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The Ultimate Retirement Account


It’s that time of year again when most employers allow their employees to change their insurance plans and benefits.

This year’s open enrollment period will be particularly interesting for me because it will be my first as a married man so I will need to see if it’s worth adding my wife onto my insurance, or vice versa.

Ultimate Retirement Account

Because some of you may be researching health insurance options like I will be, I thought it’d be a great time to talk about America’s ultimate retirement account. It’s not actually described as a retirement account but if used wisely, it could be one of the best places to put funds, not only for standard retirement but also for early retirement.

So what is it?

The ultimate retirement account is better known as a Health Savings Account, or HSA.

An HSA is a tax-advantaged savings account available for people who are enrolled in a high-deductible health insurance plan.

Since people with high-deductible health plans could face more out-of-pocket costs, due to the higher deductibles, the government provides tax incentives to motivate people to save for these expenses. HSA account holders can contribute pre-tax dollars to the account and can then withdraw money from the account, tax free, when paying for qualified medical expenses.

Why is it so great?

So how does a health savings account get the incredible honor of being named the ultimate retirement account?

Before answering that, let’s first briefly touch on some of the benefits of other types of retirement accounts.

401(k)/403(b)/Traditional IRA

These are the most common retirement accounts and are great for two reasons:

  • Your contributions to these accounts are pre-tax contributions. This means that you don’t pay any income tax on the money you contribute. So, for example, if you make $100,000 a year but contribute $15,000 to your 401(k), the IRS treats you as if you only made $85,000.
  • The money in these accounts is able to grow tax free.

You eventually have to pay tax when you withdraw money but since you receive a tax break when you put money in and the money is able to grow tax free, it is usually worth maxing out these accounts to take advantage of these benefits.

401(k)/403(b)/Traditional IRA

Roth IRA

A Roth IRA is different because you have to pay tax on your income up front, like you do with income that you spend, but the money grows tax free and you do not have to pay any tax when you withdraw the money after you reach the age of 59.5. So using the salary in the above example, if you contribute $5,000 to a Roth IRA, you will still initially pay tax on your full $100,000 salary but you don’t have to pay any tax when you withdraw the money.

Roth IRA

So what about the HSA?

For most of the population, an HSA is simply a savings account for medical expenses that provides some tax benefits.

For fientists, however, I suggest you disregard the medical aspect of the account and simply think of the account as a special retirement account that you are able to contribute to when you are enrolled in a high-deductible health plan.

When used intelligently, the HSA can potentially provide the best benefits of both a Traditional IRA and a Roth IRA combined. With an HSA, you are not only able to contribute pre-tax dollars, like you can with a 401(k)/403(b)/Traditional IRA, but you can still enjoy the tax-free growth and tax-free distributions that a Roth IRA provides!

That means you could potentially have tax-free contributions in, tax-free growth, and tax-free distributions out!

Health Savings Account

How is this possible?

Well, this is all possible because of the fact that there is no rule stating that you must use your HSA to directly pay for medical expenses or that you must withdraw money from your HSA within a certain amount of time after paying for a medical expense. As long as the qualified medical expense occurred after the HSA was opened, you can withdraw money from the HSA at any time after incurring the expense to reimburse yourself.

Example

Let’s assume that I only spend $200 a year on medical expenses. It doesn’t make sense to pay a lot of money for a fancy, full-service health insurance plan, since I rarely go to the doctor, so I instead decide to get a cheaper, high-deductible health plan with a lower monthly premium.

Since I have a high-deductible health plan, I am able to open a health savings account so I elect to put $3,000 into the account every year and I invest the account’s money in a total stock market index fund.

Because contributions to the HSA are pre-tax, depositing $3,000 into my HSA decreases my taxable earned income by $3,000.

When I go to the doctor, I can pay for my $200 yearly visit with my HSA debit card or I can pay for it with cash or with another credit or debit card instead. If I pay with my HSA debit card, that money is extracted directly from my HSA and that’s the end of the story. I just used tax-free dollars to pay for the expense and there is nothing else I can do.

If I instead pay with cash or with another card, however, I am able to withdraw that $200 from my HSA and deposit it into my normal checking account at a later time, to pay myself back for the qualified medical expense. The great benefit of having an HSA is that I can decide when to pay myself back. Since I live well below my means and have ample savings, a $200 payment isn’t going to break the bank so there is no rush to get paid back from my HSA. Instead, I am able to leave that $200 in my HSA and can sit back and watch it grow, tax-free, until I decide to withdraw it!

As long as I keep my receipts, I can withdraw the money for qualified medical expenses from my HSA at any time, in a similar way a retired person over age 59.5 can withdraw money from a Roth IRA…tax free!

So at the end of the year, I have saved myself from paying income tax on the $3,000 of income I used to fund the account, I now have $2,800 that is growing in the HSA tax free, and I have another $200 that is in the HSA growing tax free that I can withdraw whenever I want to!

Worst Case (or Best Case?) Scenario

I can hear you saying, well what if I put all this money into my HSA but I don’t have any health issues…how will I ever get my money out?

In this case, the account will simply act like a Traditional IRA with an increased distribution age (65 instead of 59.5 for a Traditional IRA). Like a Traditional IRA, your contributions to the HSA are pre-tax contributions and your contributions are allowed to grow tax free. If you don’t use your HSA funds for medical expenses, you can begin withdrawing money from your HSA account for any expenses after you turn 65, without penalty. Like a Traditional IRA, you’ll have to pay income tax on any distributions that aren’t for qualified medical expenses but you won’t incur any additional penalties or fees. Therefore, after the age of 65, an HSA is nearly identical to a Traditional IRA!

So to describe the above example in another way, the HSA at the end of the first year is like a Traditional IRA with a balance of $2,800 and a Roth IRA with a balance of $200. As I incur additional medical expenses, I can continue converting my “Traditional IRA” money to “Roth IRA” money without having to pay tax on the conversion!

Extra Tax-Advantaged Account

The HSA is particularly useful for someone like me who maxes out all of the other tax-advantaged accounts available.

Since I’m in the wealth accumulation phase of my journey to financial independence, I try to limit my taxes as much as possible so that I can make as much of my money work for me as I can. The HSA allows me to contribute more of my income to tax-advantaged accounts, which results in a lower income tax burden and a higher savings rate.

Conclusion

If your annual medical costs are low and you don’t expect to reach your deductible in an average year, you can reap some amazing benefits by choosing to enroll in a high-deductible health plan. Not only will your monthly costs be lower, you’ll be able to take advantage of a health savings account and all the benefits that come with it.

Let me know in the comments if you have any questions and as always, I am not a medical or tax professional so please do your own research before making any changes to your health coverage or retirement investments.

Ultimate?

What do you think? Do you agree that an HSA is the ultimate retirement account? If not, what type of account gets your vote?


Addendum – As Nick pointed out in the comments section below, if you contribute to your HSA through a payroll deduction, you do not pay FICA taxes (i.e. Social Security and Medicare) on the contributions! I am not aware of any other retirement account contributions that are exempt from FICA taxes so this is yet another reason the HSA is the ultimate retirement account!


Image: rosmary

165 comments for “The Ultimate Retirement Account

  1. greg
    October 17, 2012 at 8:21 am

    thanks for the article! I have one of these but never bothered to look at the details >_<

    • The Mad Fientist
      October 17, 2012 at 10:38 am

      Glad it was helpful, Greg!

      That’s great you already have an HSA set up so that you can start taking advantage of it immediately.

      Let me know if any questions arise as you dive into the details.

    • December 11, 2013 at 10:22 am

      I agree, great article! I didn’t know there was a way around FICA and Social Security taxes either. I am going to max this account out every year until retirement.

  2. October 17, 2012 at 3:39 pm

    Brillant post here, Mr. MF.

    In fact, I liked it so much I added an addendum to my own Stocks Part VII post discussing IRA, 401K and the like with a link to it.

    As I said there, RE HSAs, I couldn’t have said it better myself and so I didn’t!

    • The Mad Fientist
      October 17, 2012 at 6:54 pm

      You’re too kind, Jim!

      As I said in our Mad Fientist FI Podcast interview, I honestly think your stock series is the only thing a person needs to read to become a successful investor so I am truly honored that you included a link to my article in that series!

      • Mad+NeoFite
        October 23, 2014 at 9:44 am

        Kudos to this article making it to the stock series. I love that you great FI guys read and contribute to each others content. I never had any knowledge on this subject and got an excellent crash course. It made me look into what we had w/ my company which unfortunately is an HRA use it or lose it. It did get me to contact HR about what could be done about it or if our insurance policy would allow an outside HSA account such as the vanguard links you have posted. Would you recomment only doing this if 401k and IRA contributions were maxed out?

        • The Mad Fientist
          October 28, 2014 at 5:50 am

          That’s a shame you have an HRA instead of an HSA. Hopefully you can convince your company to offer a High Deductible Health Plan so that you can open up an HSA somewhere.

