Can I Withdraw Money From HSA for Personal Use?

A Health Savings Account (HSA) serves as a tax-advantaged savings vehicle specifically designed for healthcare costs. Individuals must be covered by a high-deductible health plan (HDHP) to be eligible to contribute to an HSA. This account offers a unique triple tax advantage: contributions are tax-deductible, the funds grow tax-free, and withdrawals are tax-free when used for qualified medical expenses. HSAs provide a way to save for future healthcare needs while potentially reducing current taxable income.

Understanding Qualified Medical Expenses

Funds withdrawn from an HSA are tax-free and penalty-free only if they are used for qualified medical expenses. The Internal Revenue Service (IRS) defines these expenses as costs primarily for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.

Common examples of qualified medical expenses include payments for doctor visits, hospital stays, prescription medications, and certain over-the-counter drugs when prescribed. Dental care, including cleanings, fillings, and orthodontics, also qualifies. Vision care, such as eye exams, contact lenses, and eyeglasses, is covered.

Certain insurance premiums can also be qualified medical expenses. These include:

• Premiums for long-term care insurance.
• COBRA health coverage.
• Healthcare coverage while receiving unemployment compensation.
• Medicare Part A, B, D, and Medicare HMO premiums for individuals aged 65 or older.

Consequences of Non-Medical Withdrawals

Withdrawing funds from an HSA for purposes other than qualified medical expenses carries significant financial consequences. Such distributions are subject to federal income tax, as the money was originally contributed and grew tax-free.

In addition to income tax, a 20% penalty applies to non-qualified distributions. This penalty is imposed because the funds are being used outside the intended healthcare purpose for which they received tax benefits. For example, if $1,000 is withdrawn for personal use, $200 would be assessed as a penalty, in addition to the income tax due on the $1,000.

There is an exception to the 20% penalty for individuals who are age 65 or older or those who become disabled. In these circumstances, the 20% penalty is waived. However, any withdrawals not used for qualified medical expenses are still subject to ordinary income tax, even if the penalty does not apply.

Tax Reporting for HSA Distributions

HSA custodians, such as banks or financial institutions, report all distributions from an HSA to the account holder and the IRS on Form 1099-SA, “Distributions From an HSA, Archer MSA, or Medicare Advantage MSA.” This form indicates the total amount of money withdrawn from the account during the calendar year. Individuals receive this form by January 31st of the following year.

When filing federal income tax returns, individuals must report their HSA distributions on Form 8889, “Health Savings Accounts (HSAs).” This form requires you to calculate the portion of your HSA distributions that were used for qualified medical expenses and the portion that was not. This calculation determines the taxable amount and any applicable penalty.

It is the individual’s responsibility to maintain records of all medical expenses to substantiate that HSA distributions were used for qualified purposes. Without proper documentation, the IRS may consider the distributions non-qualified, leading to unexpected taxes and penalties. Accurately completing Form 8889 ensures proper reporting of HSA activity to the tax authorities.