4

The tax-free contributions to an HSA are limited, but any interest/gain made by investments in it is not taxable.
Is it legal to use the HSA as an investment vehicle to get effectively tax-free interest?

  • Let's assume I have already contributed the maximum allowed to my HSA for year X.
  • I have 10 k$ cash available.
  • I 'contribute' those 10 k$ to my HSA on Jan/2/X, and move it into some investments.
  • Let's further assume on Dec/30/X it has grown to 12 k$.
  • On Dec/30/X, I take the original 10 k$ back out of the HSA, and thereby stay within the contribution limits.
  • But I managed to make 2 k$ of interest/gains tax-free (yes, they are locked inside the HSA, and can only be used for, etc., but still, it's 2 k$ tax-free )

It seems like a useful method for certain circumstances. Would that be legal?

10

What you are describing doesn't work.

The reason is that when you do an excess contribution withdrawal, your HSA custodian will also send you any earnings from your excess contributions. These earnings will be listed in Box 2 of the 1099-SA form that they give you at the end of the year, and you will need to add them to your income as "other income" on your 1040 at tax time (line 21 on 2015's 1040).

If, for some reason, you do not remove the earnings on your excess contributions from your HSA and add them to your taxable income, you will owe a 6% excise tax/penalty on your excess contributions.

See Publication 969, Health Savings Accounts, Excess Contributions for more details.

In addition, most HSA custodians will not allow you to deposit more than the family contribution limit ($6750, or $7750 if you are age 55+) in a year. And some HSA custodians charge an excess contribution return fee.

  • However, if you contribute to an HSA long enough and/or at the maximum, it may build up enough value that the custodians will let you start investing that money in the same way an IRA does, with similar advantages of tax-free growth. At that point, it arguably does start functioning somewhat as a "health IRA" without counting against your normal IRA/401k caps.Talk to you plan administrators to get the details of what they offer, and run the numbers to see if that actually does anything interesting for you. – keshlam Oct 1 '16 at 20:40
  • 2
    Yes, you can invest inside the HSA, but you still need to abide by the contribution limits and distribution restrictions. Trying to game it like the OP suggests, by over contributing and correcting the mistake before the deadline, will not gain you any positive results. – Ben Miller - Remember Monica Oct 1 '16 at 20:44
  • Absolutely, @BenMiller. – keshlam Oct 1 '16 at 20:50
  • @BenMiller And if I'm not mistaken, one of the distribution restrictions is that you have to use the funds when distributed to pay for qualified medical expenses. – Michael Oct 2 '16 at 1:43
  • @Michael That's true for regular distributions. Excess contribution withdrawals, however, can be spent on anything, because you have to pay tax on that money. These withdrawals aren't technically HSA distributions; instead, they are an "undo" of a mistaken contribution. – Ben Miller - Remember Monica Oct 2 '16 at 1:59

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