[Newbie] Use HSA as an IRA (United States taxes)

"Antoine Bruguier" wrote

There are HSA (Health Savings Accounts), MSA (Medical Savings Accounts) and the booger FSA (Flexible Spending Accounts). The FSA's REQUIRE that money you put in is spent in that year. So be absolutely positively 100% sure you know what type of plan your employer is offering.

Funds you contribute to an HSA or MSA are not required to be spent in the same year. Funds not used in the year of contribution are carried over to future years to pay qualified medical expenses. Penalties may apply if the funds are used for something other than qualified medical expenses.

You need to talk to your insurance carrier, who will inform you of all the rules and exclusions. This is not a DIY project. It's a packaged product the insurance company helps you establish. Limitations and restrictions apply, so get to know what it is you are getting.

If your (or your spouse's) employer offers coverage, you may be disqualified to take out an MSA/HSA.

I'm familiar with the concept of these accounts, but know next to nothing about the details. How are they funded? That is to say, are you required to make regular equal payments?

Thanks.

Stu

In many ways, an HSA is like an IRA. No, you do not have to withdraw money in the same year your put it in. If you only have enough to fund one or the other, the HSA may be slightly more advantageous than the IRA, and not any worse. It depends on your other options for tax-favorable treatment of medical expenses and insurance coverage, and how healthy you are going to be in the future.

Even if you end up leaving a little on the table in an FSA (forfeited amount), you still could come out ahead based on not paying FICA on your contributions. Forfeit too much, that benefit disappears.

There is also the HRA (health reimbursement account), which your employer might offer (they have to fund it, not the employee). The balance in that can be carried over from year to year but only used for qualified medical expenses, otherwise it becomes ordinary taxable compensation.

Also, one minor note, new Archer MSA's have not been available for several years now, IIRC only about 60,000 were ever opened.

Last year I was convinced by contributors in another newsgroup that the qualified medical expenses didn't even have to be for the current year, but can be for a prior year, as long as incurred after the HSA was created. In an extreme example, you could pay 30 years of medical expenses out of pocket with after tax dollars, all the while building up an HSA balance, then use the thirty years' worth of qualified expenses to withdraw the HSA money tax-free. Don't know if this has been clarified or changed in the tax law, I wouldn't exactly recommend it as a strategy anyway.

Up until age 65 (or date you become disabled or die), then no penalty applies, just tax. This is how an HSA is a lot like an IRA, plus no RMD (required minimum distribution).

Either. But you are not eligible for an HSA if covered through some other employer-sponsored health care plan.

-Mark Bole

If the plan is through your employer, then most likely you have regular wage deductions each pay period. If not through your employer, you have up to the due date of the return to fund it.

-Mark Bole

Thanks! I'm self employed. What I was wondering was whether I can make deposits pretty much as I need them to then withdraw for medical purposes.

Does this get reglected on Schedule C or Schedule A?

Stu

I don't see why not, as long as the plan custodian doesn't prohibit it (they might not want the administrative expense of handling small, irregular contributions).

That's not really the idea behind the plan, of course. First, to have an HSA you also need an HDHP (high deductible health plan). Health insurance premiums are not themselves qualified expenses for the HSA. So, as a self-employed person, you could just get a "regular" health plan with small deductibles (i.e. few if any expenses paid out of pocket), and take the self-employed health insurance deduction for your premiums.

You raise an interesting question I don't know the answer to, can self-employed person take SE health insurance deduction for HDHP premiums, in addition to qualifying for deductible HSA contributions? This sounds a lot like being covered by some other employer plan, which eliminates the HSA eligibility.

HSA contributions are an adjustment on the front page of Form 1040, just like an IRA (first you fill out Form 8889).

-Mark Bole

I don't recall seeing that as prohibited.

Furthermore, amounts paid from an HSA don't qualify as medical expenses on Schedule A.

Things that many people may not realize: As one can reimburse one's self in a later year from an HSA for a medical expense NOT paid via the HSA, one has to TRACK such expenditures as when the reimbursement in a later year occurs, that distribution is tax free (to the extent that no deduction was taken). If a distribution is taken to reimburse for an open year where a deduction occurred, one must amend the back year (per statute - as the deduction no longer qualifies). One cannot make a tax free distribution to reimburse for a closed year where a deduction occurred (per various RevProcs). Also note what can happen when there's an NOL CB changing the deductibility of a medical expense as a result of AGI changing and there's a reimbursement made. I believe that none of this was considered when Congress wrote the statute (IRC 223?).

The RevProcs have addressed prior year reimbursements, but not as an extreme position (30 years) as you have suggested. They're written with a style that implies 1-4 years after the fact.

HSA's were created for tax year 2004. Therefore, expenses paid before January 1, 2004 never qualify for reimbursement. Per a special rule, for a person who opened the HSA before April 15, 2005, all of 2004 (and the first

As long as you're counting the 10% additional tax (in addition to the income tax) as a tax and not a penalty, I agree. See form 8889, Line 17.

Here are some FAQ's about it:

You need a high deductible plan, and your plan administrator can tell you if the plan is high deductible. Basically, high means for individuals: $1,100 deductible, $5,600 out of pocket.

The maximum amount a single filer can contribute is $2,900.

What I'm not finding easily is companies that offer HSA's for individuals. Easy to find IRA options at Fidelity, ETrade, etc. But options do exist, and they keep expanding. See

There's no reason to lose even $10 in your FSA. Just buy some OTC medicines that you or your family use from time to time -- like Tylenol, NyQuil, etc. At

I must be missing your point. The instructions confirm that 10% additional tax does not apply to HSA distributions included in income after age 65 is reached (based on actual date your age changes, not the full year).

BTW, in case it wasn't clear, what I meant by "HSA a lot like an IRA" is that after a certain age (65 and 59.5, respectively), no excise tax (a.k.a. 10% penalty) applies to distributions, no matter what they are used for.

-Mark Bole

D. Stussy wrote: [...]

Thanx. Looking further, I see that employers can subsidize some or all of the HDHP premiums and still allow (and even contribute to) an employee's HSA, so now I'd say the answer is yes, SE health insurance deduction for HDHP *and* HSA deduction can both be taken.

In Stu's case, this would minimize annual premiums and still allow full deduction for just the amount of extra expenses incurred. But if looking to sock away more money for retirement, might as well fund the HSA up to the max.

-Mark Bole

Or, maybe it was my convoluted syntax. ;-) Let's try this:

Quote: Penalties may apply [...]

Reply: Yes, up until age 65. But then, after that, no penalty applies, just tax.

-Mark Bole

For 2008. Note that the limits are adjusted every year for inflation.

Not listed at the above URL is State Farm Bank. They also administer HSAs.

Info:

That's not what you wrote (above). What you wrote indicates NO penalty BELOW age 65.

Also, it's not the actual date, but the first of the month of the month FOLLOWING your age change if your birthday is not on the first. Remember that the qualifying date is the first of each month and what happens later in the month makes no difference.

D. Stussy wrote: ...

...

Only if you take what he wrote out of the context of his reply to the previous comment that spoke of there being a penalty. It's clear what was intended in context (to me, anyway).

And there are also catch-up contributions for those 55 and older, which for 2008 is $900.