Originally Posted by bruhaha

some people are using the HSA as an investment vehicle instead of using it to pay medical expenses. People who do this pay their medical expenses out of pocket instead of using the HSA.

the advantage of doing so is because unlike an IRA or 401k, is that HSAs are pretax (funded tax free) HSA earnings are tax free, and HSA distributions are tax free when used to pay for eligible medical expenses. An HSA is better than a 401k or IRA, so if you’re using it as an investment vehicle you fund the HSA first before you fund your 401k or IRA.

as soon as you enroll in a HDHP and establish your HSA and start paying medical expenses out of pocket, you keep receipts for payments for eligible medical expense from non HSA funds.

so now several years later you need to buy your $25,000 Captain boat. You look in your medical receipts you’ve accumulated since you’ve had your HDHP and HSA and add them all up and behold you have $30000 worth of medical expense receipts.

take a 25000 distribution from your HSA, buy your boat. when you fill out the 8889, youll report the $25000 distribution which is covered by $25000 worth of medical expenses. So none of the distribution is taxable because you showed the distribution was used to cover medical expenses (paid in prior years out of pocket) but was used to buy a boat…. Or sports car or to remodel your home, or whatever you can imagine.

You dont have to wait to 59-1/2 like you do with the 401k or IRA. As long as the distribution is covered by a medical expense, the distribution is tax free.

If you don’t have the medical expense receipts you cant do this without also paying a 20% penalty for early distribution before 59-1/2 in addition to income taxes on the distribution.