          I personally would invest in an HSA over the IRA, due to the benefits described in the article, so if I couldn’t max out everything, here’s where my money would go:

          1) 401(k), up to the employer match %
          2) HSA
          3) IRA
          4) Rest of 401(k)

          • kazper
            October 28, 2014 at 12:33 pm

            How would you revise this for those of us with a TSP?

            1. TSP up to employer match
            2. HSA
            3. TSP
            4. IRA

            or would you switch 3 and 4?

          • The Mad Fientist
            October 31, 2014 at 5:12 am

            I’m not too familiar with TSPs but from what I know, they have very low costs so if you’re happy with the investment options, 3) TSP and 4) IRA makes sense but I’m not sure it makes too much difference so you could switch them and be fine as well.

  3. Mike
    October 22, 2012 at 11:16 am

    I have a different take on this. I think they’re great for individuals who can take advantage of them, but we don’t meet the “low medical expenses” criteria so for me an HSA is useless. Worse, I suspect that if you analyzed the impact of many healthy people taking HSA’s on the cost of medical goods and services, there may be some nasty side effects from healthy people removing themselves from the insurance pool and instead diving into these HDHP / HSA arrangements. Perhaps choosing an HDHP / HSA should come with a higher bar of entry if your medical situation changes later and you need traditional health insurance. 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. 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. If I could vote to eliminate them, I would.

    • The Mad Fientist
      October 22, 2012 at 10:19 pm

      Hi Mike, thanks for the comment. 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.

      While HDHPs are usually best for people with low medical expenses, sometimes they can actually be a good option for people with very high medical expenses as well. My health care provider, for example, offers a HDHP that has maximum annual out-of-pocket expenses of $2,500 for individuals and $5,000 for families. The other two “full-service” health plan options, which have higher monthly costs and don’t provide access to a Health Savings Account, have much higher out-of-pocket maximums ($4,500/$5,000 for individuals and $13,500/$15,000 for families). So for someone who could potentially need expensive procedures or require extended hospitalization, it may make sense to enroll in a HDHP, in order to minimize annual out-of-pocket costs and be able to utilize the HSA tax benefits described in the article.

      As far as gaming the health insurance system, I don’t really see it that way. The government is providing an incentive to save for health expenses and I’m taking advantage of that incentive. Over the long run, I will be less reliant on an already stressed system, because I will be able to pay for more of my own medical expenses, so I can’t imagine the government would be too concerned with me maxing out my HSA and letting it grow for years/decades until I need to use it.

      I’m not sure I understand what you mean by “HDHP/HSA should come with a higher bar of entry…”. Would you mind explaining that part a bit more?

      • Mike
        September 4, 2013 at 1:27 pm

        Words: eaten.

        We now have an HDHP through my wife’s employer. This only made sense once we decided to switch from my health insurance to hers, she had some options I didn’t. This move was primarily for cash flow advantages, after running the numbers we determined that we’d actually spend less out of pocket under her plan than mine, so we made the switch. Time will tell if this turns out to be the case in practice, and no read yet on it’s value as a retirement account.

        • The Mad Fientist
          September 4, 2013 at 7:44 pm

          Mike, good to hear from you again! I really appreciate you coming back after almost a year to post an update.

          If you do decide to open an HSA to go along with your HDHP, make sure you contribute to it through payroll deductions so that you lower you FICA taxes (as Nick described in the comments below).

          Keep me posted on what you think of the HDHP/HSA. Hopefully it will turn out to be a good switch for you and your wife.

    • Jim
      September 3, 2014 at 2:16 pm

      “Gaming the health insurance system”. The incentive is available and honestly encourages saving for Health expenses later which will not be as it seems later (trust me…like when does the US have a solid track record in this department). The health insurance industry is gaming the reputable users/payers.

  4. BG
    December 19, 2012 at 12:18 pm

    Hi Mad Fientist — I’m following you over from 20somethingfinance where I saw your comment there about HSA distributions using old medical receipts (the same as your article here discusses). I’m duplicating my comment on 20somethingfinance here to ensure you see it, plus it pertains to this article as well:

    “No, you can’t do that.

    Only “Qualified Medical Expenses” (QME) can be withdrawn from your HSA, and a QME is only valid in the YEAR the expense is PAID.

    For example, if you go to the doctor in December 2012 — but pay the bill in January 2013, then that is a “Qualified Medical Expense” for tax-year 2013. You can’t, as you imply, pay that bill in 2013 out of pocket, and then get a distribution from your HSA in 2016 (or some future year).

    This is mentioned in the language in IRS Pub 969 (talking about “Qualified Medical Expenses” for HSAs), and IRS Pub 502 defining when a “Qualified Medical Expenses” is good for:

    “You can include only the medical and dental expenses you paid this year, regardless of when the services were provided.”

    I erroneously thought the same as you a few years ago and a quick call to the IRS help line set me straight then: 1-800-829-1040″

    • The Mad Fientist
      December 20, 2012 at 8:25 am

      Hi BG,

      Thank you for getting in touch. I try very hard to ensure everything I post here is accurate so I’m really thankful that you took the time to speak up when you thought something I wrote was incorrect.

      I had read the IRS Pub 969 when doing research for this article but I didn’t look at the IRS Pub 502 that you mentioned. I just looked through it now though and to me it still seems ambiguous. I can see how Pub 969 defines qualified medical expenses as “expenses that would generally qualify for the medical and dental expenses deduction”, as defined in Publication 502, and Pub 502 does say “You can include only the medical and dental expenses you paid this year” but to me, that doesn’t explicitly mean the HSA can only be used for current year expenses.

      Publication 502 describes what medical and dental expenses you can deduct on your tax return so it makes sense that you can only deduct qualified medical expenses that were paid for in the tax year that you are hoping to receive the deduction. For HSA purposes, however, just because it doesn’t fall within the current tax year doesn’t mean it wasn’t a qualified medical expense. To take a deduction, Pub 502 states that the expense has to be a qualified medical expense AND has to have been paid for in the current tax year but an HSA distribution just states that it has to be a qualified medical expense, as defined in Pub 502. To me, the date the expense was paid for is additional information and does not determine if a medical expense is a qualified medical expense.

      Saying all that though, if you actually spoke to the IRS about this, I definitely believe what you’re saying. I will give them a call to get clarification on everything and will update this article accordingly.

      Thank you very much again for the comment and I will be in touch again soon.

      • BG
        December 20, 2012 at 10:43 am

        When I called the IRS a few years back, it was for a real example I was facing. I had roughly $8k in QMEs, but only $6k (max contributions) in the HSA. My question to them was whether I could ‘roll’ the extra $2k in QMEs into the next year and take the distribution from the HSA then (when I could add an additional $6k to the HSA again).

        The IRS agent pointed me to Pub 502 and said the best I could do in my current situation was try to delay the payments to the medical providers into the next year. Any payments I had already made in the current year would not count as a QME for HSA distributions in a future year.

        If you call the IRS and find that they have changed their position on this, that would be very good news.

      • BG
        December 20, 2012 at 2:30 pm

        OK, I stand corrected. I called the IRS again, and spoke with a representative who put me on hold a few times to research the question. She changed her mind from originally “you can’t do that” to ultimately coming to the conclusion that yes, you can ‘roll’ your QMEs into the future and take the HSA distribution at any arbitrary future time (be that years away).

        She did say, however, “unless my specific plan precludes that” — though it isn’t clear if that is my employer’s ins. plan, or the bank (HSA) trustee that could preclude us from using HSAs this way.

        Regardless, as far as the IRS is concerned, there is nothing in the rules preventing us from saving QME receipts, and deferring HSA distributions indefinitely — as long as you had an HDHP insurance plan when the expense was incurred.

        Also, though this is common sense: no ‘double-dipping’ allowed: using the same QME for multiple HSA distributions and/or using a QME that was deducted on Sched A in any tax year.

        • The Mad Fientist
          December 20, 2012 at 11:54 pm

          BG, that’s great news! Thanks a lot for giving the IRS another call.

          Tax documents are such a pain to interpret so that’s a great idea calling the hotline to ask questions. I’ve never thought to do that in the past, I’ve always just suffered through hours of frustrating reading instead, but I can definitely see myself using that service in the future.

          Thanks again for bringing your concerns to my attention and for following up. It’s nice to know there are people out there keeping me honest!

          • Geoff Smith
            February 25, 2014 at 10:34 am

            Your HSA plan has nothing to do with this, since you do not have to substantiate withdrawals — you just have to keep your own records.

            The IRS has issued a notice specifically on this topic — IRS notice 2004-50, see Q-39.

          • The Mad Fientist
            February 25, 2014 at 11:25 am

            You’re absolutely right, Geoff. Jeremy from GoCurryCracker.com actually linked to that IRS notice in his comment on the How to Hack Your HSA article.

