Overfunding of HSA

[Exit 2024]

I was part of discussion on Boglehead.org site for updating HSA wiki page.
Owner proposed to add page for "Overfunding HSA" based on my input that I afraid that we are truly overfunded and will never be able to spend all of it on healthcare, which will result in large tax bite for inheriting it.
I understand that money could be taken out after 65 for any reason but it will also add additional tax burden on us as those distribution will not count for RMDs. One of the poster suggested that I am "a corner case" and majority of people will never have such problem, which I disagree with, as HSA have been around long enough that more and more savers who never took anything out will end up with very large balances in such accounts and that is worth of the discussions on how to deal with that "good problem to have"

Anyways, purpose for that poll is to see if I am really "a corner case", feel free to add details in comments below.

Here are mine:

• Started to contribute to HSAs in 2006 to the max allowed
• Never took anything out
• Have well documented receipts for all those years for $40k spent
• Total current balance $224k, 98% invested in VIG through Schwab
• We are both 55 and if we stop contributing to HSAs this year and will not take anything out by age 65, with modest 6% growth rate we will end up with ~$500k.

Overfunded? or do I underestimate healthcare cost at the old age?

 

[MichaelB]

I was part of discussion on Boglehead.org site for updating HSA wiki page.
Owner proposed to add page for "Overfunding HSA" based on my input that I afraid that we are truly overfunded and will never be able to spend all of it on healthcare, which will result in large tax bite for inheriting it.
I understand that money could be taken out after 65 for any reason but it will also add additional tax burden on us as those distribution will not count for RMDs. One of the poster suggested that I am "a corner case" and majority of people will never have such problem, which I disagree with, as HSA have been around long enough that more and more savers who never took anything out will end up with very large balances in such accounts and that is worth of the discussions on how to deal with that "good problem to have"

Anyways, purpose for that poll is to see if I am really "a corner case", feel free to add details in comments below.

Here are mine:

• Started to contribute to HSAs in 2006 to the max allowed
• Never took anything out
• Have well documented receipts for all those years for $40k spent
• Total current balance $224k, 98% invested in VIG through Schwab
• We are both 55 and if we stop contributing to HSAs this year and will not take anything out by age 65, with modest 6% growth rate we will end up with ~$500k.

Overfunded? or do I underestimate healthcare cost at the old age?

The biggest health care expense not covered by insurance is long term care, either assisted living or home health care aides. They can easily cost $25k-$50k per year and go on for many years. It’s not easy to predict if they will be needed or for how long. If needed, though, a well funded HSA probably won’t be enough.

If not needed, the well funded HSA will probably leave funds unused. The taxes can be paid by heirs.

 

[Exit 2024]

MichaelB​

Thanks for your input, yes, LTC is definitely on my mind but I assume it will be needed, if needed at all, after age of 80 or 85, by that time unless, we start spending all earnings or more every year (about ~30k/year at 6%) HSA balance will get even bigger.

With all great things that HSA offers- it is not inheritance friendly.
I am leaning to the idea that funding HSA and not taking anything out should end at some point, when moving/contributing those money to taxable is more preferable.

 

[SevenUp]

• Have well documented receipts for all those years for $40k spent
• We are both 55 and if we stop contributing to HSAs this year and will not take anything out by age 65, with modest 6% growth rate we will end up with ~$500k.

Overfunded? or do I underestimate healthcare cost at the old age?

If your concern is leaving your heirs with an ordinary income lump sum, take the $40K out now and start withdrawing as allowed each year.

What IRMAA tier do you expect and what Medicare premium amounts alone will that cause?

 

[Exit 2024]

If your concern is leaving your heirs with an ordinary income lump sum, take the $40K out now and start withdrawing as allowed each year.

What IRMAA tier do you expect and what Medicare premium amounts alone will that cause?

