An account beneficiary may defer to later taxable years distributions from HSAs to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established. Similarly, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary’s gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year. 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.
Example. An eligible individual contributes $1,000 to an HSA in 2004. On December 1, 2004, the individual incurs a $1,500 qualified medical expense and has a balance in his HSA of $1,025. On January 3, 2005, the individual contributes another $1,000 to the HSA, bringing the balance in the HSA to $2,025. In June, 2005, the individual receives a distribution of $1,500 to reimburse him for the $1,500 medical expense incurred in 2004. The individual can show that the $1,500 HSA distribution in 2005 is a reimbursement for a qualified medical expense that has not been previously paid or otherwise reimbursed and has not been taken as an itemized deduction. The distribution is excludable from the account beneficiary’s gross income.
Q-39. When must a distribution from an HSA be taken to pay or reimburse, on a tax-free basis, qualified medical expenses incurred in the current year?
A-39. An account beneficiary may defer to later taxable years distributions from HSAs to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established. Similarly, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary’s gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year. 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.
Example. An eligible individual contributes $1,000 to an HSA in 2004. On December 1, 2004, the individual incurs a $1,500 qualified medical expense and has a balance in his HSA of $1,025. On January 3, 2005, the individual contributes another $1,000 to the HSA, bringing the balance in the HSA to $2,025. In June, 2005, the individual receives a distribution of $1,500 to reimburse him for the $1,500 medical expense incurred in 2004. The individual can show that the $1,500 HSA distribution in 2005 is a reimbursement for a qualified medical expense that has not been previously paid or otherwise reimbursed and has not been taken as an itemized deduction. The distribution is excludable from the account beneficiary’s gross income.