I just turned 65.
You should be aware that premiums you pay for Medicare Parts A, B, C and D (but not other parts) are qualified medical expenses that you can reimburse yourself for out of your HSA.
Is there any reason to start using HSA funds sooner than my above plan?
I will point out that when leaving an HSA account to a non-spouse beneficiary, the account ceases to be an HSA, and is distributable as taxable income to the beneficiary immediately. (It can be used to pay qualified medical expenses for the original owner for up to 12 months after their death.) So you may not want to just leave the account sitting forever without claiming prior expenses, as it could be quite a tax hit to the beneficiary. In comparison, IRAs are allowed to be distributed to non-spouse beneficiaries over 10 years. So that could be a reason to use HSA funds before IRA funds.
So if I use the funds for medical purposes, it is NOT taxed as ordinary income.
Close - if you use the HSA funds for qualified medical expenses, the withdrawals are tax-free. Not all medical expenses are qualified. For instance, if you already got a tax break on expenses through an FSA, you can’t claim those expenses again. And medical insurance premiums, other than COBRA, while you are on unemployment, or the Medicare premiums noted above, are generally not qualified medical expenses. The same with medical expenses for any years that you took a Schedule A deduction on your tax return, since you already got a tax break on those. You may also need to check multiple versions of IRS Pub 502 to confirm what qualified medical expenses are, if you are claiming medical expenses for prior years. That’s because what qualifies as medical expenses has changed from year to year, and you need to be sure that what you are claiming for prior years actually was a qualified medical expense in that year.
How is it taxed if used for **non-**medical purposes?
There, fixed that for you. When used for expenses that are not qualified medical expenses, it’s taxed as ordinary income, just like a Traditional IRA withdrawal.
And finally, can I wait until I am older and my taxable account is dwindled further and then withdraw the funds to reimburse myself for decades of medical expenses I’ve been paying out of my taxable account?
Yes, as long as the expenses are qualified, were incurred after you first opened and funded the HSA, and you have documentation of the medical expenses for those prior years.
AJ