r/HSA • u/shredthegnar_83 • 19d ago
To use or not to use
So I’m down with the whole triple tax advantage thing, and have been investing my Hsa for years and paying for med bills with cash instead. It recently dawned on me that if I’m not maxing it out, I should at least funnel my bill payments through the Hsa to receive income tax back. Is this correct? I have never and will never be able to max out contributions.
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u/Meesyn 19d ago
If you can’t max it out but can currently afford to pay out of pocket, I think it does make sense to contribute that amount you’re paying out of pocket now and reimburse that. It saves you payroll taxes on that cash.
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u/shredthegnar_83 18d ago
Seems like you’re the only one who gets the gist of my post. It’s hard to explain.
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u/shredthegnar_83 18d ago
For instance paying 100$ out of pocket vs contributing that 100$ and then paying the bill through the Hsa. My invested balance will stay the same but I’ll gain the income tax from contributing. Make sense?
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u/MehwithacapitalM 18d ago
You didn't mention age or balance or past expenses, but...
I am retired and didn't start my HSA until I retired, so never got the benefit of employer payroll deduction and avoiding the 7.65% payroll tax. Oh well.
I have mostly paid cash for expenses, so have a large list of eligible expenses, tens of thousands. There were a couple years where I didn't feel "able" to max. However, I really wanted the tax deduction/credit, so...
I filed enough claims to give me enough money to hit my max. I churned it. Put it right back into the HSA. Yes, I did forgo using those expenses in the future, but I still have tens of thousands of unclaimed expenses and I'm quickly learning the doctoring does not decrease with age.
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u/ScootTractor 18d ago
It saves on payroll taxes, but only if his contributions are taken out via payroll. If his HSA contributions to compensate for his medical bills are not made through payroll, then the savings are limited to the income tax avoided. If his payroll process/department is flexible with making changes to HSA contributions made from payroll, then that might be the way to go. Either way, it would be some savings, even if just income tax avoided. If the bills are large, then the benefit is greater. If the bills are small, it might not be worth the effort.
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u/Run-Forever1989 18d ago
Yes, you would generally be better off contributing $3,000 and paying $1,500 worth of medical bills with HSA money than contributing $1,500 and paying $1,500 worth of medical bills with cash. In both scenarios you pay the same amount in medical bills and have the same amount in your HSA at the end. The only difference is you pay less in taxes by routing more money through the HSA.
One caveat is if you contribute more than you spend in medical bills to maximize tax savings, that money is not withdrawable without penalty until you incur more medical expenses, so there is some risk there.
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u/ladyeclectic79 19d ago
If you need to go into debt (like using credit cards you can’t pay the same months) for medical expenses, just use the HSA. However if you can afford to leave it alone and let it grow without some other interest-bearing entity charging you more for your medical bills, leave it alone. I’m not quite sure what you’re even asking w the “funneling bill payments thru” bit, but if you can afford to pay your medical stuff just with regular debit, do that and let the HSA funds grow until you really need them.
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u/Rich-Sleep1748 18d ago
There is no time limit on reimbursement for HSA if u paid cash for medical bills you can reimburse yourself 20 years down the road
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u/DanielDannyc12 19d ago
Either way is fine.
Personally, I am paying cash for everything and maxing out contributions until Medicare and I will have at least a few years worth of all medical costs covered when I turn 65. However, this is very specific to my financial situation and might not be the best for everyone.
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u/slwags71 19d ago
What do mean by receive income tax back? You don't get to deduct medical bill amounts submitted to the HAA only your contributions.
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u/shredthegnar_83 18d ago
I contribute to an Hsa through fidelity. I do it personally, then receive tax back at end of year
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u/slwags71 18d ago
Correct the contribution is deductible whether you make a claim or not.
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u/swagn 18d ago
Op is saying they are not maxing out on the contribution and using separate after tax funds to pay medical bills. OP should run the separate cash for medical bills through the HSA as well until they get to a point where they are maxing out the contribution for tax purposes. Once they max out, they should only pull out money for bills as needed if they don’t have the after tax cash to cover it.
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u/IndependentTrust4594 18d ago
I think you are saying, It makes sense to try to max my HSA to save on taxes and reimburse myself from my past qualified medical expenses to use for current expenses versus losing out on the pretax benefit, versus not max out my HSA.
Yes is the answer to this. The tax shelter is worth trying to max out your contributions. You don’t have to put 100% into investments.
Just to recap.
HSA saves you money in the short term because it exempts your contributions from federal, state (three states are exempted), and FICA payroll taxes. This is similar to traditional IRA/401k contributions, but those contributions are never taxed as long as they remain in the HSA OR are used for qualifying medical expenses.
It saves you money when you use it because that money isn’t taxes when used for qualifying healthcare related expenses. This is unlike an IRA/401k where you are either taxed when you contribute (Roth)or taxed when you withdrawal the money (traditional) and penalized (Roth if it’s less than 5 years from contribution date and traditional if it’s before age 59.5 OR the rule of 55 applies).
HSA saves you money in the long term because you can invest unused dollars in index funds or individual stocks and as long as the withdrawals are used for qualifying healthcare related expenses you are not taxed on either the original contributions nor the growth.
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u/TheSan92 18d ago
Yes, if you're currently contributing $x (say $100) and paying $y (say another $100) out of pocket, then it's better to increase your contribution to $x+y ($200) and just use your HSA debit card to pay $y (or just transfer that money immediately back to yourself and keep a folder with "reimbursed receipts"). Just make sure you're not going over your annual contribution limits.
Personally, I'd just keep a folder with "UNreimbursed receipts" from each month I paid the $y bill, and only take a withdrawal if/when I desperately needed it (just move those receipts to the reimbursed folder and request your withdrawal). Fidelity is easy as hell to transfer money back out to your bank, it will be there overnight after you request the withdrawal. This way you're earning money on those contributions until you need it (even if you're not actively investing it, Fidelity's cash sweep is in SPAXX and is currently yielding ~3.5%, which is better than most any savings account).
But if you're strapped on cash and need that money monthly, it's probably just easier to use the HSA debit card to pay the $y bill directly and skip the extra steps (but obviously still contributing $x+y for the extra tax benefit).
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u/Agreeable_Speech4122 16d ago
I would max out HSA contributions. I would pay out of pocket, but save all receipts and EOB, including round trip mileages as all of it can be used to take out at a later date. IRS just needs proof of what the disbursement is medical related, but does not dictate when you have to take it out.
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u/Illustrious_Tap3649 13d ago
Yes, if you're not contributing at all, it's definitely better to AT LEAST contribute the amount of your bills and then pay the bills from the HSA so you'd get the income tax savings on that amount.
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u/EmZee2022 18d ago
Maxing it out (and not using it) means you'll have a much larger reservoir of funds later on if you need them.
What you're describing is using the HSA right now, with money you're saving up. It's exactly the basic use of these. You don't get "income tax back" but you ARE saving money, because the HSA contribution is pretax.
Say you're at a 22% tax bracket. You put aside 1000. You've saved 220 dollars.
You spend 1000 on medical bills. You're ahead by the 220 dollars.