Taxing a HSA?
 

Put pre-tax money into a HSA.
Looks like that money isnt really pre-tax?
Doing my taxes and it asked how much I didnt spend, then taxed me on that amount.
I guess they need every penny for those that need it more than me.

Something is amiss. You shouldn't be paying any taxes on non-used HSA funds. They roll over tax free each year and are never taxed so long as you spend them on documented expenses.

We (wife and I) max out our HSA yearly but don't touch it. Any out of pocket (deductibles for example) expenses comes out of savings. We are letting the HSA moneys invested in funds increase in value so that when we are on medicare we will have a worthwhile nest egg to pay for medical expenses in retirement.

Marc…why use highly taxed income to pay medical expenses that should be covered by your untaxed HSA? Surely your tax rate is higher now than it will be after you’ve retired.

Maybe I’m misunderstanding something?

Mike, yes I expect our tax rate when retired will be lower than the current rate, but the earnings on the HSA investments in mutual funds will continue to grow - tax free forever - and will eventually be used for medical expenses. Essentially it's treated like a ROTH IRA - but the money was never taxed.

Here's a good article that covers the advantage of the HSA and letting it grow. Unfortunately, we haven't been doing this for 20 years as in the example but our current balance is almost half the example amount since we've both been able to contribute.

https://www.thebalancemoney.com/max-out-your-hsa-contributions-4157954

Let’s say that the maximum contribution never went up, and you contributed the maximum for an individual each year ($3,850) for 20 years and you earned a 4% rate of return.

We’ll use a very conservative return rate because you'll have some years where you'll have to withdraw funds for medical expenses. Using these numbers, you would have a balance of nearly $124,000 that is completely tax free if it's used on qualified medical expenses.

So im a little confused.
Using HR block tax software
Input line 1 from 1099 sa.
Input amount used on medical expenses last year.
Then my displayed refund amount decreased.
Im sure I did something wrong, just need to figure out what.

What happens after all those years of putting money in the HSA and you don’t get to spend it all because of one reason or another i.e. death? Does the government get it or is it part of your estate/taxed and your beneficiaries get it?

The average senior pays something around $250k in medical costs in retirement. Spending the HSA account is not a concern. You can use it for glasses, dental work, drugs and even medical insurance - all aside from regular medical costs.


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