            Here’s the link, for anyone else interested: http://www.irs.gov/irb/2004-33_IRB/ar08.html

  5. Peter
    March 8, 2013 at 4:44 pm

    I realize I am late to this party, but I enjoyed the article and it has made me think more about fully funding my HSA account. I currently fund some but I do not max it out.

    I wanted to point out another advantage of an HSA account with high deductible health plans. Many companies are encouraging HDHP and HSA’s by giving money HSA accounts. I’m assuming this is because it also saves them money. My company gives me $500 a year into my HSA.

    So just another way to get “bonus” money from my company above and beyond my salary.

    • The Mad Fientist
      March 9, 2013 at 2:06 am

      Welcome, Peter! It’s better to come late to a party than to not come at all so thanks for joining the discussion.

      That’s amazing your company contributes $500 per year towards your HSA. I imagine that your free $500 combined with the amount you save on monthly premiums by having a HDHP adds up to almost cover the difference in deductibles between the HDHP and some of the other options. Your HSA is the super ultimate retirement account!

      • Rob
        July 30, 2013 at 12:46 pm

        Not to one up Peter, but my company puts $2400 a year into my HSA, $200 a month, which equals my $2400 deductible.

        Thanks for the great article. I never realized I could invest the money, its sitting in an account paying .15% interest. I found out I have 22 mutual funds I can choose from, including 2 vanguard index funds.

        I also didn’t realize i could add in more than my company already puts in.
        I have been looking for ways to sock away more money tax-free. I already have the 401k and IRA’s maxed.

        Thanks for saving me money!!!

        • The Mad Fientist
          July 30, 2013 at 2:31 pm

          Wow, $2400 per year is very generous. That’s great you also have two Vanguard index fund options to choose from.

          It’s always nice to hear when one of my articles helps someone so thanks a lot for letting me know!

  6. Nick
    March 10, 2013 at 10:15 am

    Great article! As a financial planner, just wanted to add one extra feature that gives the HSA an extra vote as the “ultimate” retirement account. If you contribute through payroll deduction, you also save on Social Security and Medicare tax (7.65% this year)! You do not receive this extra tax break if you do not contribute through your paycheck at work.

    • The Mad Fientist
      March 10, 2013 at 10:57 am

      Thanks, Nick! That is definitely another incredible benefit and one that I actually didn’t even recognize. This is why I love writing about this stuff here…other smart people like you come to my house and tell me more interesting information about topics that interest me. The HSA keeps getting better!

      • July 21, 2014 at 3:36 pm

        Hi Nick, MF….

        Can you site a source for HSAs being free of FICA taxes? Sound intriguing, but I can find anyplace that confirms this feature. Thanks!

        • July 21, 2014 at 4:28 pm

          I don’t have an official document as a source, but I can say that looking at my W-2 from last year, Box 1 (wages minus 401k withholding and HSA withholding) and Boxes 3 and 5 (SS and medicare wages, respectively) differ only by the amount of my 401k withholding, so it appears the HSA contributions were not added back into the SS/Medicare wages.

          Additionally, each paycheck I receive, I can calculate the amount that SS/Medicare withholding is based off of by dividing the withheld amount by .062 or .0145, respectively. Taking the difference between my wages and that amount tells me that my automatic payroll deductions for HSA contributions, as well as my portion of medical and dental insurance premiums that automatically come out of my paycheck, are not subject to FICA taxes.

        • The Mad Fientist
          July 22, 2014 at 10:22 am

          Hey Jim, check out this IRS bulletin (see the answer to question #19).

          Like Matt, I too can confirm that HSA contributions are not added back into SS/Medicare wages on my W2.

        • July 22, 2014 at 3:48 pm

          Thanks guys!

          That works.

      • Eli
        August 28, 2014 at 12:26 am

        Depending on your taxable income level, the FICA tax rate for the $3300 in potential HSA contribution will be:
        – 7.65%: $0 – $117,000
        – 1.45%: $117,000 – $200,000
        – 2.35%: $200,000

        My employer doesn’t allow front-loading of the HSA contributions through paycheck contributions. Therefore, it occurs to me that I’m better of front-loading the HSA directly with FICA-taxed funds, rather than pre-FICA paycheck deductions. Assuming I don’t fall into the 7.65% tax rate, the earnings from front-loading are likely to compensate for the potential FICA savings.

        Is my thinking correct or flawed?

        • The Mad Fientist
          August 29, 2014 at 1:42 pm

          Hi Eli,

          If you make $300,000 a year, for example, you would have to pay 7.65% on the first $117,000, 1.45% on the next $83,000, and 2.35% on the final $100,000. Were you thinking that you’d have to just pay 2.35% on the entire $300,000?

          • Eli
            August 29, 2014 at 2:27 pm

            No, but any reduction in taxable income comes from the top tax bracket.

            If you make $300,000 a year and you have $3,300 deducted from your paycheck for the year, the result is:
            – 7.65% of $117,000
            – 1.45% of $83,000
            – 2.35% of 96,700 (instead of $100,000 without the deduction)

            The savings in FICA taxes is 2.35% * $3,300.

          • The Mad Fientist
            September 4, 2014 at 2:59 pm

            Ahh, I see what you’re saying now.

            I think I would still go the payroll-deduction route, since that’s a guaranteed return and I like to minimize my taxes as much as possible. If you’re making more than $200k though, 1-3% of $3300 is likely only a very small drop in your investment bucket so you might as well just go with whichever option is easiest.

    • L.R.
      March 4, 2014 at 6:08 pm

      Nick (and MF), Thanks for this great information. 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. I’d like to approach him with as much information as possible but am having a hard time finding it on my own. Wondering if you could help me out with…

      1. Mainly, who would my employer get in touch with to set up a payroll-deductible HSA?

      2. Do you know of any that have Vanguard Funds as an option to invest in?

      Many thanks,

      L.R.

      • The Mad Fientist
        March 5, 2014 at 5:30 pm

        Hey L.R., I’m not sure about how your employer would need to set up the HSA but Health Savings Administrators is a good choice if you want to invest in Vanguard Funds.

        Good luck!

  7. Nephi
    March 20, 2013 at 3:52 pm

    Which HSA custodian do you recommend? Mine is currently at a local credit union since it’s free of fees and I have a small balance thus far.

    • The Mad Fientist
      March 20, 2013 at 4:56 pm

      Hi Nephi, I would recommend a custodian that a) doesn’t charge account fees and b) allows you to invest in low-cost index funds. Hopefully your local credit union has some good low-cost investment options so that you don’t have to worry about moving the money you already have invested and can instead just focus on maxing out the account every year!

      • Nephi
        March 20, 2013 at 5:10 pm

        Any custodians you would recommend I look at that offer both those? The current is no fees, but only basic interest accounts. (at most, .7%)

        • The Mad Fientist
          March 20, 2013 at 5:40 pm

          Ahh, I see. A basic interest-earning account really won’t let you maximize the HSA as I described in this article.

          The first thing I would do if I were you is check to see if your employer offers an attractive HSA option. My employer offers a Fidelity HSA and they pay the annual fee so I’m able to invest in low-cost index funds without paying any fees. Going through my employer also means I don’t have to pay Social Security and Medicare tax on that money, as Nick mentioned in his comment above, since my HSA contributions are deducted directly from my paycheck.

          If your employer doesn’t offer a good option, your best bet may be to go with Health Savings Administrators. They charge an annually fee but they allow you to invest in Vanguard Admiral shares, which are the best index funds you can invest in, in my opinion.

          • Adam
            April 3, 2013 at 9:48 pm

            You could also take a look at HSA Bank. Their investment option is provided through TD Ameritrade, which offers quite a few commission-free ETFs, including several good Vanguard ETFs whose expense ratios are equivalent to Admiral shares.

  8. May 14, 2013 at 10:13 am

    Awesome post. I am maxed out on Roth and 401(k) and working toward financial security. This is perfect! I really appreciate the post!

    • The Mad Fientist
      May 14, 2013 at 10:58 am

      Thanks, David! Thanks a lot for stopping by!

  9. enceladus
    July 11, 2013 at 10:41 am

    I looked in to my employer’s HSA after seeing this post, but I’m concerned about this statement in the plan:

    “All pre-tax funds that are not used for eligible expenses incurred during the plan year will be forfeited. This is mandated under the IRS “use it or lose it” rule.”

    What does “forfeit” mean? Does it just mean I’ll be returned the unspent money and taxed on whatever isn’t used for QME? Or does all of the deposited money get swallowed up by the government?

    I’m a reservist in the military (single, healthy 26 y/o male) and I have access to Tricare ($51/month premium, only $150/yr deductible). Thus, my reason for looking into this is for the tax benefit, since I spend next to nothing on health care costs.

    Ideally I’d like to max out contributions and take the money out at 65 like you recommend, but I’m not sure what the “use-it or lose-it”/forfeit clause means.

    Thanks!

