The U.S. medical care system is really messed up, but the Health Savings Account (HSA) is a great vehicle to use if it is available to you.  In order to have an HSA, you have to have a high-deductible health insurance plan.

The Health Savings Account allows you to contribute pre-tax money into an account and use that money for eligible medical expenses.  It is somewhat similar to a 401k except it is supposed to be for medical expenses instead of general retirement.

In addition, some employers will make a contribution to your HSA, somewhat similar to a 401k plan.  Unlike a Flexible Spending Account (FSA), an HSA plan carries forward.  If you don’t use any of the money in a particular year, it stays in your account.

You can technically spend your HSA money on anything, but it will negate any tax benefits.  You will owe income taxes on non-qualified expenditures.

A Strategy for Growing Your HSA

There is a small segment of people out there, including a few financial advisors, who will suggest that you not use any of your HSA money while you are working and earning money.  Instead, you should keep all of your medical receipts and keep growing and investing the money that is in your HSA account, which will grow tax-free.

When it comes time to retire or when you really need the money, you can then redeem your money with all of the receipts you have saved.  If you have $30,000 in medical receipts over the course of 20 years, you can then withdraw $30,000 tax free as long as you have the receipts to show for it.

This is a strategy that is commonly employed in the FIRE (Financial Independence Retire Early) community.

Personally, I am not a fan of this strategy for multiple reasons.  I’m not saying it is a disaster if you are currently doing it, but I do want to warn about a few things.

Are You Maxing Out Your HSA and 401k?

If you are not maxing out your pre-tax accounts, there is no point in doing this strategy.  Actually, there is only downside to doing it.

If you can legally contribute more to your pre-tax accounts each year – particularly your HSA – then it doesn’t make sense to not claim your medical expenses now.  Why would you not claim $1,000 in medical expenses while still being able to contribute another $1,000 per year to your HSA?

You are better off getting reimbursed now through your HSA and maxing out your contributions.  If you are not maxing out your HSA contributions, then there is no tax advantage to saving your medical receipts to get reimbursed in the future.  It is just complicating things.

A 401k is not as accessible as an HSA, but you really should be maxing out your contributions to a 401k too before you consider deferring HSA reimbursement.

A Bird in the Hand

If I find an old receipt, the print is often faded.  After 10 years or so, how do you know you’ll be able to read what is on the receipt?  If you can’t read it, then you can’t document it to the IRS.  You could end up in a situation where you can’t get reimbursed for some of the qualified medical expenses that you did have.

Maybe you are really organized and have scanned all of your medical receipts.  Even here, it is possible that you could lose a file or a file gets corrupted.  If they are stored on a home computer and not in the cloud, you are always at risk of a fire or some other damage.  The same holds true for paper receipts.

Plus, just the organization of it all sounds like a nightmare.  You have to have really great organization skills to track receipts for many years and not lose them.

Other Factors

There are other problems that come to mind with this whole strategy.  Do you really want to wait for 20 or 30 years and then claim, say, $50,000 or more in medical expenses?  This sends up smoke signals to the IRS to be audited.  You are almost begging to be audited, and then you will have to prove out $50,000 in receipts for one year.

Meanwhile, if you were spending something like $1,500 per year on average in medical expenses using your HSA card, it would not be nearly as burdensome if you were audited the following year.  It wouldn’t be as big of a deal if you couldn’t prove some of the expenses.  Also, it would be much easier to possibly retrieve a receipt for something that just happened in the last two years or so.

Another factor is that it is just easier when you go to the doctor’s office to pay with your HSA card and to save the receipt.  Again, if you are going to save receipts for many years or decades to be reimbursed later, you need exceptional organizational skills.

If you aren’t maxing out your pre-tax accounts, there is no point to this strategy, as discussed above.  If you are maxing everything out, you are probably in a position where you don’t need this headache anyway.  Just take the money now.  If you still want to invest it, put it in a regular brokerage account.  You won’t get the tax benefit with your investment returns, but you will have easy access to your money, which isn’t always the case with a 401k plan.  And you don’t have to use it for medical expenses.

In order to employ this strategy of saving your receipts to get reimbursed in the distant future, you should have a strong cash flow outside of pre-tax accounts while also maxing out contributions to your pre-tax accounts.  Most people aren’t in this position.

If you are in this position, you are already doing extraordinarily well.  Why give yourself these possible headaches for the possibility of a few extra tax-free bucks?