Do I Lose My HSA Money at the End of the Year?

Health Savings Accounts (HSAs) are tax-advantaged savings accounts designed to help individuals pay for healthcare costs. A common question among those considering or currently using an HSA is whether the funds disappear at the end of the year. Unlike some other benefit accounts, money held in an HSA generally rolls over from year to year, providing a distinct advantage for long-term healthcare planning.

Understanding HSA Carryover

HSA funds are not subject to a “use-it-or-lose-it” rule; unused balances remain available for future medical expenses. This feature applies indefinitely, allowing funds to accumulate. The account is owned by the individual, so funds remain accessible even if employment or health plans change.

HSA funds can often be invested once they reach a threshold, allowing for tax-free growth. This investment potential, combined with the carryover, makes HSAs useful for saving for immediate and future healthcare needs, including retirement.

HSA Versus Other Accounts

HSAs are often compared with Flexible Spending Accounts (FSAs). Both offer tax advantages for healthcare expenses, but their rules differ significantly regarding unused funds. FSAs are typically subject to a “use-it-or-lose-it” policy, where most unspent money is forfeited at the end of the plan year. Some FSA plans may offer limited grace periods or a small carryover, but these are exceptions and more restrictive than HSA carryover.

HSAs offer long-term savings potential, allowing funds to accumulate and grow, unlike FSAs, which are generally short-term. The primary difference is the contrast between HSA rollover and FSA forfeiture.

Permitted HSA Spending

HSA funds do not expire, so understanding their permissible uses is important. Funds can be withdrawn tax-free for qualified medical expenses, including a broad range of services and products. Examples include deductibles, copayments, prescription medications, dental care, vision care, and certain over-the-counter items. The IRS provides guidance on qualified medical expenses.

Before age 65, using HSA funds for non-qualified expenses incurs income tax and a 20% penalty. After age 65, funds can be withdrawn for any purpose without the 20% penalty, though non-medical withdrawals are subject to income tax. If used for qualified medical expenses, withdrawals remain tax-free at any age.

HSA Eligibility and Contributions

HSA eligibility requires coverage under a high-deductible health plan (HDHP). An HDHP must meet specific deductible and out-of-pocket maximum requirements. Other criteria include not being enrolled in Medicare or claimed as a dependent.

Contributions can be made by the individual, an employer, or both, up to IRS annual limits. These contributions are tax-deductible, even for those who do not itemize deductions. Individuals aged 55 and older can make an additional “catch-up” contribution.