    • The Mad Fientist
      July 11, 2013 at 5:45 pm

      Hi enceladus, it sounds like you’re looking at a Flexible Spending Account (FSA) and not a Health Savings Account (HSA). An FSA must be used up by the end of the year or you’ll lose that money forever. An HSA, on the other hand, does not require you to spend the money during any particular timeframe so you can let that money grow tax free, as described in the post, for as long as you want.

      Great call maxing out your HSA for the tax benefits but definitely make sure it is an HSA and not an FSA before you make any contributions!

      • enceladus
        July 11, 2013 at 7:37 pm

        Thanks for the quick reply MF!

        On closer inspection, you’re correct. My employer refers to it as a Healthcare FSA in my benefit plan, which I incorrectly read as HSA. Glad I didn’t throw a bunch of money it before I realized this!

        • The Mad Fientist
          July 11, 2013 at 9:47 pm

          I’m glad too!

          • Carlos
            August 5, 2013 at 1:27 pm

            Hello,

            I have the same option from work and it is an FSA, you loose the money if you do not use it within the calendar year, do I have another option or am I stuck with that?

          • The Mad Fientist
            August 5, 2013 at 5:20 pm

            Hi Carlos, you’ll need to check with your employer but it’s possible you only have an FSA option. If your employer doesn’t know for sure, contact your health insurance provider to see if your plan is HSA eligible.

  10. Jill
    July 22, 2013 at 2:20 pm

    Loved this article. So glad someone confirmed what I was thinking. I changed to our HSA/HDHP two years ago when I started doing all the math. My company also contributes, and what I pay out of pocket is almost exactly the same — but I now have thousands saved in an HSA account that would have just been ‘my share’ to pay to the insurance company under a traditional plan. We will on occasion ‘max’ out the year due to hearing aids needed by myself and my daughter, and soon my son. But, I plan this to happen all in the same year so we max out our out of pocket. That leaves ‘off years’ as savings years for us. 3 out of 4 years of savings helps out!\

    Even without investing, having 20 years of $3000 savings in an account is better than just paying it to the insurance company for a traditional plan and letting them profit from it.

    • The Mad Fientist
      July 22, 2013 at 6:09 pm

      Absolutely! 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.

      Glad you enjoyed the article and thanks for the comment!

  11. Fubek
    July 28, 2013 at 4:41 pm

    Hi there,

    very nice post. It made me start to think about the following: would it make sense to pay all medical expenses with after-tax money, i.e. not accessing the HSA at all? Because the HSA money can grow tax-free for a long time, and when I use the HSA money, this obviously stops.

    There must be a way to figure out under what circumstances paying with after-tax money is the better solution. Do you have an idea how to run the math?

    Thanks
    Fubek

    • The Mad Fientist
      July 28, 2013 at 6:16 pm

      Absolutely! That’s exactly what I propose in the article (see the last three paragraphs in the Example section).

      I just pay for my qualified medical expenses with after-tax money, keep track of the expenses so that I know how much I could withdraw from my HSA if I need to, and then leave the entire HSA to grow tax free.

      I’d argue that most of the time it makes sense to pay with after-tax money. That way, more of your money is left to grow tax free.

  12. Steve
    August 12, 2013 at 11:03 pm

    I have health insurance through Kaiser at my company. I just got married and I’m in the process of filing for my wife’s “green card.” She needs to get some sort of insurance policy in the near future.

    We are in great health and are very motivated to retire early and slow travel! Should we get an HSA in addition to my Kaiser? Where is the best place to buy these policies? Does 2 people mean I can max us out our savings as a family? Lastly, do high deductible HSA accounts require monthly fees? Thanks so much.

    • The Mad Fientist
      August 13, 2013 at 2:05 pm

      Hi Steve, I would first speak to your health insurance provider to make sure your plan is HSA eligible. Next, I would speak to your employer to see if you could automatically contribute to an HSA through a payroll deduction (this will allow you to save on FICA taxes). If your health plan is HSA eligible but your employer can’t help you set one up, I’d take a look at Health Savings Administrators. They charge an annual administration fee but they offer some great Vanguard investment options so it could be a good choice.

      If both you and your wife have HSA-eligible health plans, you should be able to max out the family contribution limits.

      Good luck and let me know if you have any other questions!

      • Steve
        August 13, 2013 at 9:07 pm

        Thanks for the tips. This is a great stepping stone for me! Can you please edit out my last name in the previous post. Keep up the great work!

        • The Mad Fientist
          August 13, 2013 at 9:16 pm

          Your previous comment has been edited, as requested. Good luck getting everything set up!

  13. Danielle
    September 24, 2013 at 9:34 am

    Brandon,
    My DH can get an HSA through his employer this year (literature wit details will be distributed beginning of October during open enrollment).

    I am reading on this topic and cannot see a clear answer anywhere: what happens if his employment is terminated?
    I assume the HSA would stay active till the end of the contract year?

    Suppose next year husband has a different employer and decides to get a traditional health insurance plan.
    Is this possible, or is once you start the HDHP, you are stuck forever?

    • The Mad Fientist
      September 24, 2013 at 11:19 am

      Hi Danielle,

      The individual owns the HSA, not the employer, so even if your husband leaves his job, the HSA will stay with him.

      You are definitely not stuck with a HDHP forever. 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.

  14. Nancy
    September 25, 2013 at 9:30 am

    Really interesting. A question: if you’re only earning .1% on your HSA funds (no investment options are available), is there any reason not to pull out the money from your HSA now (tax free) to pay for a medical expense vs paying for the medical expense out of pocket and letting the money sit in your HSA account but earning very little? I briefly looked into HSA Bank & HSA Administators (transferring my HSA dollars there) but the fees & hassle etc don’t seem to make sense for a fairly small HSA balance (~$7000 at the moment). Also, do you know what kind of long-term care premiums can be paid for from HSA accounts? Thanks!

    • The Mad Fientist
      September 25, 2013 at 10:27 am

      Hi Nancy, it sounds like it may make sense to use your HSA to immediately pay for your medical expenses, since you don’t have any good investment options within your HSA. You’d be giving up tax-free growth but the additional returns could make it worth it, assuming you invest the after-tax money that you didn’t spend on medical expenses.

      As far as what kind of long-care premiums can be paid with HSA money, your best bet would be to take a look at this IRS document to see if your specific expense is a qualified medical expense.

  15. Antonio
    September 26, 2013 at 1:03 am

    Great job Brandon. This is my favorite post, I have reread it many times.

    I had a question regarding the medical expenses and delaying their payment. I was wondering if it wouldn’t be safer to “pay yourself” for your yearly expenses and stash that tax free money in a Roth IRA? (I know you would love to max out both of them!)

    By “safer” I mean you’re sure that you don’t have to interpret the IRS Pub 502 or rely on an employee’s interpretation of it. Or am I missing something here?

    • The Mad Fientist
      September 26, 2013 at 4:03 pm

      Hi Antonio, glad you enjoyed the post!

      If you don’t plan on maxing out both your HSA and your IRA and you feel a bit funny about leaving your money growing inside the HSA, then what you proposed makes sense.

      I was working under the assumption that all retirement accounts would be maxed out so what you proposed isn’t an option in that scenario.

      • Antonio
        September 26, 2013 at 4:45 pm

        Thanks for the answer Mad Fientist.

        I wasn’t worried about leaving money in the HSA but I am worried about Uncle Sam :)

        My proposal comes from a guy longing to be FI but still on the road to freedom, i.e. I still haven’t maxed out all these accounts :P

        Please keep up the great job for all the future FI guys and gals out there that still need a north star.

  16. Dave
    November 4, 2013 at 5:00 pm

    Thanks for this post. I had thought about joining my employer’s HSA last year but decided against it because I was concerned about the high deductible. What a mistake! After reading your article and looking at things more carefully I’ve decided to switch to the HSA in this year’s open enrollment period.

    My employer’s EPO plan was costing me $865/year, with no in-network deductible, a $1000 out-of-pocket max and $10 copays for doctors visits. The HSA plan costs $0/year, furthermore they put $1000 in your HSA account if you take an annual physical (which is free), but it has a $1250 deductible, and a $2400 out-of-pocket max on 10% coinsurance for visits.

    The amazing thing here is that even if I use my HSA to pay for medical expenses, in the worst case where my expenses hit the out-of-pocket max, I’d only be paying $1400/year on the HSA after the $1000 company contribution, compared to $1865 on the max o-o-p plus fees on the EPO, a saving of $465. In the best case, if I don’t go to the doctor at all, I save $1865! Neat!

    • The Mad Fientist
      November 6, 2013 at 2:46 pm

      That’s great, Dave! It’s always nice to hear when something I’ve written helps someone save a considerable amount of money so I really appreciate the comment.

      Also, thanks for sharing the specific numbers of your company’s available plans because I imagine it will inspire others to look more closely at their own options.

  17. Denise
    November 8, 2013 at 2:49 pm

    I would add that one should also do their homework on the bank distributing your HSA. Chase charges a monthly fee (I think it was $10 or $15) for maintaining the HSA. So you need to at least gain that much in its tax-deferred growth in order to break even on the tax-deferred advantage.

