Using an HSA for a down payment on a House

For those of you who do not know, an HSA is a Health Savings account.  In very simple terms an HSA is an account where you can put in money tax free to pay for qualified medical expense.  Think doctor visit copays, trips to the dentist, and glasses.  For a better list see http://www.hsacenter.com/qualified-med-expenses.html [1]

If you happen to be in 25% tax bracket every $1,000 you put into an HSA saves you $250 on your taxes. 

Most HSA accounts provide you with a checkbook and debit card.  When you have an expense, say $220 for eyeglasses you can write a check or use your debit card to pay for it.   Or you can pay with non HSA money and later reimburse yourself out of your HSA, as long as it was a qualified medical expense and you have detailed records.

If you reimburse yourself, how much time do you have to get the reimbursement done?  Do you have to reimburse yourself within 30 days?  90?  

If you look at https://www.tangohealth.com/posts/flex-reserve/is-there-a-reimbursement-deadline-for-hsa-expenses/ [2] and more definitively at the IRS page http://www.irs.gov/irb/2004-33_IRB/ar08.html#d0e1935 [3]  look at Q-39 and it has the answer

Q-39.  When must a distribution from an HSA be taken to pay or reimburse, on a tax-free basis, qualified medical expenses incurred in the current year? 

A-39.  An account beneficiary may defer to later taxable years distributions from HSAs to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established. Similarly, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary’s gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year. See Notice 2004-2, Q&A 31 and also Notice 2004-25, for transition relief in calendar year 2004 for reimbursement of medical expenses incurred before opening an HSA.

Example.  An eligible individual contributes $1,000 to an HSA in 2004. On December 1, 2004, the individual incurs a $1,500 qualified medical expense and has a balance in his HSA of $1,025. On January 3, 2005, the individual contributes another $1,000 to the HSA, bringing the balance in the HSA to $2,025. In June, 2005, the individual receives a distribution of $1,500 to reimburse him for the $1,500 medical expense incurred in 2004.  The individual can show that the $1,500 HSA distribution in 2005 is a reimbursement for a qualified medical expense that has not been previously paid or otherwise reimbursed and has not been taken as an itemized deduction. The distribution is excludable from the account beneficiary’s gross income.

In other words…

Every qualified medical expense that you incur after starting an HSA can be reimbursed at any time in the future. 

As an example, lets say you had $4,000 this year in qualified medical expenses, and you chose to pay for them out of pocket (non-HSA money). You could wait 10 years later to reimburse the $4,000 from your HSAaccount, as long as you have good documentation to back it up.

So how does this apply to paying a down payment on a house?

I was discussing this idea with my wife the other day and it took a while to sink in, and she is a bright woman so I will try and take it slow here.

We just started an HSA and we have some upcoming medical expense (dentist and eye glasses for the kids).  We also plan to pull some money from my IRA to put into the HSA.   You can transfer money from your IRA, tax free, once in your lifetime.  In our particular case we can transfer $6,650 in 2015.  See http://www.hsabank.com/hsabank/education/irs-limits-and-guidelines [4].

We have already put in $1,000 this year.  Let's suppose we put another $2,350 this year (2014).   After we put in the $6,650 from my IRA next year we would have

   $1,000

   $2,350

+ $6,650

 $10,000

Let's assume for the rest of 2014 we have $1,500 of qualified medical expenses.  And in 2015 we have $4,500 in qualified medical expenses and in 2016 we have $4,000. 

   $1,500

   $4,500

+ $4,000

 $10,000

If we had used or HSA to pay for these expenses, and had not added any more to our HSA, our HSA would now have a balance of $0.00.

But if we did this; the money I transferred from my retirement effectively subsidize our medical expenses at the expense of my retirement money.  In other words I am draining my retirement to pay for medical expenses.   This is not something I want to do!  Retirement is important!

My thinking on this

My wife and I are in a strange situation we saved a lot of money into our retirement after college and did not save enough cash at the same time.  As a result we have a good sized retirement for our age (coming upon 40 now).   But we don't have cash in hand to put a 20% down payment for a house.  We are working on it but still have a ways to go.  

If the federal government came out tomorrow and said you can take out $10,000 or $30,000 from your retirement tax and penalty free from your IRA if you use it to pay for a house we would do that in a heartbeat.

My plan is to transfer the max amount I can from my IRA to our HSA account.  Then every time we have a medical expense pay for it with cash, non-HSA money, and document it well.  The first thought I had was to reimburse myself from the HSAand put it into my savings.  This would allow me to track how much money we had effectively transferred from our IRA into our down payment account. But there is a danger in this.  If the money is available to use we could be tempted to use it.  Instead we can leave it in the HSA and wait, and wait, and wait, then take it out in one big chunk.

So in my example above at the end of 2016 we could pull out $10,000 from our HSA in one go.

So in short the plan is

1.      transfer the max amount from our IRA to our HSA

2.      Add some cash to it, but not much more than we have documented qualified medical expense for

3.      Pay cash, non-HSA, for all medical expenses.

4.      When we get ready to buy a house pull out the full, documented, amount of qualified expenses we have had since we opened our HSA account.

In truth the HSA really only allows us to pay for qualified medical expenses tax free.  But, since we are used to paying for medical expenses with taxed money we can continue to do that (paying cash).  This gives us the ability to effectively save up part of a down payment for a house tax free.

 

References

[1]  Health Savings Account (HSA) Eligible/Ineligible Expenses

      http://www.hsacenter.com/qualified-med-expenses.html

       Visited 08/2014

[2]  Is There a Reimbursement Deadline for HSA Expenses?

      https://www.tangohealth.com/posts/flex-reserve/is-there-a-reimbursement-deadline-for-hsa-expenses/

       Visited 08/2014

[3]  Health Savings Accounts—Additional Qs&As

      http://www.irs.gov/irb/2004-33_IRB/ar08.html#d0e1935

       Visited 08/2014

[4]  IRS Limits and Guidelines

      http://www.hsabank.com/hsabank/education/irs-limits-and-guidelines

       Visited 08/2014