Can You Pull Money Out of Your HSA?

A Health Savings Account (HSA) is a tax-advantaged savings account for individuals with a High-Deductible Health Plan (HDHP). It allows you to set aside money on a pre-tax basis for qualified medical expenses. Funds contributed to an HSA are not subject to federal income tax and can grow tax-free. You can withdraw money from your HSA, offering a flexible way to manage healthcare costs.

Using Funds for Qualified Medical Expenses

HSA funds can be withdrawn tax-free for qualified medical expenses. The Internal Revenue Service (IRS) defines these as costs for diagnosis, treatment, or prevention of disease, and for treatments affecting any body function. Examples include doctor visits, prescription medications, dental care, vision care, and certain over-the-counter medicines. This tax-free withdrawal applies to expenses for yourself, your spouse, and your dependents, even if they are not covered under your specific HDHP.

Maintain detailed records and receipts for all medical expenses paid with HSA funds. This documentation demonstrates that withdrawals were used for qualified medical expenses during an IRS inquiry. Without proper substantiation, tax-free withdrawals may be challenged, potentially leading to taxes and penalties. The funds in an HSA roll over year to year and do not expire, allowing for long-term savings for future healthcare needs.

Understanding Non-Qualified Withdrawals

While HSAs offer significant tax advantages for qualified medical expenses, withdrawing funds for non-qualified purposes carries financial implications. If HSA funds are used for expenses that do not meet the IRS definition of a qualified medical expense, the withdrawn amount becomes subject to ordinary income tax.

In addition to income tax, a 20% penalty applies to non-qualified withdrawals made before the account holder reaches age 65. For instance, a $1,000 non-qualified withdrawal would incur a $200 penalty on top of the income tax owed. Once the account holder turns 65, the 20% penalty is waived, but withdrawals for non-qualified expenses are still subject to ordinary income tax. At this age, an HSA functions similarly to a traditional retirement account, where distributions are taxable if not used for qualified medical expenses. Unlike some traditional retirement accounts, HSAs do not have Required Minimum Distributions (RMDs), offering continued flexibility in managing funds.

Methods for Accessing HSA Funds

HSA funds can be accessed through several methods provided by custodians. A common method is a dedicated HSA debit card. This card functions like a regular debit card, allowing direct payment for qualified medical expenses at the point of service, such as a pharmacy or doctor’s office.

Account holders can also use online transfers or bill pay features from their HSA provider. This allows electronic transfers to a personal bank account or direct payment of medical bills to healthcare providers. Many individuals choose to pay for qualified medical expenses out-of-pocket and then reimburse themselves later from their HSA. This strategy requires meticulous record-keeping of receipts to substantiate the reimbursement.

For larger expenses or lump-sum withdrawals, direct distributions can be requested from the HSA custodian. This involves submitting a request form to receive a check or a direct deposit into a linked bank account. Regardless of the method chosen, the HSA custodian will issue IRS Form 1099-SA, which reports all distributions from the account for the tax year.