HSA vs HELOC Dilemma Solved

Last night, during the “quiet your mind” part of yoga class, I came to an epiphany about how to solve our HSA vs HELOC dilemma (good thing I’ve never been able to quiet my mind during that part of the class).  

When we first set up the HSA, we were planning to use it primarily as a long-term investment account, and we still planned to pay medical expenses out of pocket, while maxing out the HSA each year and rolling the money over from one year to the next, watching it grow.   We did plan to take money out to pay for childbirth, but that was it.   Then my husband hurt his knee last summer, and all of a sudden we needed to ramp up our contributions to make sure we had enough to pay our deductible so that he could get his knee fixed.   But since we’ve had the goal of not taking money out of the HSA firmly in our mind, we had been paying smaller medical expenses throughout the year, out of pocket, without reimbursing ourselves from the HSA.   I had been keeping the receipts just in case, because the law allows you to withdraw money from an HSA any time after a medical expense occurs – even years in the future – as long as you have receipts to prove the charges.

So this morning I sat down and looked at our medical expenses from this year.   Between my husband’s lipoma surgery last spring, and some dental fillings that we had, we incurred $1666 in medical expenses this year, which we had paid from our regular checking account.   So I transferred that amount from our HSA to our checking account.   Then I transferred $1900 from our checking account to our HSA, bringing our total contributions for the year to $5400.   Next week, when I get paid from my library job, I’ll transfer another $250 to the HSA, and we will have maxed out that account for 2007.   So we’ll get the full allowable tax deduction for HSA contributions.   And the $1666 that I transferred to our checking account can go back into our HELOC, since we already paid for the medical services.

The beautiful thing about an HSA is that in effect, we’re getting a first dollar tax deduction on our medical expenses this year.   In the past, before we had an HSA, we were limited by the 7.5% rule, where we could only deduct medical expenses that exceeded 7.5% of our income.   So that $1666 we spent this year wouldn’t have gotten us a deduction at all.   But since we have the HSA and we put money in it, we’re allowed to deduct everything we put in (up to $5650), and then take out as much as we spent on medical expenses.   I am so glad that we decided to switch our health insurance last winter!!!