Health Savings Accounts (HSA’s) have been around in the U.S. since the end of 2003. However, using your HSA for retirement has only been gaining popularity over the last handful of years.
There’s no doubt that this is one very special account. Although designed as a medical savings account to be paired with a high-deductible health plan (HDHP), there’s a crafty way to make it even more valuable. In doing so, your money goes in with pre-tax dollars, grows tax-free, and can be taken out tax-free as well.
I can’t think of another account that awesome! Even a 401(k) plan loses out against this account (not counting employer matches). Traditional 401(k) money gets taxed when you withdraw your money. And Roth 401(k) plans inherently mean that you’re putting in after-tax dollars.
So a three for three on the tax benefits is unheard of except for using an HSA for retirement.
Some of you may already know about how valuable the Health Savings Account can be. I’ve talked about it years ago in Are HSA Plans the Best Bang for Your Buck? and The HSA Benefits Just Keep Rolling In.
I’ll briefly discuss the value of this account. But what I really want to do is to show you how I keep track of our unreimbursed medical expenses to ensure compliance while making the process as efficient as possible.
Disclaimer: As a reminder, I’m not an accountant, financial planner, or any other fancy-titled person. Contact a professional before making any changes or investments that you don’t fully understand.
Using an HSA for retirement
I first learned about the idea of using your HSA for retirement when I stumbled upon the Mad Fientist’s post, HSA – The Ultimate Retirement Account. It was an a-ha moment for sure – too bad I didn’t come across it until around 2017.
First off, be aware that a Health Savings Account (HSA) is completely different than a Flexible Savings Account (FSA). An FSA is a terrible account compared to an HSA. Nerdwallet has a nice table comparing the two types of accounts, but everything we’re talking about today is about Health Savings Accounts.
When you have an HSA, you have two choices on how to use the money saved in the account to pay for medical expenses:
- Pay for the expenses directly with the debit card from your HSA provider.
- Pay for the expenses out-of-pocket and then reimburse yourself later.
Now, if you’re just using the account as a middle-man and a way to build your HSA a little, either option is fine.
However, if you’re ready to take things to the next level and use your HSA for retirement, you can take advantage of option two with what might be considered somewhat of a loophole.
When you think of paying out of pocket and reimbursing yourself later, you might envision that “later” means sometime in the near future. But, the interesting detail is that there isn’t a deadline for reimbursement.
In other words, you can leave that money earmarked for reimbursement sitting in your HSA until later… much later if you want. As a matter of fact, you can leave it in there until you want to pull it out in retirement if desired.
Think about that – you can pay your medical expenses with after-tax money and leave the money that’s owed to you to sit and grow tax-free in your HSA for years. And then when you withdraw the money, it’s 100% tax-free because it’s a reimbursement for the earlier medical expenses.
That’s it. This simple strategy gives you a fantastic way to take advantage of some nice tax savings over the years.
So, that’s easy enough. It’s an approach that’s floated around and become a popular topic in the personal finance community over the past few years.
What’s not talked about though is how to keep track of what’s involved in using your HSA for retirement. I’m a systems kind-of-guy (to a fault) so I’m going to take you through how I easily and efficiently keep track of everything needed for this strategy.
Organizing/Preserving the receipts
The interesting part about reimbursing yourself for your medical expenses is that you don’t need to submit receipts to the IRS or anything like that. You request the reimbursement through your HSA provider and get your money. The provider issues you IRS Form 1099-SA at the end of the year and you use that to report the distribution on Form 8889 of your taxes.
But at no point in the process do you submit any receipts. It’s almost the honor system in a way. So why keep them at all?
Because if you’re ever audited by the IRS, you darn well better have those receipts as documentation of the reimbursement.
My recommendation is to come up with a system that’s easy to use yet doesn’t keep all your eggs in one basket. Here’s my two-part system:
- Scan the receipts and keep the digital copies organized in cloud storage.
- Keep the physical copies in a folder somewhere safe yet easy to get to.
Let’s go into these in a little more detail.
#1 – HSA for Retirement – Operation scan and store
If you have a printer with scanner functionality, you can always use that to scan your medical receipts. I haven’t owned a printer in probably 15 years now, but technology has made that unnecessary for this case.
There are now several smartphone apps that will let you “scan” your documents into PDFs. I’ve come to like the free app, Adobe Scan: PDF Scanner & OCR. I use it on my Android phone religiously to scan any straggling paper docs in general, including my receipts. But I do see that they offer the app on iPhone as well.
In essence, you snap photos of the receipts using the app, crop them easily as needed (the automatic cropping is usually pretty good if you put the document on a surface of a different color), and save it out. Adobe Scan also OCR’s the doc as part of this process, which turns it from just a photo to a document where you can select text in it, search text within it, etc. – very important.
Even better is that if you have the app installed for your favorite cloud storage provider, you can just share the receipt to that app and it’ll upload right to it. In my case, that’s Google Drive.
I love this method because I can digitize and store a receipt in just a matter of a couple of minutes.
The important part of this though is to keep your digital files organized. Don’t just upload them into the root of your cloud storage and call it a day – you’ll regret that one day.
