Can I Withdraw Money From My HSA Account?

A Health Savings Account (HSA) serves as a tax-advantaged savings vehicle designed to help individuals cover qualified medical expenses. This account is typically paired with a high-deductible health plan (HDHP), making it a popular choice for managing healthcare costs while benefiting from tax incentives. Contributions to an HSA are tax-deductible, investment earnings grow tax-free, and withdrawals for eligible medical expenses are tax-free, offering a “triple tax advantage.” This structure allows account holders to build a dedicated fund for healthcare, which can be useful given the higher out-of-pocket costs associated with HDHPs.

Understanding Qualified Medical Expenses

To ensure tax-free withdrawals, funds from an HSA must be used for what the IRS defines as “qualified medical expenses.” These are costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any structure or function of the body. Common examples include doctor visits, prescription medications, dental care, and vision care, such as eyeglasses and contact lenses. Certain insurance premiums also qualify, including COBRA premiums, Medicare Parts A, B, and D premiums (but not Medigap), and long-term care insurance premiums within age-based limits.

It is important that these expenses are incurred only after the HSA was established. Non-prescription over-the-counter medications and menstrual products are also qualified medical expenses. Maintaining detailed records, such as receipts, for all qualified medical expenses is important, as the IRS may require proof during an audit. These records show that distributions were for eligible medical expenses and not reimbursed or claimed as itemized deductions.

Tax Consequences of Non-Qualified Withdrawals

Withdrawing HSA funds for expenses not considered qualified medical expenses carries financial repercussions. Non-qualified withdrawals are subject to ordinary income tax. A 20% penalty tax is also imposed on the amount withdrawn if the account holder is under age 65. For example, a $1,000 non-qualified withdrawal by someone under 65 would incur both income tax and a $200 penalty.

Examples of non-qualified expenses include general living costs, vacations, or non-medical retail purchases. Once the account holder reaches age 65 or becomes disabled, the 20% penalty tax no longer applies. However, withdrawals for non-qualified expenses are still subject to ordinary income tax, even after age 65.

How to Access Your HSA Funds

Accessing HSA funds for qualified medical expenses varies by HSA provider. Many HSA administrators issue a debit card linked directly to the account, usable at the point of sale for eligible expenses. This provides immediate access to funds for covered medical costs.

Another method is requesting a check from the HSA administrator, mailed to the account holder or directly to a healthcare provider. Account holders can also initiate online transfers to a linked personal bank account, allowing them to pay for expenses out-of-pocket and then reimburse themselves from the HSA. Regardless of the method chosen, retaining receipts and documentation for any expenses paid from the HSA is essential.

Reporting HSA Withdrawals

Tax compliance for HSA distributions requires specific reporting to the IRS. HSA administrators issue Form 1099-SA, “Distributions From an HSA, Archer MSA, or Medicare Advantage MSA,” to account holders by January 31st each year. This form details the total amount of all withdrawals made from the HSA during the tax year.

Account holders must report these distributions on Form 8889, “Health Savings Accounts (HSAs),” filed with their federal income tax return, typically Form 1040. On Form 8889, the taxpayer indicates how much of their distributions were used for qualified medical expenses versus non-qualified expenses. This distinction determines the taxable portion of the withdrawal and if any penalties apply. While receipts are not submitted with the tax return, they must be kept with tax records for at least three years in case of an audit.