    Another cool thing about the HSA is some employers (like my last 2) will contribute $1K each year to your HSA just because you’re participating in the HSA. Other wellness incentives abound: $50 for signing up for a mail-order prescription service, $50 for keeping phonecall appointments with “life coaches,” $25 for signing up for a 5K, etc. All of those small amounts are contributed to your HSA by either your employer or the provider.

    I’ve been able to “make money” by not needing to spend that free money from my employers. One troublesome thing about HSAs is also the requirement of having a high deductible plan at the time you decide to pull money from it in order to get all the benefits of the HSA (no penalty, no tax).

    So while I agree that HSA is a good tool for saving, it’s more of a tax shelter than a strong way to grow tax-deferred money.

    • The Mad Fientist
      November 10, 2013 at 7:28 pm

      Good point about fees, Denise. When running your calculations though, you need to not only factor in tax-free growth but also the amount you save on taxes up front (thanks to your pre-tax HSA contributions).

      You mentioned that you need to be enrolled in an HDHP when withdrawing money from an HSA but that is not actually the case. You only need to be enrolled in an HDHP when you contribute to an HSA. Once your money is in there, you can use it for qualified medical expenses (tax and penalty free) whether you’re enrolled in an HDHP or not.

      • Denise
        November 12, 2013 at 3:06 pm

        When you put it that way, HSAs DO sound like the ultimate retirement plans. Especially considering how medical expenses will probably go up as we age.

        Thanks for your site; learning a lot of good things on here.

        • The Mad Fientist
          November 13, 2013 at 9:50 am

          Glad you’re enjoying it, Denise!

  18. DB
    November 18, 2013 at 12:01 pm

    First off, great article; it pretty much was the tipping point for enrolling in my employer’s HSA plan. Quick question about that though, and a slightly unrelated topic:

    How much should I be contributing the HSA a year? My employer matches up to $1,800 a year but the overall limit is $6,450. Should I be contributing as much as I can towards that limit? I just don’t know where to start when it comes to contributing to the HSA versus my 401k, versus my IRA, versus a regular savings account, etc. Thanks.

    • The Mad Fientist
      November 19, 2013 at 10:33 am

      Thanks, DB!

      As far as how much you should contribute, it definitely depends on your personal situation but I, for example, choose to max out my HSA because I already max out all of my other retirement accounts and I have a good HSA custodian with low-cost investment options and low fees (my employer actually covers the fees while I’m employed).

      Without knowing anything about what options you have available, I’d probably say it’d be worth funding your HSA at least up until the employer match. If you can contribute via a payroll deduction, you’ll save an extra 7.65% on FICA taxes so it could be worth maxing out the account for those additional savings.

      Traditional IRAs and 401(k)s are great too and are a bit more flexible when it comes to withdrawing money from them for ordinary expenses prior to standard retirement age (see my Traditional vs. Roth IRA article). If your employer offers a 401(k) match, you should definitely take full advantage of that.

      The important part is to just save as much as you can so it’s up to you how much future flexibility you want to trade for tax savings now.

  19. November 22, 2013 at 3:15 pm

    I literally smacked myself on the forehead — literally — when I read the line in which you pointed out that you don’t have to reimburse yourself for your qualified medical expense immediately; you have the option to continue letting that money grow tax-free.

    Of course! (*Head-smack!*) That makes SO much sense! Why didn’t I think of that?!

    I’ve had an HSA for many years. I ALWAYS pay for medical expenses with a rewards credit card, and then I reimburse myself from the HSA. It never occurred to me that I could simply choose NOT to reimburse myself, and instead let the money grow.

    Why didn’t I think of that?!?! That makes so much sense!!

    Brilliant post, Mad FI. It’s not often that I read one single blog post that will immediately and forever cause me to change my behavior. But this post did it. :-)

    • The Mad Fientist
      November 23, 2013 at 11:14 am

      Haha, while I’m glad you enjoyed the article, I don’t want to be the cause of damaging that brilliant brain of yours so I hope you smacked lightly :)

      I’m really glad you enjoyed the post so thanks a lot for letting me know!

  20. Ryan
    December 5, 2013 at 11:57 pm

    This was an amazing article, but after reading it and all the comments I don’t think I saw anywhere how long you plan or think it would be safe or wise to wait before being reimbursed from your HSA.

    You mention, and I agree since I’m young and have similarly few medical bills, that $200 a year doesn’t meet the deductible and it doesn’t break the bank to pay it and not get reimbursed right away.

    Assuming there is no financial emergency that you’d need the money for, are you planning on just saving all of your receipts for a 3, 5, 10+ years before submitting them for reimbursement? Do you think the institution would guffaw at you for submitting a several year old receipts? Would they accept them without a fight?

    Instead, would you recommend after 5 years (arbitrary suggestion) to start a “reimbursement receipt ladder,” where on the 6th year you’d submit bills from your 1st year, thus allowing your investments to still grow and compound, while not holding onto receipts for decades?

    I suppose I’m wondering, how long you can keep this streak going without worrying that they won’t “honor” your receipts. I’m 28 right now; could I max out my HSA every year and invest in a total stock market index until I’m 65, all the while letting my investments grow like crazy, and then start submitting my 30 year old receipts?

    Thanks for all your financial wisdom!

    • Ryan
      December 6, 2013 at 12:13 am

      Well I went to Health Savings Administrators’ website and found this under their “Commonly Asked Questions:”

      http://www.hsaadministrators.info/welcome-kit#WhatIsTheDeadline

      …What is the deadline for submitting claims for reimbursement from my HSA?

      There is no deadline for submitting claims for reimbursement from an HSA. In the event of an IRS audit, you will be required to produce receipts for any medical expenses for the amounts that have been reimbursed from your HSA…

      I suppose that takes care of my question, though it still makes me wary for keeping the receipts for the next 30 years. I guess I’d just start submitting receipts for my HSA reimbursements before any other accounts during my years of early retirement when I need income.

      • The Mad Fientist
        December 6, 2013 at 10:17 am

        Hi Ryan, it’s safe to keep your money in there as long as you want (see this IRS document).

        I understand your concern about keeping receipts for 30 years but I’m sure you could scan them or take a picture of them so that you have a digital copy to keep somewhere.

        I likely won’t start taking money out of my HSA until I stop contributing to it. The tax benefits associated with making pre-tax contributions outweigh the admin fees for the HSA but if I stop contributing to the account, I won’t get those tax benefits so it would probably make sense to start drawing down on the account then to minimize the years I have to pay the additional HSA admin fee.

        Hope that helps!

  21. JC
    February 6, 2014 at 8:35 am

    Your article served to re-enforce what I already assumed about HSAs. However, I am also making another assumption that wasn’t addressed, so I wonder if you would comment.

    I’m retired already. I set up my HSA after retirement and fund it with withdrawals from my Traditional IRA. My assumption is that the deduction for the HSA contribution will offset my withdrawal from my IRA, rendering it tax free. Correct?

    • The Mad Fientist
      February 7, 2014 at 1:34 pm

      Hi JC, your assumption seems to be correct. 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.

  22. JC
    February 25, 2014 at 6:45 pm

    One more benefit to an HSA account. Once you reach 65 and sign up for Medicare you can make your Medicare payments out of your HSA account as if they were regular medical expenses. Normally you can not make premium payments out of an HSA account, but they make an exception for some reason for Medicare payments. Also, it should be noted, once you are on Medicare you can no longer make HSA contributions.

    • The Mad Fientist
      February 28, 2014 at 7:50 am

      Great points, JC. Thanks!

  23. March 3, 2014 at 4:47 pm

    This is a great article and I really appreciated all the comments. From personal experience – I have a HDHP through my Employer with a Family Deductible of $4,000 each year. My employer puts in $2600 each year and I have been adding $1400 so that I always have $4000 saved each year. 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. After that all my medical expenses were covered by the HDHP. These are great plans, and now I like building up my HSA to save. Plus it is helpful to know that I will never pay more than $4k in a year.

    One other piece of advice – when you are 65 you can use your HSA funds to pay for Medicare premiums – so again Tax Free in, Tax Free Gains, and Tax Free Withdrawal on a Medical expense we are going to have to pay someday anyway. Keep up the great Blogs!

    • The Mad Fientist
      March 4, 2014 at 11:12 am

      Thanks a lot for sharing your experiences. Most people don’t realize that the out-of-pocket maximums for high-deductible health plans aren’t much more than they are for the full-service plans. As long as you can cover the out-of-pocket maximums, the HDHP seems like the way to go.

      I actually had an emergency appendectomy last year and I hit my $2,500 max but that was all I had to pay! I’ve pumped way more than that into my HSA over the years so even if I had decided to use my HSA to pay for those bills, it wouldn’t have even made much of a dent.

