HSA questions. Using funds when no longer on a HSA plan?

[LD1]

Google didn't help. Maybe I didn't ask the right question.:mur:

Question is kinds two fold. Currently, I carry the insurance. It's what they call a HDHP (high deductible helth plan). Which are the only ones qualified for a HSA.

Well, the HSA money rolls over. And my employer puts in $2k per year as well as me contributing some.

Well now the wife is interviewing for a different job. This job is old school low deductible plan with co-pays, and even cheaper premiums than I have. So if she gets the job....we will be carrying insurance through her. So I will no longer be enrolled in a HDHP and no longer contributing.

So what happens to the money on my HSA card? Am I still allowed to use it for medical expenses? And co-pays/deductibles from HER plan? And if not...what happens to the money that I am not eligible to use any more? Wait til retirement to be able to use it?

One of the things they always say is a benefit to HSA is you can build up quite a nest egg of tax free money to use on healthcare in retirement. Am I gonna have to wait til then?

These questions never crossed my mind when I decided to put in near the max ($6500ish), for the last few years. And am now wondering what the proper penalty free way of using the money is?

 

[wjmst]

Yes, you can still use the money for qualified medical (including dental and vision) expenses. However, as you stated you can no longer contribute to the account if you don't have a HDHP. If you decide not to use the money now, you can withdraw it penalty free but not tax free at 65 for any expenses.

One loop hole (advantage) is there is currently no time frame on when you need to use the money. So, say for the next 20 years you pay cash for your medical expenses. Let's say that cost is $20,000. In 20 years from now, you can withdraw $20,000 to pay yourself back for those medical expenses tax and penalty free! However, you need to keep receipts and proof of payments to reimburse yourself.

It is a very powerful savings tool when used to its maximum capabilities.

Wes

 

[murphy1244]

We have the same HSA account stuff as you and IMO Wes just gave you a excellent answer. Could not do better than that.

 

[TheMan419]

Interestingly my HSA is paying a higher interest rate than my regular savings. So I am paying my out of pocket from regular savings and letting the HSA accumulate as my emergency fund. As suggested above I keep a copy of the bills I COULD have paid from the HSA. Then if I need the money from the HSA for some reason I reimburse myself for those bills.

One thing to do the math on is the premium for you and the wife. It might be cheaper to have her on her own plan and you on yours (unless there are kids). Do not forget to factor in the tax savings you get for putting money in the HSA. Might still be cheaper on your plan or might not. Just have to do the math.

 

[LD1]

Thanks guys. Got the same sorts of confirmation this morning with our HR manager.

Not to shift gears and risk this turning political, but never understood the need for a penalty on the HSA or a 401k?

Sure, I understand its pre-tax money that goes in, destined for a specific use and if used as designed will result in the tax break, ........but if on hard times, or just wanna pay off a loan/mortgage......shouldnt the tax be all thats owed? Cause if you DIDNT put money away in HSA or 401k, paying income tax is the only additional expense you would have.

But trying to do the right thing by saving/contributing, then maybe needing some, not only do you owe taxes, but get penalized as well? Just dont see the logic behind it?

 

[mddorange]

LD1, as explained to me, the penalty on early withdrawal from a 401K is to discourage withdrawing it early so that it will be there when you retire.

 

[buckeyefarmer]

Timely for me, i was about to call my HSA company today to ask the same question.
You will probably have to pay maintenance fees on the HSA account.

 

[LD1]

LD1, as explained to me, the penalty on early withdrawal from a 401K is to discourage withdrawing it early so that it will be there when you retire.

Thats what I have always heard to, but think its total BS. Its my freaking money. So I didnt pay you taxes when I "set it aside", I'll pay you the taxes now that I need it.....but why tack a penalty onto MY money.

Maybe the reason fewer people put money into a 401k is this very reason?

Maybe my 401k is being stagnant and the market is stale, and have sufficient funds, and maybe I would rather go into retirement with no mortgage at the cost of a smaller 401k ........vs.............going into retirement with a mortgage, plenty of funds in 401k (that I cant have without steep penalty) and then the market tanks?

401k is isnt like a savings acct. You can loose money just a quickly as you can make money. But one things for sure.....if you have a car payment or mortgage.....you can bet your interest rate aint going down.

 

[ustmd]

Thats what I have always heard to, but think its total BS. Its my freaking money. So I didnt pay you taxes when I "set it aside", I'll pay you the taxes now that I need it.....but why tack a penalty onto MY money.

Maybe the reason fewer people put money into a 401k is this very reason?

Maybe my 401k is being stagnant and the market is stale, and have sufficient funds, and maybe I would rather go into retirement with no mortgage at the cost of a smaller 401k ........vs.............going into retirement with a mortgage, plenty of funds in 401k (that I cant have without steep penalty) and then the market tanks?

401k is isnt like a savings acct. You can loose money just a quickly as you can make money. But one things for sure.....if you have a car payment or mortgage.....you can bet your interest rate aint going down.

The penalties have two purposes:

1. To encourage people to use the money for the intended purpose
2. To prevent the accounts from becoming a tax dodge for the wealthy.

#2 is the main goal. Without the penalty, if I have a banner year in income (earning over $500K), so on Dec 31st, I max out all the contributions and avoid the marginal tax rate of 39.6% on that money. The next year, is not as great--I only earn $200K, so I decide to pull the money out from the previous year. But now my marginal tax rate is only 33%. I have just made 6.6% on that money by avoiding a tax.

If you want easy access to your money, put it in a saving account.

 

[fordmantpw]

If you want easy access to your money, put it in a saving account.

Or a ROTH IRA or 401(k).