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HSA in Retirement - Tax Advantage?

#1
I retired early this year at age 60. I have a non-employer HSA account that I was funding with after tax wage earnings and then claiming the credit on my taxes. Now that I’m retired, I’m taking taxable distributions from my retirement account.
 
Is there any advantage in still funding the HSA?  Seems the answer would be no, since I’m paying taxes on the IRA distribution only to turn around and claim a tax credit on my tax return. Am I missing something?  Seems like it should be more complicated than that, since nothing Involving the tax code is ever simple.
 
Thanks for your insight.
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#2
Can you grow your HSA balance tax deferred until used? If so, is that amount of growth worth your effort?
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#3
If you have a high deductible health plan and are eligible to contribute to an HSA, it's hard to screw up by making that contribution.  Money that is contributed to an HSA that is used to pay medical expenses will NOT be taxed upon withdrawal.  So even if you must fund the HSA contribution via an IRA withdrawal and pay the associated taxes, you can claim the tax credit and get the taxes back!  This is essentially the same thing as transferring money from your IRA to your HSA where it will not be taxed upon withdrawal.  How can that not be a good thing … everyone will eventually have medical expenses.  Why not pay them with "before tax dollars".

IMHO, HSAs are the most underutilized financial account out there!  Even if you want to use the HSA money for something other than medical expenses, you just pay the taxes upon withdrawal (just like an IRA).  So if you are eligible to contribute to an HSA … DO IT!

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#4
By taking the money as a taxable distribution from my IRA to fund the HSA, they are not “before tax dollars”. If it’s a wash, pay the taxes and then get a credit, why bother? I don’t have a very large balance in the HSA, so I’m confident the entire amount will eventually be used on medical expenses.
 
You are correct that the HSA is a great thing. Had I known years ago what I do now, I would have fully funded it each year and not used any of it.
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#5
I'm struggling a bit with this one, but I'll toss this out, anyway. I think you are correct, ggminn. If you are only able to fund the HSA by taking a taxable distribution, I don't see the benefit. As I see it, the taxable IRA distribution raises your AGI by, say $4500 (line 15b on 1040). HSA contribution lowers AGI by $4500 (line 25). Net result, no tax benefit. I am ignoring any possible investment returns.

By way of clarification, the HSA "deduction" is not a credit, it is a deduction from gross income to get to Adjusted Gross Income. HSA contributions are technically "adjustments" to income, meaning that one does not need to itemize in order to claim. These might seem like obscure semantic differences, but to someone actually trying to figure this out, they are not.
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#6
You are both correct in that there is no tax benefit in the year that you use IRA money to fund your HSA contribution. But that's the point … there is no tax liability either. All that happens is that you now have more money in your HSA and less money in your IRA. But money in your HSA is TAX FREE. Money in your IRA will incur taxes upon withdrawal. If I could move my whole IRA into my HSA without paying any net taxes, I would do it in a heartbeat.
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#7
I am at a loss to understand why you say that you would move your entire Trad IRA to a HSA just because the process is tax neutral. Isn't the use of HSA tax dollars only for qualified medical benefits? On the other hand, one can use Trad IRA withdrawals (after taxes) for any purpose or QCDs even before taxes.

Isn't the 10%, 20% penalty (plus the taxes due) for using HSA dollars for non-qualified- medical benefits a deterrent? Do you expect the non-taxed growth of the HSA will be such that it will more than compensate for the penalty and taxes?

Unless you expect that your medical expenses will be such that you'll need the entire proceeds of your Trad IRA to cover them, I don't see why you would move your whole Trad IRA to a HSA. Can you please explain what your rationale may be? Thanks.
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#8
I was perhaps being a bit glib when stating that I would move my entire IRA to my HSA if I could do so tax free. The only deterrent for me would be loss of the ability to do Roth conversions. Let me explain my thinking. An HSA account is worth more than an IRA account of the same amount because qualifying medical expenses are tax free. You are correct that there is a penalty (20%) plus income tax if the funds are withdrawn for any other reason prior to age 65. But after age 65 the penalty goes away and you only pay income tax on un-quantifying withdrawals. So in that regard, an HSA acts just like an IRA after age 65, except that medical expenses are still tax free. And … HSAs do not have RMDs so I would have to withdraw and pay taxes only on the funds that I actually needed to live on.
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