      Thanks for stopping by and I hope you return to full health very soon :)

  24. March 6, 2014 at 12:21 pm

    Glad I stumbled across this article. I heard about the benefits of the HSA so I did luckily sign up for the full contribution amount in 2014. I’m glad I did. It helps that my employer chips in $1000 for the year also.

    One other small benefit with this method is that if you pay out of pocket for medical expenses, using a rewards credit card helps as well. So if you have a large medical expense coming up and you would like to use HSA money for it, use a rewards card to rack up cash back or for a bonus, and then withdraw that money to your regular checking account.

    It’s a very good account that hopefully doesn’t lose its great tax benefits in the future.

    • The Mad Fientist
      March 6, 2014 at 5:00 pm

      Great point, Syed. 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’m actually going to just leave that $2k+ in my HSA to grow tax free though so I’ll just keep that receipt and will only withdraw that money when I need it (hopefully many decades from now).

      • March 11, 2014 at 1:21 pm

        I think there is some confusion on when you can withdraw from the HSA. While you can put up to $6550 in each year, and can use the HSA funds at anytime for Medical expense tax free. Unlike the FSA (Flexible Spending Account, where it is use it or lose it at the end of the year), the HSA continues to roll over and remains your money to grow tax free.

        However when you go to take withdrawals from the HSA the year that you take the withdrawal must match Medical expenses for THAT tax year, or you will be taxed on the withdrawal. During an Audit, we received a form from our HSA that showed we had pulled $3600 out of our HSA for the tax year 2010. We had to prove that we had at least $3600 in medical expenses during that tax year.

        So while you had $2k in expenses this year, you can use that receipt only for withdrawals this tax year.

        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! I hope this helps someone, as I know the language is awkward on the HSA rules.

        • March 11, 2014 at 1:29 pm

          Okay, I don’t know if the rules have changed, or it during our Audit we just had to show $3600 in Medical expenses (and we were told it had to be from that tax year – but the IRS Auditors can be wrong too!).

          Here is a good answer from the IRS Website, which conflicts with my previous statement:
          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.

          • The Mad Fientist
            March 11, 2014 at 2:47 pm

            Yeah, hopefully you just got an auditor that didn’t know any better.

            As the IRS bulletin states, “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.”

  25. Pat
    March 21, 2014 at 7:03 am

    Enrolled in an HSA for the first time this year and already loving the decision – EVEN MORE NOW!!! I had no idea that I could defer the reimbursals which is awesome. I also will take advantage of the reduced taxes. I have four kids so I probably won’t be able to delay all of my reimbursals, but certainly some. Thanks.

    • The Mad Fientist
      March 21, 2014 at 6:46 pm

      Glad you enjoyed the article, Pat!

  26. Matt
    March 25, 2014 at 10:13 am

    I know this is an old post, but it looks like you still respond to comments on it, so here goes!

    I have an HSA with work that does not allow investment, so I opened a second HSA at Eli Lilly Federal Credit Union that does allow investing, and plan to roll over my balance from the work HSA to the investing HSA each year.

    However, I am just getting this underway, so I just opened the ELFCU HSA last week. I also hit my deductible last month when my first son was born. My question is this: would I be allowed to withdraw the money from the ELFCU HSA? It was opened after the QME, but I did have another HSA open prior to the QME. Any thoughts?

    • The Mad Fientist
      March 26, 2014 at 9:06 am

      Hi Matt, as long as you contributed the funds that you plan to withdraw to a valid HSA prior to the medical expense, you should be able to withdraw that money to pay for the expense.

      The government doesn’t care who houses your HSA so switching banks shouldn’t affect anything.

      • Geoff Smith
        April 12, 2014 at 2:16 am

        You can do a rollover once a year. Every December, I withdraw almost the entire balance from my employer-sponsored HSA and then send it to a low-cost one.

        In theory you can do a trustee-to-trustee transfer (no limit how often), but the trustee losing money is going to make it painful and I always got the vibe that something would go wrong, maybe even accidentally-on-purpose. They seem to be under no obligation to cooperate on transfers. 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.

  27. Jeff
    April 12, 2014 at 5:35 pm

    Trying to get this straight.

    In your example you pay $200 with post-tax dollars out of pocket. Do you then sign into your HSA management system and tell “it” that you spent $200 so that it tracks the money separately, or do you wait until you are 65 to reconcile?

    • The Mad Fientist
      April 14, 2014 at 9:14 pm

      Hi Jeff,

      I would just file away the receipt and update my custom spreadsheet, moving the $200 from my ‘HSA’ column to my ‘HSA Withdraw Anytime’ column.

      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.

      • Jeff
        April 25, 2014 at 11:35 pm

        I think I get it. So hypothetical situation:

        You pay out of pocket for all medical expenses until you are age 65 and you don’t withdraw any money to cover your receipts.

        When you withdraw money after age 65, will only the amount equal to your out-of-pocket expense be tax free, or will it be the capital gains on those amounts too, starting from the time of original expense?

        • The Mad Fientist
          April 26, 2014 at 6:22 pm

          Only the amount you spent when paying for the original medical expense would be tax free.

          • Jeff
            April 26, 2014 at 7:10 pm

            Interesting. Example. An individual expense is $200 and you are 40 years old.

            If you pay out-of-pocket, you are paying $200 post-tax dollars, say $334 pre-tax dollars. The “benefit” is that you get to withdraw $200 tax-free in 25 years, but I don’t understand how that is a benefit.

            You just paid $334 pre-tax dollars right now and in exchange, you’ll get $200 pre-tax dollars in the future……. Doesn’t seem like a good deal. I feel like I’m probably missing something :)

          • The Mad Fientist
            April 27, 2014 at 10:56 am

            Just think about the two choices you have when paying for a medical expense (and forget about the contribution stage since that’s already happened and doesn’t affect the current spending decision): you can either a) pay out-of-pocket or b) you can use HSA funds. Since HSA funds can grow tax free, it makes more sense to pay out-of-pocket so that you have more money growing tax free (assuming your HSA fees are low and/or you’re still contributing to the HSA).

  28. April 23, 2014 at 5:09 pm

    FWIW I’d like to share my brief HSA story, full of mistakes and definitely not an optimized HSA strategy, but still some lessons learned. My wife was at her last job for about two years. They offered a HDHP with a $500 employer contribution. The first year we contributed none on our own. The next year we realized there were some tax benefits to contributing and we could spend the money on both of our health expenses with no time limits so we set up to contribute $1000 a year (I believe through payroll deduction so we probably got more benefit than we realized). I’m sure the money is in some basic checking account of some sort.
    This year she took a new job which offered no HDHP and we had about $500 left in the HSA (we paid all sorts of medical expenses out of the account including the entire deductible of my LDHP twice). Having left her previous employer she now gets a grace period before the HSA starts charging a $3.50 monthly fee. Obviously that will eat through our money rather fast so aside from looking for “medical expenses”, the next best option seems to be to just pay taxes and penalty on a withdrawal (since most of the money was free to begin with it’s still a net positive).
    To transfer the funds into a separate account (if we could find something like the no fee savings account mentioned above) would cost a hefty $25, and HSAs offering investment options all seem to have annual fees comparable to the $3.50/month in our current plan (the administrator Vanguard links you to is $45 a year + 0.008%).
    Obviously we didn’t max out our contributions or hold our money in the account, but if you are young and don’t expect to be at your current employer for a particularly long time, there is no guarantee your next employer will offer an HSA compatible plan and you could be stuck paying some $45+ a year until 65. It would take many years before that ate through your savings from the 7.5% FICA and income tax deferment, and the more you contributed the less it would matter. Anyhow, that just my two cents regarding what not to do with an HSA.

    • The Mad Fientist
      April 26, 2014 at 12:15 pm

      Thanks for sharing your story, LMaS.

      Yeah, you definitely want to watch out for fees and if the fees outweigh the tax-free growth you get in the account, it’d make sense to use your HSA funds to directly pay for medical expenses.

      • Ray
        May 8, 2014 at 12:39 pm

        Should you use the HSA for more tax inefficient investments like TIPS OR REITS
        Inside of the total stock index fund that is already tax efficient.

        • The Mad Fientist
          May 11, 2014 at 2:59 pm

          Yes, it makes sense to put your tax-inefficient investments into your tax-advantaged accounts. My buddy Jim over at jlcollinsnh.com wrote a great article about where you should put various investments so you should take a look when you get the chance.

  29. Ashley
    May 14, 2014 at 10:48 am

    I feel the HSA bank my employer uses has structured their program so that it’s not worth using as a retirement account. Can you help me look at the figures to see if I’m correct?

    -You must maintain a balance of at least $2,000 in a 0.05% apr savings account before you can invest funds. If you drop below that $2,000, you can’t invest.
    -There are no low cost index fund investment options. They’re actively managed funds with expense ratios right between .80% and 1.9%.
    -The moment you leave your employer, they charge a maintenance fee of $4 a month if your balance is less than $2500.

    Thoughts?

