The IRS recently announced that in 2024, the maximum HSA contribution will be $4,150 for an individual and $8,300 for a family, up from $3,850 and $7,750, respectively. Fantastic! I’ve already effused about HSAs, here: Sedulous Middle-aged Man Plugs H.$.A. Leak, and here: Middle-aged Man on 2023 401k and H.S.A. Limits and More! Now, this middle-aged man will share how HSA funds can effectively be used tax-free for any purpose, even a new roof!
In our case, we max out our HSA, and we don’t distribute funds. This allows us to enjoy a tax deduction on the contributions and to leave the funds invested for tax-free growth. Of course we can pull the funds out tax-free for medical expenses, but instead, we pay for medical expenses out of other accounts and scan the receipts into the cloud. That leaves the door open for tax-free distributions down the road if needed, effectively for ANY reason, not just medical bills. How So?
By way of example, let’s say ten years from now, we need to replace our roof for $30,000, but we don’t have $30,000 sitting in our checking account. We need not despair; effectively we can use funds from our HSA to pay for the new roof!
What?!? A roof is not a medical expense. How can we use HSA funds to pay for a roof?
Easy. Let’s say over the same ten year period, we paid an average of $3,000 per year for medical expenses, but we never used HSA funds for those expenses. Also, we kept all the receipts. We’d have a total of $30,000 accounted for medical expenses for which the law allows us to reimburse ourselves from the HSA at any time, tax-free.
Accordingly, we can technically reimburse ourselves $30,000 for medical expenses that really have long since been paid, forgotten, and are irrelevant to our current finances. Now we have $30,000 for the roof!
This gets even better. The $30,000 comes out of thin air! Remember, during this same ten year period we would have been maxing out our HSA for approximately $8,300 per year.* Assuming a reasonably attainable average 7% tax-free annual rate of return, on at total of $83,000 invested, we’d have $119,178 in the HSA. That’s $36,717 more than we put in–roof money out of thin air!
Of course, the goal is to keep HSA money invested and growing. However, it’s nice to know that the funds can be tapped tax-free, at any time, effectively for any reason provided we can match the amount distributed dollar for dollar with receipts for qualified medical expenses that we did not pay with HSA funds, even if they were medical expenses from many years ago.
Disclaimer. I am not providing financial advice. Please talk to your financial advisors about your specific case.
With Love,
P. Gustav Mueller, author of The Present