I pay for all medical expenses out of pocket with after-tax dollars. My HSA is just a triple-tax-advantaged "IRA" at this point. I keep all receipts for medical expenses going back years, and I can technically go "reimburse" myself out of my HSA any time I want to with tax free dollars. After age 65 it turns into a normal IRA and you can pull out money for any reason.

Here's a good primer on HSA strategy:

https://www.whitecoatinvestor.com/re...e-stealth-ira/

 

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.

 

Wow thanks for the insight.

 

^^all of this that he said, except that I believe the penalty-free withdrawals (for non-medical reasons) start at age 65 (not 59-1/2). You will owe income tax on non-medical distributions after 65 (just like an IRA).

 

Bringing this back up for those in the know. I have another question.

I have opened an HSA with Fidelity and have been successfully transferring cash out of Optum and into Fidelity, which offers far superior investment options. Within Optum I have a Vanguard investment that I can no longer contribute to and it appears that Optum is taking a small chunk each month just for fun. Anyone know if I move that investment from Optum to Fidelity so that Optum can no longer keep taking their $3/month gift? I get that there are fees involved with investments but Optum seems to be worse than most and preys on those who don't know better or don't read the fine print.

I'd like to just keep the minimum cash balance there with Optum and nothing more.

Anyone have insight on this?