    • The Mad Fientist
      May 14, 2014 at 7:23 pm

      That looks pretty rough to me so you should maybe look into opening an HSA somewhere else instead. You may have to pay a fee to do so but if you plan on maxing it out every year for the foreseeable future, it may be worth it. You could also try talking to your HR department to find out why they picked such a terrible custodian and see if you can convince them to switch one with better options!

      • Geoff
        June 23, 2014 at 5:39 am

        I was in the same boat before retiring — maybe even the same bank! What you want to do is find a good HSA account, and once a year you can withdraw the contributions from your employer-sponsored HSA and roll them over into the good one.

        Don’t bother trying a trustee-to-trustee rollover, because they have no incentive to cooperate. I found the only fee-free way was to use the ATM card and withdraw $800 every day starting Dec 1 (arbitrary day — you can only do this once a year per IRS) and then send a big check to the new trustee when I had drawn it down to under $20.

  30. Shashi
    June 13, 2014 at 12:18 am

    Great post. I think HSA is a good deal for people (US citizens as well as non-citizens) who wish to retire abroad.

    I called Benefit Wallet (my HSA administrator) and I was told that HSA funds can be used for qualified medical expenses incurred outside of US. Few things to consider if you wish to retire abroad and have funds in HSA –
    a. Once you move out of US (quit your job or transfer), employer may no longer pay account maintenance fees. In my case I will be paying around $3.25/month
    b. HSA administrator might charge international transaction fee when using HSA debit card for medical expenses abroad
    c. After 65, there might not be any US taxes on withdrawal of HSA funds for non-medical expenses, but the country where you live might tax you on the amount withdrawn from HSA

    Let me know if you have any additional information on using HSA outside of US.

    • Shashi
      June 13, 2014 at 12:20 am

      I meant to say “….good deal even* for people who wish to retire abroad”

    • The Mad Fientist
      June 19, 2014 at 10:59 pm

      Hi Shashi, glad you enjoyed the post.

      a. Yes, you may need to start paying account maintenance fees after leaving your job so you’ll need to run the numbers to see if the tax-free growth outweighs the additional fees.
      b. I imagine most HSA debit cards would charge foreign transaction fees so I’d recommend using a fee-free rewards credit card instead and then reimburse yourself from your HSA later.
      c. Would you declare that as earned income on your foreign tax return?

      • Shashi
        October 12, 2014 at 1:49 am

        Sorry, just saw your reply today. I am getting ready to make changes to my HSA contribution and revisited this great post. Regarding item (c), as you mentioned I might have to declare the withdrawal as earned income, but the tax rules might vary by country. So, it really depends on where I end up during retirement.

        Thanks to your blog, my wife and I have made two major changes in our investment approach –
        – front load and max-out 401(k)
        – max-out HSA

        • The Mad Fientist
          October 16, 2014 at 4:00 am

          Glad to hear you’ve made some positive changes as a result of reading this blog!

  31. Sacagawea
    June 22, 2014 at 10:20 am

    Thank you for your informative article and the clarifying replies to other readers. We have had employer insurance so far with no access to HDHP, we’re now retiring (early) and will take an HSA eligible HI policy. My question is about the maximum that can be tax deferred in HSA accounts for a couple, both aged over 55, with one child still at home. If we are all on the same family policy for 2015 I calculate the limit is $7650 (6650 plus 1000 for over 55). If we were to enroll in a family policy for dad and child and then a separate policy for mom could each parent have their own HSA? That would allow contributions of $7650 plus $4350. The drawback would be that there would be two separate out-of-pocket maximums, but we don’t use much healthcare anyway and could take this extra risk. We file taxes MFJ if that matters. Possible?

    • The Mad Fientist
      June 23, 2014 at 9:15 pm

      Yes, the family limit is $6650 for 2015 with an extra $1000 for over 55 catch-up.

      Since you file Married Filing Jointly, you may have trouble combining the family and individual HSA contributions. Even it it were possible, I’m not sure it’d be worth the extra hassle and expense. Surely the higher premiums and higher out-of-pocket expenses would outweigh the benefits of the additional HSA contributions?

  32. green_knight008
    June 26, 2014 at 1:51 pm

    Aren’t you essentially making the billed medical expenses similar to a ROTH IRA when you defer your withdrawal-except with a higher no penalty withdrawal date and none of the additional ROTH benefits? After all, you are paying the bill with after tax dollars to keep an untaxed dollar in the account-meaning that you are actually spending more money in the present to invest less money than you would if you were putting that $200 pre-tax into a traditional 401k or IRA.
    Considering your support for what you refer to as front loading this seems a bit counter to your usual tactics. I can understand the logic since you’ve already maxed the 401k and IRA options though I’m not sure if that was specifically pointed out that it is an important consideration that these be maxed out to use the tactic you’re talking about as opposed to withdrawing and use a traditional IRA/ROTH IRA conversion strategy with the $200 you could have invested.
    Overall an interesting article, unfortunately my insurance disqualifies me from this plan.

    • The Mad Fientist
      June 27, 2014 at 9:51 am

      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).

      As you mentioned, this is more useful for people who already max out all of their other retirement accounts but is also useful for people who already have money in an HSA and don’t tend to invest every last cent they have every month. When you have money in an HSA and have a medical expense, you can either pay with normal money or HSA money. If you pay with HSA money, you lower the amount you have growing tax free so it makes more sense to pay with normal money and leave that HSA money alone in most cases.

      • Dan
        July 4, 2014 at 1:06 am

        I agree with Green Knight. Take 2 examples to demonstrate:

        (1) Put $1000 into an HSA. Immediately you have a $1000 bill which you pay out of pocket. Now, you have $1000 in your HSA which is tax-free.
        (2) Put $1000 into an HSA. This time you use the HSA to pay the $1000 bill, then take the $1000 which you would have spent on the bill and open a Roth IRA.

        In either case you have your bill paid and you have $1000 growing tax-free forever, so there’s no special advantage to spending your bill out of pocket.

        • The Mad Fientist
          July 6, 2014 at 2:16 pm

          Hey Dan, I definitely see what you’re saying but I’m not sure how many people would be disciplined enough to invest the money they would have spent on the medical expense into a Roth IRA after the fact. If you are disciplined though and you aren’t already utilizing all of your Roth IRA contribution space, I agree that option #2 is better because I’d choose $1000 in a Roth over a $1000 in an HSA, for the reasons Green Knight mentioned.

          • MooseOutFront
            July 11, 2014 at 2:13 pm

            Continuing down this train of thought, say you are currently maxing all tax advantaged space including HSA and Roths. On top of that, every dollar left over at the end of the month is invested in your taxable brokerage account, so it’s not like spending it out of your monthly cash flow instead of your HSA is forcing any additional overall savings, it’s just a tax decision. This is me. How does this affect your view of spend vs save HSA qualified expenses? I’m having a hard time wrapping my head around the optimal strategy in this case.

          • The Mad Fientist
            July 12, 2014 at 9:02 am

            In your case (which is also similar to my situation), I’d pay for medical expenses out-of-pocket so that I leave more of my money growing tax free (I’d rather have $1000 in an HSA instead of $1000 in my taxable account, if given the choice).

  33. Dustyn
    July 15, 2014 at 9:24 am

    Isn’t there a problem with the math here? If you pay for a $200 medical expense out of pocket now so you can leave the $200 in the HSA to grow tax-free and pay yourself back later, you used after-tax dollars initially. If we say your income tax rate is 25%, you would have needed to make about $267 to pay that out of pocket. The HSA money would have to be growing in the account for quite some time to make the tradeoff worth it, right?

  34. Dyk
    August 8, 2014 at 1:25 pm

    OK Mad Fientist, a strange question.
    Checking for if my Health Insurance Plan qualifies for an HSA: http://www.irs.gov/publications/p969/ar02.html#en_US_2013_publink1000204025

    I see that to be eligible, the minimum deductible for a family is $2,500
    My plan is a hybrid, where the company partially self insures it. The deductible is $10,000, which obviously meets the minimum. However the employee is responsible for the first $1,000, and the company picks up the remaining $9,000. So $1,000 does not meet the minimum.

    Is my plan HSA eligible or not? (I did ask and they told me ‘no’, but they are a smaller company and the tone was more like “we don’t understand, and are not sure, and we don’t know what to say ….. so ‘no’ “)

    Thanks for the help!

    • The Mad Fientist
      August 12, 2014 at 1:54 pm

      If you don’t trust the person you spoke to, you may want to call the health insurance provider to get a definitive answer or just keep calling people in your HR department until you find someone that seems to know what they’re talking about. Definitely be sure you have an HDHP before you open an HSA!

  35. George
    September 7, 2014 at 11:33 am

    Commenting on the addendum. My company only offers an FSA (not doing that). I want to open up an HSA with Vanguard. I dont think they can automatically deduct the HSA funds from my paycheck, so I believe I would be contributed after-tax money into it.