Create a folder structure and naming convention that makes sense for you. I have a solid organizational structure that works well for me. Bear in mind that I store all my docs in Google Drive so mine might be built up a little more. Here’s a small example of some of the folder structure:
- My Drive
- Bank Statements
- Cell Phone Bills
- Credit Card Bills
- Electric Bills
- Health Savings Account (HSA)
- Unreimbursed Medical Expenses in HSA
- Unreimbursed Receipts
- Unreimbursed Receipts
- Unreimbursed Medical Expenses in HSA
- Insurance (Home and Auto)
All receipts are stored in that year’s folder. They’re named with the date format of when it was paid and what it was for or where it took place. For example:
- 06-12-21 – Chiriqui Hospital – Mammogram (Lisa) – Receipt.pdf [I wrote a post on this one!]
- 07-09-21 – Biomedica – Antigen Tests – Receipt (Jim, Lisa, and Faith).pdf
- 09-05-21 – Clinica Monica Sanjur – Receipt (All).pdf
- 09-01-21 – Medico General – Dra. Shannon Tuer – Receipt (Lisa).pdf
These are the actual names of the receipts I have saved (though I changed the dates for privacy and security). This might look complex, but remember, these can be named and shared right from the Adobe Scan app.
Scanning a receipt, renaming it, and sharing/saving it to the appropriate folder only takes a couple of minutes. But look how easy it is now to find what I need. This makes it extremely simple to prepare your unreimbursed funds in your HSA for retirement.
As an aside, I only keep proof of payment (receipts) in these folders. I store EOBs, statements, and other documents in a separate medical insurance hierarchy in order to keep my unreimbursed expenses clean and easy to find what I need in the future.
#2 – HSA for Retirement – Physical copies
You’ll need to figure out an easy way to store the physical copies themselves. Although the digital copies should satisfy the IRS if ever audited, I prefer not to keep all my eggs in one basket.
So I keep the digital copies stored offsite in cloud storage. Then I keep the physical copies at home in a folder. If my house burns down, I don’t lose the digital copies since they’re not stored locally. If there’s a problem with the cloud storage, I still have the physical copies. Better safe than sorry, folks!
Personally, I just keep all our physical receipts in a single manilla folder right after I’m done scanning them. We don’t have a lot of them and I like the simplicity – the newest receipt always goes on top… no muss, no fuss.
Should we start accumulating receipts faster at some point, maybe it’ll make sense to do a folder for every year, but for now, that’s just overkill.
Now, we just need an easy way to keep track of all this…
Tracking the numbers
Hmm, what would be a good way to keep track of all of these unreimbursed medical receipts?
Stop it… we all know it’s going to be a good old spreadsheet to the rescue!
Here’s the great part though – there’s really nothing too elaborate about this spreadsheet. To track the unreimbursed receipts you’re owed from your HSA for retirement (or before if needed), the info to record and present back to you is straightforward.
We essentially just need to know the total amount that we’ll be able to withdraw as a reimbursement down the line. Nonetheless, it would be helpful to know how much we still have left to pull out as a reimbursement after we start doing any reimbursement withdrawals. That could be sometime soon or even as far out as retirement.
Fortunately, I have a spreadsheet that does exactly that!
First off, it has a tab for each year to enter in the pertinent information – easy and simple to fill out…
As each new year approaches, ready-made sheets already exist and just need to be unhidden with a simple click. The same goes for previous years that might have some unreimbursed medical receipts as well…
Then there’s a tab to record any distributions taken for unreimbursed money…
And that’s about it for entering the information we’re owed from your HSA for retirement (or anytime before).
Everything is automatically pulled and tabulated on the Summary tab so you can easily see exactly where stand. It’s also a great way to easily track this information to have ready should an audit ever transpire…
So, that’s my spreadsheet – and it’s worked extremely well while still taking just seconds to add an entry as needed.
Nice, right? Wouldn’t that be generous if someone would be willing to share a fantastic spreadsheet like this with you?
Well, boy oh boy, this must be your lucky day! As a gift to you, you can have a copy of this awesome spreadsheet so you can track your own unreimbursed medical expenses in your HSA for retirement!
If you’re already on my email list, you received the link to this spreadsheet in the email that went out this morning. If not, sign up here and I’ll send you an email with this spreadsheet as well as several other cool and handy spreadsheets…
Free with no strings attached! I hope you find this useful. Anytime I create something effective for making my life easier, I love to share it with my loyal readers… you’re welcome!
As a side note, I keep my copy of the spreadsheet in the same folder hierarchy I presented earlier. It sits directly in the “Unreimbursed Medical Expenses in HSA” folder in Google Drive. Organization is king, folks!
So that’s how we use our HSA for retirement. We currently have a little over $45,000 in my Health Savings Account. Not too shabby for having about 7 years with it before retiring at the end of 2018. Now it sits and grows at Fidelity fully invested in the Fidelity ZERO Total Market Index Fund (FZROX). I just watch it continue to creep up in value in Personal Capital.
Once we’re back in the U.S. next year and as income from the blog continues to grow, I do hope to start contributing once again. I love this account and would like to grow it a lot more.
Of that $45k in the HSA, we currently have around $6,000 in unreimbursed medical receipts.
It’s a double-edged sword, too. $6k isn’t a ton of money, but that’s because we’re a relatively healthy family and don’t spend a lot of time at the doctor (or dentist) outside of routine visits… I’ll take that any day!
Over time though, I’m sure we’ll be able to account for everything in that account. That means we’ll have a good chunk of change coming back to us with money that was put in with pre-tax dollars, is growing tax-free, and that we’ll be able to take out tax-free as well. In the meantime, we’ll let the account continue to grow over the next few decades.
Are you utilizing an HSA for retirement? If so, how do you keep track of your receipts and numbers?
Plan well, take action, and live your best life!
Thanks for reading!!