The Health Savings Account is one of the most flexible tax deferred accounts available to people in the United States. As long as you have a qualified high deductible health plan, you can have an Health Savings Account. One debate to consider with the Health Savings Account is do you use it for expenses as they are incurred or should you save your receipts for reimbursement later? There are pros and cons to both approaches and we’ve done both in our path to building an $80,000 HSA account, however either way you will need to save your receipts.
How Long Should You Save Receipts?
Scenario 1: If you pay for expenses directly from your HSA, save your receipts for seven years.
Your Health Savings Account will send you a year end tax statement known as form 1099-SA. This form will show all distributions made that the account provider can identify as qualified distributions. The taxpayer then will attest to the distributions being qualified on IRS form 8889, Line 10. The IRS then accepts this attestment unless/until your ta return return is flagged for an audit. The audit will usually occurs in the first three years, with the IRS reserving an additional three year period from the date of filing for what they consider a severe offense. The math of how long you should save your HSA records include the year the expenses were made, three years for the first audit window, and three years for the second audit window. Save the receipts for a total of seven years.
Scenario 2: Save receipts and reimburse yourself later tax free. Save your receipts until reimbursement plus seven years.
The same process as above applies, but your chance of an audit may increase since your distributions jump from zero to a high number in a single year. You will want to keep the same detailed records including a log of the expenses you are reimbursing.
How We Save Receipts:
Here are the four things we do to preserve our Health Savings Account receipts:
Step 1: Physical Copies: We keep physical copies of our HSA receipts in these 2″ pocket envelopes and separate them by year.
Step 2: Electronic Copies: I scan and save each receipt in PDF format and save it to our computer. We use an older model of this HP Laserjet Multifuction machine and the ability to scan multiple pages has made our life easier. It is important to scan your receipts in (or take a picture of them) since some receipts are printed on thermal paper and will fade over time.
Step 3: Google Drive: We utilize the Google Drive attached to our Gmail account and backup all of the HSA files from our computer into the Google Drive.
Step 4: Google Sheets: Inside the same folder on Google Drive, we create a Sheet that includes a running total of all expenses incurred and we know how much we can withdraw from our Health Savings Account.
Other Health Savings Account Resources:
Fidelity Investments: We moved our HSA account to Fidelity this year. They do not charge any maintenance fees for the account, assisted me with the rollover process from my old employer, allow us access to no cost index funds, and issued us two debit cards for use. If it were not for the high-fee employer plan driving me to not save HSA receipts back in 2017, we would probably have closer to $100,000 inside our Health Savings Account.
Internal Revenue Service Publication Library: The IRS uses this consolidated page to link to all of their publications related to the Health Savings Account and Qualified Medical Plans
HSA – The Ultimate Retirement Account (Mad Fientist): This was the original article in the Financial Independence space explaining the how the HSA receives a “triple tax advantage” and is superior to all other tax deferred accounts.
How To Use Your HSA for College (Frugal Engineers): Kim combined research relating to the Federal Application for Student Aid (FASFA) with some tax research and pointed out distributions from an HSA account are “double-blind”. Unlike distributing out contributions from a Roth IRA distributions from a Health Savings Account will not be counted against a child applying for financial aid. She encourages families to think of HSA receipts as “future college tuition vouchers”.
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