Do HSAs Have Required Minimum Distributions?

A Health Savings Account (HSA) offers a tax-advantaged way to save for healthcare expenses, often serving as a component of long-term financial planning. Many individuals consider these accounts for their triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. A common question, particularly for those planning for retirement, is whether HSAs are subject to Required Minimum Distributions (RMDs), similar to other retirement accounts. This article will clarify the rules surrounding HSA distributions, including what happens to these accounts after the account holder’s death.

Required Minimum Distributions Explained

Required Minimum Distributions (RMDs) are mandatory annual withdrawals from certain tax-deferred retirement accounts once individuals reach a specific age. The primary purpose of RMDs is to ensure taxes are eventually paid on contributions and earnings that have grown tax-deferred. These distributions are generally taxed as ordinary income, adding to the account holder’s taxable income for the year.

RMD rules apply to various retirement vehicles, including traditional Individual Retirement Arrangements (IRAs), Simplified Employee Pension (SEP) IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, and most employer-sponsored plans such as 401(k)s, 403(b)s, and 457(b) plans. For individuals who turn 72 after 2022, RMDs typically begin in the year they reach age 73. This requirement aims to prevent indefinite tax deferral on retirement savings.

HSA Distribution Rules

Health Savings Accounts are distinct from traditional retirement accounts: they are not subject to Required Minimum Distribution rules. Account holders are not mandated to withdraw funds at any particular age, allowing the money to remain invested and potentially grow tax-free indefinitely. This flexibility provides a unique advantage for long-term healthcare savings.

Funds withdrawn from an HSA for qualified medical expenses are always tax-free, regardless of the account holder’s age. Qualified medical expenses encompass a wide range of healthcare costs, including doctor visits, prescription medications, dental work, vision care, and even certain insurance premiums like those for long-term care, COBRA, or Medicare premiums for individuals aged 65 and older. There is no time limit for taking a withdrawal for qualified medical expenses incurred after the account was established.

Distributions from an HSA for non-qualified expenses are treated differently depending on the account holder’s age. If a non-qualified withdrawal occurs before age 65, the amount is subject to ordinary income tax and an additional 20% penalty. However, once the account holder reaches age 65, non-qualified distributions are only subject to ordinary income tax, with the 20% penalty waived. This allows HSAs to function much like a traditional IRA in retirement, providing a source of income after age 65, with tax implications for non-medical withdrawals.

Managing HSAs After Account Holder Death

Upon the death of an HSA account holder, the disposition and tax treatment of funds depend on the designated beneficiary. It is important to name a beneficiary to ensure the account is handled according to the owner’s wishes and to potentially avoid the complexities of probate. The rules vary significantly for spousal versus non-spousal beneficiaries.

If the surviving spouse is designated as the beneficiary, the HSA can be seamlessly transferred into their name, maintaining its tax-advantaged status. The spouse can then use the account as their own, continuing to make tax-free withdrawals for qualified medical expenses and benefiting from its tax-free growth. This transfer does not trigger any immediate tax liability or RMD-like requirements for the spouse.

For non-spousal beneficiaries, the HSA ceases to be an HSA as of the date of the original account holder’s death. The fair market value of the account at the time of death becomes taxable income to the non-spousal beneficiary in the year of death. While this distribution is subject to income tax, it is not subject to the 20% penalty that applies to non-qualified withdrawals made by living account holders under age 65. A non-spousal beneficiary may reduce the taxable amount by using funds to pay for the deceased account holder’s qualified medical expenses that were incurred before death and are paid within one year of death. If no beneficiary is designated, the HSA funds typically become part of the deceased’s estate, and the entire balance is included as taxable income on the deceased’s final tax return.