We already know that a health savings account is a terrific savings vehicle because it is triple tax advantaged, which allows you to pay for medical care with tax free dollars. We also know that your HSA is yours forever, and that you can invest and grow your savings for long periods of time. This presents the opportunity – given diligent savings and investment – to grow your HSA into a certified nest egg, for either medical care or retirement.
But there is another major advantage that can help you along the way. You can design your HSA so that you can pull tax free cash from it at any time. In this way, it acts as your own personal ATM.
Of course, there is no free lunch. To pull money out of your HSA tax and penalty free, you must do so by reimbursing yourself for previous qualified medical expenses that you paid out of pocket. This means that at some point in the past, you simply paid for QME out of pocket (credit card, cash, check) instead of using your HSA debit card or check. Any QME paid out of pocket can be reimbursed from your HSA at any time, tomorrow or in 30 years.
As a simple example, suppose I go to the doctor and pay the $45 copay out of pocket. Since this is a qualified medical expense, I am entitled to reimburse myself from my HSA at any time. This reimbursement is simply a transfer of $45 from my HSA to my checking account. No paperwork, no taxes, no mess. Just a simple transfer. Tracking this by keeping proper records ensures you maximize your tax free withdrawals and don’t make mistakes.
Unreimbursed QME Credits
You can begin to see the advantage here. The more QME I pay out of pocket now, the more I can reimburse myself for in the future. Depending on how often I do this, I can accumulate a fair amount of unpaid reimbursements. $25 here, $45 there, $100 the following month. Eventually, I have a lot of cash in my HSA that I am entitled to draw from for reimbursement.
I have termed these credits Unreimbursed QME (creative, I know). These represent amounts that I can pull from my HSA, tax free, at any time for reimbursement. While I wouldn’t reimburse myself to purchase baseball tickets, it does serve as a backup emergency fund should such an event arise. It is nice to have this available should I need it. Of course, I would rather keep cash in my HSA so it can grow, tax free.
Unreimbursed QME goes back to the essence of saving and personal financial: sacrificing consumption today to enjoy a better tomorrow.
The Benefits of UQME
Paying medical expenses out of pocket isn’t necessarily fun, as it takes from my monthly budget. At the same time, one of my goals is to pay for as much QME out of pocket as possible. Why is this? There are three reasons:
- My HSA is one of my savings accounts, and I aim to protect it. I am much happier spending $45 out of pocket than reducing my HSA by $45. I want that account to grow, and you can only contribute so much each year. In my monthly budget, I have a line for HSA contributions (savings) and a line for random medical (expense). This prevents small medical spending from chipping away at my HSA.
- Speaking of growing, there is a huge benefit to allowing your HSA to grow and compound. Spending it ‘early’ reduces the amount that can compound, which limits the potential growth of the fund. You need your money working for you for as long as possible. For example, it would be nice to keep that $100 in your HSA, invest it for 7 years, allowing it to double. Then, you can reimburse yourself with ‘the house’s’ money.
- Moreover, I view the UQME as a safety net. I like the option of being able to pull cash from the HSA if I need it, with no tax implications.
Thus, whenever I pay QME out of pocket I feel good as I am protecting my HSA, letting it grow, and establishing a ‘line of credit’ that I can pull from at any time. Hopefully I won’t need it, but it is nice to know that it is there.
I bet you can’t do that with your copays on your ‘other’ health insurance plan.