What is the best way to model a Health Savings Account (HSA)?

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ddeberry1218
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Joined: Wed Nov 20, 2019 5:44 pm

What is the best way to model a Health Savings Account (HSA)?

Post by ddeberry1218 » Wed Nov 20, 2019 5:58 pm

I am planning on retiring at 60 but still contribute to a HSA between 60 and 64. I think I would have to model both $4,500 of income for these years and $4,500 of tax free investment. However, an HSA is both tax free and tax deferred. I am not quite sure on how to model this correctly.

Thanks!

jimr
Posts: 524
Joined: Thu Feb 28, 2008 6:48 pm

Re: What is the best way to model a Health Savings Account (HSA)?

Post by jimr » Wed Nov 20, 2019 6:05 pm

The first question is whether you plan to spend the $4500 on medical expenses each year or expect to use the funds like a ROTH IRA to withdraw years down the road tax free on medicare premiums or other qualified medical expenses?

If you plan to let the HSAs grow tax deferred/tax free then putting the funds into the tax free portfolio each year does seem to make sense. You can do this using the addition inputs window and creating a "tax free savings" cash flow for $4500 with the correct age range.

You'll probably also want to increase your annual expenses for those years by enough to cover the $4500 savings contribution (this is just to account for the extra cash you'll need to make the HSA contribution). You can reduce the amount of the expense increase by the amount you'll save on taxes from making the deductible contribution.

ddeberry1218
Posts: 3
Joined: Wed Nov 20, 2019 5:44 pm

Re: What is the best way to model a Health Savings Account (HSA)?

Post by ddeberry1218 » Thu Nov 21, 2019 3:52 pm

Thanks for the very quick response!

For now, I am looking at using the HSA like a Roth IRA. I was planning to pay for my medical needs out of pocket and save the HSA as part of an insurance for medical costs or long term care later in life (along with a Roth IRA). I have already done as you suggested and modeled it as "Tax Free Savings" to age 65 within the "additional inputs" tab. I also modeled the HSA as "Other Expenses" for ages 60 to 65. I anticipate that my income tax rate will be 15%.

This is a little confusing to me. Am I missing something? It seems like you would be taxed initially for the HSA expense (60 to 64), but then get it back at the end of the year. With the current set-up, should there be another "taxable savings" category that is 15% of the HSA withdrawal to account for the HSA taxes?

Should there be another tax deferred/tax free savings category or a tax free expense category to accommodate HSA savings?

jimr
Posts: 524
Joined: Thu Feb 28, 2008 6:48 pm

Re: What is the best way to model a Health Savings Account (HSA)?

Post by jimr » Thu Nov 21, 2019 4:34 pm

I think the simplest way to handle this is to reduce the "other expenses" amount by whatever your total income tax rate is. It sounds like you're using 15%. So even though you'll create a taxable savings entry from 60-64 for the full amount, the offsetting "other expenses" entry will be the full amount minus the tax savings you'll get.

It is true that from a cash flow basis, you probably won't get the tax savings back until you file your taxes, but since all the entries in the planner are intended to be annual, I think it's ok to ignore the timing difference.

ddeberry1218
Posts: 3
Joined: Wed Nov 20, 2019 5:44 pm

Re: What is the best way to model a Health Savings Account (HSA)?

Post by ddeberry1218 » Fri Nov 22, 2019 7:35 pm

Ok. Thanks!

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