Page 199 - TaxAdviser_2022

Table 1: Comparison of after-tax cumulative returns from investing $1,000 for ten years
Table 1: Comparison of after-tax cumulative returns from investing $1,000 for 10 years
in an investment that produces annual ordinary income realizations
in an investment that produces annual ordinary income realizations
$1,000 reimbursed 1/1/22 from $1,000 paid personally on
the HSA, then invested outside the 1/1/22, leaving $1,000 invested
HSA within the HSA

Pretax annual earnings rate 2% 6% 12% 2% 6% 12%

Panel A: 20% marginal tax rate

After-tax return rate 1.6% 4.8% 9.6% 2% 6% 12%

#### $ 2,500.95
$ 1,172.03
After-tax investment at 12/31/31 $ 1,172.03 $ 1,598.13 $ 2,500.95 $ 1,218.99 ######## ########
######## $ 1,790.85 $ 3,105.85
Cumulative after-tax 10-year return 17.2% 59.8% 150.1% 21.9% 79.1% 210.6%

Additional after-tax return by delaying
HSA reimbursement 4.7% 19.3% 60.5%

Panel B: 40% marginal tax rate

After-tax return rate 1.2% 3.6% 7.2% 2% 6% 12%

########
########
########
After-tax investment at 12/31/31 $ 1,126.69 ######## $ 2,004.23 $ 1,218.99 $ 1,790.85 $ 3,105.85
######## $ 1,424.29
$ 2,004.23
Cumulative after-tax 10-year return 12.7% 42.4% 100.4% 21.9% 79.1% 210.6%
Additional after-tax return by delaying
HSA reimbursement 9.2% 36.7% 110.2%

Medicare Part A, B, C, or D coverage the 10-year after-tax effects of two ways outside the HSA) are assumed to pro-
and long-term health care costs.4 of using the HSA: (1) paying the $1,000 duce interest or short-term capital gain
medical bill personally, requesting reim- income that is reinvested annually and,
Quantified benefits of the bursement of the $1,000 from her HSA, if invested outside the HSA, are subject
strategy and investing the $1,000 reimbursement to two possible marginal tax rates (20%

Let us assume that in December 2021 check outside the HSA, and (2) paying and 40%).
a taxpayer receives a $1,000 medical bill the $1,000 medical bill using existing Table 1, Panel A, shows that, facing a
for a recent outpatient procedure. She after-tax investment funds that do not 20% marginal tax rate, after 10 years, the
maintains an HDHP and possesses both require gain recognition to access, and investment outside the HSA increases
a $5,000 balance in her HSA and suf- leaving $1,000 invested within the HSA in value by 17.2%, 59.8%, and 150.1%
ficient after-tax investment funds with with annual earnings realizations. with respective annual pretax returns of
which to pay the bill. She expects the Table 1 shows the results of this 2%, 6%, and 12%. However, if the funds
same risk and return from the HSA in- comparison across three possible pretax are invested within the HSA, the 20%
vestment that she would obtain from the rates of return (2%, 6%, and 12%). In the annual tax does not apply. Thus, the
non-HSA investment. Let us compare table, the investments (either inside or annual pretax returns of 2%, 6%, and

4. Details of the B and G computations can be viewed here.

www.thetaxadviser.com April 2022 29