Yes, I am contemplating to start draining those $40k as soon as we FIRE in about 1-2 years. Taking lump sum is somewhat scary thought though - if audited, I have to send to IRS couple large boxes of paperwork LOL

Currently cannot decide should we continue to max out HSAs this year and contribute anything at all till age 65. We contribute minimum through the payroll to get employer match (will continue to do that till FIRE) and max out at the end of the year outside of the payroll.

Also we plan to stay in lowest tier for IRMAA, will try to convert good chunk of pretax money to the ROTH during 8 years between FIRE and age 65. Continue after that to manage IRMAA as much as possible.

 

[Montecfo]

I was part of discussion on Boglehead.org site for updating HSA wiki page.
Owner proposed to add page for "Overfunding HSA" based on my input that I afraid that we are truly overfunded and will never be able to spend all of it on healthcare, which will result in large tax bite for inheriting it.
I understand that money could be taken out after 65 for any reason but it will also add additional tax burden on us as those distribution will not count for RMDs. One of the poster suggested that I am "a corner case" and majority of people will never have such problem, which I disagree with, as HSA have been around long enough that more and more savers who never took anything out will end up with very large balances in such accounts and that is worth of the discussions on how to deal with that "good problem to have"

Anyways, purpose for that poll is to see if I am really "a corner case", feel free to add details in comments below.

Here are mine:

• Started to contribute to HSAs in 2006 to the max allowed
• Never took anything out
• Have well documented receipts for all those years for $40k spent
• Total current balance $224k, 98% invested in VIG through Schwab
• We are both 55 and if we stop contributing to HSAs this year and will not take anything out by age 65, with modest 6% growth rate we will end up with ~$500k.

Overfunded? or do I underestimate healthcare cost at the old age?

Our numbers and strategies are similar though we are in our 60s.

Not sure you are "over funded". I think the concern about this (evident in a few other threads here) is overstated given typical healthcare expenses for a couple in retirement. Fidelity estimated this in 2022 at $315k after age 65. They also note that folks grossly underestimate these costs.

This $315k is an average and excludes LTC and end of life type expenses. I have seen similar predicted expense levels from other sources.So consider that.

Now, let's say your expenses underrun the averages. I think this is a good problem to have.

And concern over paying taxes on withdrawals also seem to not be a huge issue since these are untaxed funds. If you stop contributing, you will pay tax now and on an ongoing basis on those funds in your taxable accounts.

Having said all of that, the required record keeping does become an issue. That may be a better reason to begin drawing down or currently using funds. When one spouse passes, the deferred medical expenses of that spouse appear to pass away also except for those incurred in final year (though the regs may be read a bit more favorably). If the first to pass is the "record keeper" the other deferred expenses may be at risk also. And our faculties become less sharp even if healthy, thus is normal aging.

So to summarize even if not over funded, everyone with an HSA needs a drawdown plan so that the tax benefits are maximized, at least in my opinion.

Congrats on your savings and all the best!

 

[Aerides]

I don't know if I'd go by averages, but means. I'm sure there are some very expensive cases throwing off the average?

That said, I don't think anything shy of $150k is overfunding. It's not hard to spend on healthcare if you try, especially all the things that are covered by HSA dollars that aren't part of insurance (dental, vision/glasses, prescriptions, non-covered stuff.)

 

[tulak]

Interesting topic. I haven’t put much thought into it, but I can see having too much in my HSA at some point.

If the balance is large, then I figured I’d use it for income after 65, but need to think about how to manage that with 401k/IRAs and RMDs.

But it does make me think about what’s too large? 250k, 500k, or more?

That’s likely a personal decision, much like the other choices we have to make without knowing how long we’ll be around, and in this case, how healthy we’ll be.

 

[medved]

Wife and I have an LTC policy. I have heard that paying premiums for such a policy is a permitted use of HSA funds. Anyone know whether that is true? If it is, I might use the HSA funds for that purpose, after I retire at the end of this year (!!). (I might as well use the HSA account for something...)