    If I am correct so far in my HSA assumptions, do you get the money taxed on the $3K contribution to your HSA back in your tax refund/taxes you file for that calendar year? (I would call Vanguard but its Sunday and they arent accepting calls and figured you might know)

    • George
      September 7, 2014 at 11:36 am

      Also, the same question comes to mine about getting the taxed money back on your yearly tax refund with contributing to the traditional IRA outside of the company offered 401K. Do you get the amount taxed on the $5.5K back in the refund?

    • The Mad Fientist
      September 16, 2014 at 11:21 pm

      Hi George,

      Yes, any after-tax contributions to an HSA or Tradition IRA will be reported on your tax forms and will reduce your taxable income.

      • George
        September 16, 2014 at 11:23 pm

        Thank you

  36. Andy
    September 24, 2014 at 1:05 pm

    MF – question for you (couldn’t find this in any other comments, but may have missed and if so, apologies)…

    What if my company’s payroll structure does not support pre-tax contributions to the HSA so I need to make them post tax? Is it still worth it to open one up and contribute? Too broad a question without knowing specifics?

    Thank you

    • The Mad Fientist
      September 24, 2014 at 2:34 pm

      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.

  37. Kazper
    October 11, 2014 at 11:41 am

    What if the deductible is much higher than the standard plan? I currently use geha standard with a deductible of 750. The hdhp is 3k. Worse yet, the out to pocket max is 12k for the hdhp while 5k for the standard. Premiums are about even between the plans. The govt would put 1500 in the hsa, but I still don’t think it makes sense to go the hsa route. Thoughts?

    • The Mad Fientist
      October 16, 2014 at 3:56 am

      It all depends on how much you spend on healthcare each year and whether you could cover the additional costs associated with the HDHP in particularly bad years.

      Decide which option will make you most comfortable and if that option comes with an HSA, great! If not, I wouldn’t make a change that could stress you out just to have an HSA.

  38. Nate
    October 16, 2014 at 7:55 pm

    I apologize if you addressed this in another comment but…Have you considered the impact of this account upon the death of the account holder and spouse? If at death the account holder is anybody but the spouse the designated beneficiary or estate must include in gross income the fair market value of HSA assets at death. However, Internal Revenue Code 223(f)(8)(B)(ii)(I) states that the amount included be reduced by the amount of qualified medical expenses which were incurred by the decedent before the date of the decedent’s death and paid by such person within 1 year after such date.

    For example, if I contributed $6,500 to the account for 20 years I would have approximately $200,000 (front loaded contributions). My intention is to take advantage of the triple tax benefit and use the money tax free for medical expenses, but I live a healthy, wealthy life so I never dip into it. At my death my child or other beneficiary might be left with a $200,000 nightmare of taxable income! No option for RMDs to spread out the taxation, so since they’re stuck with a big fat tax liability maybe some of the benefit of this strategy is lost?

    OK, maybe this is a little too much and a big hypothetical but the point is that it’s not a great gift to leave your children.

    • The Mad Fientist
      October 22, 2014 at 4:53 pm

      I hadn’t considered it but I don’t think it’s something I’d worry about at this stage. Maybe later I’d make moves to try to prevent something like that happening but I wouldn’t change my strategy now because of that risk.

  39. Nate
    October 16, 2014 at 7:58 pm

    p.s. I used a 4% rate of return in that scenario and did not account for account fees.

  40. Alan
    October 27, 2014 at 10:04 pm

    My company just made a HSA an option for us this year. I am signing up because I read this article a while back and was wishing my employer had the option. Now they do! And, they are kicking in $500 a year. Thanks for this article. Even though the info did not resonate with me in the beginning, it quickly came back to memory after I saw that the HSA was now an option for us. Had to come back for a re-read. Kudos!

    • The Mad Fientist
      October 28, 2014 at 6:41 am

      That’s great news, Alan! My company just decided to start chipping in $500 every year as well so I’m excited the HSA will be even better for me in 2015!

      Glad this article stuck in your memory and was eventually useful to you :)

  41. DaveM
    November 8, 2014 at 11:28 am

    Holy crap MF, this is an awesome post! I never thought about an HSA this way, so I’m really glad I found your article! My employer is basically forcing everyone into a HDHP next year, and of course, it includes an HSA. There is one other plan available, but it’s a lot more expensive and doesn’t make sense for us. Anyway… My employer will contribute $1000 to my HSA, and then I was going to contribute a small amount each month in addition. After reading this post, however, I’m going to look into maxing my contribution out completely. I already max out my 401K, and contribute the max each year to my Roth IRA (and my wife’s). Now I need to go look into the investment choices I will have with my new HSA in 2015 and find out how much I can contribute to max it out. :)

    • The Mad Fientist
      November 12, 2014 at 10:53 am

      Glad you enjoyed it, Dave!

      That’s great your employer contributes $1000 to your HSA. I’m excited because I just found out that next year my employer will start contributing $500 every year to mine!

  42. November 19, 2014 at 3:23 pm

    Really interesting info. We are strongly considering a HDHP with HSA for next year’s enrollment with my job. 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.

    I think my biggest concern would be with keeping track of my medical expenses if I want to withdraw the money well after the expense occurred but before age 65 when I could withdraw for any expense. If I spend $1000 on medical expenses over 5 years and decide I want to withdraw the $1000 at the end of the 5 year period, I would need to have records of those expenses. I would definitely have to put a system in place to make that easier, since I am not particularly organized in this type of stuff. Not meant as an excuse, not too hard to overcome, just something I would have to act on if I were to use the HSA in this way.

    I love the idea of paying for expenses out of pocket and letting the HSA money continue to grow though. 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.

    • The Mad Fientist
      November 30, 2014 at 6:30 am

      Yeah, keeping track of the receipts could be a pain but I’d suggest storing them all in one location and then making a digital backup of each receipt and store the digital copies in Evernote or something.

  43. OSUmountaineer
    November 20, 2014 at 6:40 pm

    MF,
    Between you, jcollins, and MMM, I have a full notebook of “Worthwhile Financial Shit” that has me on the path of FI. I am 30, started saving last year, and 2014 will be the first time that I max out my HSA, t401K, and tIRA. I was also able to put ~8k into taxable accounts (index funds!). Man does it feel good.

    I am trying to sell my long term girlfriend on the idea of FI. We have always lived below our means, saved way more than we spend, and this year I finally took the time to put together spreadsheets to show her how what we do now will change our lives both now and the indefinite future. She is finally on board, and last month opened her first Vanguard account.

    One question she perpetually has, that I haven’t been able to answer, is what about medical insurance? Let’s pretend Obamacare doesn’t exist (for the simple fact that it 1) is relatively new and 2) we have no idea what power shifts in Congress will mean for the law). What is your plan for health insurance coverage/what would be the best way to approach this? Health care premiums are so expensive (irrespective of the actual care itself), and I haven’t seen this brought up yet on any of the blogs I mentioned. This is her number one concern, and I would love to appease her worries with any insight you might be able to provide. I know I’ll have a bunch of money in the HSA, but I’d like to consider that another FI vehicle instead of a use for health care (since it can’t be used for premiums anyway…?).

    Keep it up man! Safe travels to Scotland when you head that way.

    • The Mad Fientist
      November 30, 2014 at 6:54 am

      Congratulations on such a good savings year! You’ll be FI in no time!

      As far as health insurance is concerned, I think the Affordable Care Act is great for future early retirees. If for some reason that gets repealed, you could always just work part-time for health insurance or you could move to somewhere that offers free or cheaper healthcare. I’m in the UK now and the NHS provides free healthcare to everyone but if you didn’t want to move abroad, I’m sure you could move to a cheaper state or something.

      It is an expense that you’re going to have to factor into your calculations but since you’re a fientist, I’m sure you’ll figure out a way to minimize that expense as much as possible :)

  44. orey10m
    December 3, 2014 at 1:23 pm

    Hi Mad Fientist,

    I just changed to the high deductible plan at work and the HSA that goes along with it.I will not be able to max out my 401k and IRA contributions next year, as this is only my second year of work and I don’t make/save enough to do that. This raises the question of how much to contribute to the HSA, assuming any amounts I put in it I could have just put in my 401k or IRA. I have somehow landed on a somewhat arbitrary number of $1400 for the upcoming year to go into my HSA, based on room I had within my budget and my expectations for the year etc. My question is, does it make any sense to contribute to an HSA with the strategy above in mind if I am not already maxing out my 401k and IRA?

    Thanks! Your site is awesome and my roommates and I talk about it all the time!

    • The Mad Fientist
      December 4, 2014 at 5:43 am

      Do you have any sort of employer 401(k) match? If so, I’d definitely take advantage of that first and then move on to the HSA. When contributing to an HSA, make sure your contributions are made via a payroll deduction so you can save on FICA taxes!

      • orey10m
        December 4, 2014 at 9:19 am

        MadFientist, thanks for getting back to me. Yes , I am contributing to the 401k up to and a little over the match.

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