HSA and tax free investing

Question

The below is a quote from another HSA question's comment:

I agree. To your point the best course of action would be to max out your HSA contributions, not distribute them even if you can, invest them for many years, and pull out many years worth of distributions tax free any time you'd like in the future. (With years worth of saved receipts in case of audit.)

I do not understand the italicized text. It reads to me as such:

• 2020 contribute 5000 to HSA and place into investment vehicle.
• 2020 surgery for 1000 incurred payed out-of-pocket
• 2021 contribute 5000 to HSA same as 2020
• 2022 surgery for 9000 incurred and payed out-of-pocket
• 2023 take tax-free disbursement from HSA in amount of $10k since receipts have been saved.

I believe I am misunderstanding the comment.

Answer 1

Your sample scenario is correct, but on such a short timeline the advantage is likely not very significant. If instead of 2023 you waited until 2050 to request reimbursement, you could have significantly more than your initial $10k contributions depending on investment performance.

The great benefit of an HSA is that it gets pre-tax contributions, tax-free growth, and tax-free distributions if used for qualifying expenses.

There is currently no time requirement for when you request your reimbursement except that the expenses have to be incurred after the HSA was established. This enables you to capitalize on the tax-free growth by delaying reimbursement.

Not all HSA's have good investment options, this delayed reimbursement plan is only lucrative if your HSA has good investment options (like low-fee index funds, for example). If your HSA doesn't offer compelling investment options you should still leverage the HSA, but don't delay reimbursement. Another item to note is that the rules could change in the future, typically such a rule change would not be retroactive, but you'd want to keep up on the rules if you had many years of reimbursements waiting.