 

[MichaelB]

Wife and I have an LTC policy. I have heard that paying premiums for such a policy is a permitted use of HSA funds. Anyone know whether that is true? If it is, I might use the HSA funds for that purpose, after I retire at the end of this year (!!). (I might as well use the HSA account for something...)

Yes, you can use the HSA to pay LTC premiums, but there’s a limit. From IRS Pub 960 Publication 969 (2023), Health Savings Accounts and Other Tax-Favored Health Plans | Internal Revenue Service

The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. See Limit on long-term care premiums you can deduct in the Instructions for Schedule A (Form 1040).

 

[Montecfo]

Wife and I have an LTC policy. I have heard that paying premiums for such a policy is a permitted use of HSA funds. Anyone know whether that is true? If it is, I might use the HSA funds for that purpose, after I retire at the end of this year (!!). (I might as well use the HSA account for something...)

Yes you can. And as noted, LTC expenses were not included in Fidelity's $315K per couple estimate.

I see you asked about premiums. MichaelB answered that one more completely above.

 

[MichaelB]

I used to thinking the Fidelity numbers of $250k were too high. Not any more. We’ll pass that without including LTC.

 

[tulak]

This would be an interesting poll question: how much do you expect to spend on medical expenses after 50.

Or maybe an older age, 55 or 60?

 

[Montecfo]

Fidelity said the average self-estimate was $41k. Obviously a huge disconnect.

If you think about a 30 year retirement, $10k and change on average annually for a couple does not seem outrageous at all.

 

[audreyh1]

We started HSAs in 2013 as that was the first time it was an option. I looked ahead at when to spend them down. Medicare premiums looked like the best way for us given the amounts we were likely to have saved. Plus easy to document annually. We pay premiums directly from the HSAs. It’s bridging the gap to SS payments taking over plus a bit more.

 

[pb4uski]

Now that we are over 65 and on Medicare, our HSA eligible costs are relatively low.... about $7,500 in 2023. Part B was $3,967, Part D was $202 (will be $0 in 2024), Part B deductibles were $552 and the rest were Part D co-pays, dental and vision (including $835 for new glasses that we only do every 5 years or so). At our current rate, our HSAs would be depleted in about 7 years, when we are 76. And to be clear, this if for a couple.

At this point I'm more interested in simplicity for DW and DD if I get hit by a beer truck so I am consciously withdrawing to drain them over the near term. I did a big withdrawal in 2020 because of uncertainties of whether past expenses can be withdrawn tax free after I die and I didn't want to risk DW and DD forgetting about it.

My guess is that unless you end up with LTC expenses then you are likely very overfunded.

Another way to frame the question, if your HSA eligible costs were $10k a year and your HSA investments yield 5% then you would only need $154k to fund $10k a year for 30 years (ages 65 to 95).

Another way to frame the question, if your HSA eligible costs were $10k a year and your HSA investments yield 8% and your HSA withdrawals increase at 5% then you would only need $196k to fund $10k a year adjusted for inflation for 30 years (ages 65 to 95).

 

[Montecfo]

Another way to frame the question, if your HSA eligible costs were $10k a year and your HSA investments yield 5% then you would only need $154k to fund $10k a year for 30 years (ages 65 to 95).

So you assume investments grow but expenses are static. Is this realistic?

And in the case of the OP, what about pre-65 costs? Those would be additive to the need.

 

[pb4uski]

So you assume investments grow but expenses are static. Is this realistic?

And in the case of the OP, what about pre-65 costs? Those would be additive to the need.

Fair point that I overlooked and edited my post. Part B premiums have increased about 5% annually over the last 20 years so what a reasonable real discount rate would be would depend in part on what the HSA is invested in.

For us it is in a single investment grade preferred stock that yields about 8%. So if we can earn 8% and withdrawals increase 5% and our withdrawals are the same as the $7,500 that we had in 2023, then over 30 years we would need ~$150k.... if the withdrawal base was $10,000 then one would need $196k.

