No. of Recommendations: 1
I understood your plan. Where we differ--and differences are what make a market--is that I consider withdrawing to pay for incidentals, whether currently or accumulated into a single larger withdrawal, being money no longer available for use on major expenses, to be suboptimal.
It is all the same money, right? Let's say you retire early (which I mostly did, with some addition earned income), in that case ACA subsidies are based on MAGI which includes IRA/401k withdrawals, Social Security, capital gains, interest and dividends, and Roth conversions, but does NOT include HSA withdrawals. So having available HSA dollars from incidentals can save many thousands in taxes/lost subsidies. That means I have more money for major expenses, not less.
Similarly, HSA withdrawals from incidentals don’t trigger NIIT and importantly do not affect IRMAA. Again, potentially saving many thousands in taxes. HSA withdrawals also don't trigger Social Security taxes up to 85% of SS if you exceed "provisional income."
It gets better. Many retirees live on capital gains. HSA withdrawals from incidentals don't affect capital gains tax brackets.
Then to your point about major expenses, under the ACA the maximum out of pocket (if I understand the rules correctly) is $17,000. I'm not Medicare-eligible so I haven't looked deeply into the rules, but if you have a Medigap plan the OPP is $7,450, but there might be drug costs above that, I don't know. So that's about as big as the major expenses are. Anything more than that is gravy.
But bottom line, it is all the same money. The IRS doesn't care if I use the HSA to pay for a trip to Aruba or for colonoscopy. The major medical expenses in retirement are more or less capped.