I wasn't addressing pre-65 costs, the main point is that you need to consider the growth of the HSA in calculating the necessary funding... that's all.

 

[HenryD]

I've always tried to max mine/ours and kept scanned receipts. Have drawn it down by the documented amount this spring, partly for the tax issue which I learned about here. Thanks to the members of this board.

 

[Exit 2024]

Have drawn it down by the documented amount this spring, partly for the tax issue which I learned about here.

Are you referring to the issue that that beneficiary (non-spouse?) will not be able to use receipts for reimbursement?

 

[Exit 2024]

Thanks all for feedback and your poll participation, so far looks like I am not that much of the outlier with larger HSA balance.

Based on above discussion here is what I plan:

• I am still undecided if I should max out HSA for next 2 years before FIRE or not.
• At the start of FIRE will start getting reimbursements in chunks of 2-3 years saved receipts starting with oldest ones, with target to get current by age 65. Quick question here - I still can reimburse for child's healthcare spending while she was our dependent back then, but now she is not, correct? I assume yes, but just to confirm that I am not missing something.
• At age 65 start to pay Medicare premiums and all new healthcare expenses out of the HSA.
• Re-evaluate HSA balance by RMD start date (?) will that be too late to mitigate tax bite?

 

[Montecfo]

Exit2024,

Good thoughts. Regarding tax bite, what is your alternative use of HSA contribution funds? If tax deferred then that has future bite too. If it goes into taxable funds then tax bite is now and every year.

You could also shift your safe type investments into those HSA funds to limit growth in that vehicle.

Just ideas.

 

[Exit 2024]

Thanks, Montecfo
We do not have any tax advantaged space available for increased contributions, we maxing out every year all that is available for us. So potential HSA money will go to the taxable. We are at the top of 22% bracket, HSA contributions may partially go into 24%.

Ironically, 2024 is the first year that we are eligible for HSA catch up contributions, was looking forward to it, till now

To invest HSA into bonds and increase % of stocks in other accounts is interesting idea, but benefits are not that clear. Currently all our bonds holdings are in 401k, so moving them to HSA will slow down HSA but will increase potential RMD later? Need to think about it, thanks for the idea though

 

[SevenUp]

Thanks all for feedback and your poll participation, so far looks like I am not that much of the outlier with larger HSA balance.

Depends on the definition of "outlier". You are in the top 10% of this unscientific poll.

 

[SecondCor521]

Thanks all for feedback and your poll participation, so far looks like I am not that much of the outlier with larger HSA balance.

Based on above discussion here is what I plan:

• I am still undecided if I should max out HSA for next 2 years before FIRE or not.
• At the start of FIRE will start getting reimbursements in chunks of 2-3 years saved receipts starting with oldest ones, with target to get current by age 65. Quick question here - I still can reimburse for child's healthcare spending while she was our dependent back then, but now she is not, correct? I assume yes, but just to confirm that I am not missing something.
• At age 65 start to pay Medicare premiums and all new healthcare expenses out of the HSA.
• Re-evaluate HSA balance by RMD start date (?) will that be too late to mitigate tax bite?

On your first question about HSA reimbursements for dependent medical expenses, the answer is generally yes. For the specific details, see Publication 969 (2023), Health Savings Accounts and Other Tax-Favored Health Plans | Internal Revenue Service.

On your second question, you can't contribute to an HSA unless you're only on an HDHP. Since pretty much everyone goes on Medicare at age 65, contributions to an HSA at age 65 and later is generally not possible. RMDs currently start between 73 and 75. What sorts of actions do you think you might be able to take at that point?

Also, as an aside, HSAs, unlike IRAs, do not require compensation in order to make contributions, so you can, if you're covered by an HSA eligible HDHP, contribute to an HSA after FIRE if you want to. I FIREd in 2016 and started my HSA in 2020.