Does an HSA Have Required Minimum Distributions?

Health Savings Accounts (HSAs) serve as a tax-advantaged savings vehicle specifically designed for healthcare expenses. These accounts offer a unique combination of tax benefits, including tax-deductible contributions, tax-free growth, and tax-free withdrawals when used for qualified medical expenses. For individuals planning their financial future, particularly those approaching retirement, a common question arises regarding whether HSAs are subject to Required Minimum Distributions (RMDs), which apply to many other retirement savings accounts.

Understanding Required Minimum Distributions

Required Minimum Distributions (RMDs) represent the minimum amounts that individuals generally must withdraw annually from their retirement accounts. These distributions typically apply to various types of retirement accounts, including traditional Individual Retirement Arrangements (IRAs), Simplified Employee Pension (SEP) IRAs, Savings Incentive Match Plans for Employees (SIMPLE) IRAs, 401(k)s, 403(b)s, and 457(b) plans.

The age at which RMDs generally begin has seen changes over time. Under current law, for those turning age 73 in 2023 or later, RMDs typically commence at age 73. This age will further increase to 75 for individuals who turn 74 after December 31, 2032, as part of the SECURE Act 2.0. Owners of Roth IRAs, however, are not subject to RMDs during their lifetime. It is important to note that Health Savings Accounts are explicitly exempt from these Required Minimum Distribution rules.

HSA Distributions in Retirement

Account holders retain significant flexibility in how and when they utilize their funds, particularly in retirement. Distributions from an HSA remain entirely tax-free at any age, provided they are used for qualified medical expenses. This feature makes HSAs a valuable tool for managing healthcare costs during retirement.

Qualified medical expenses encompass a broad range of healthcare costs that retirees commonly incur. These include deductibles, co-insurance, and co-pays associated with health plans. Notably, once an account holder reaches age 65, HSA funds can also be used to pay for Medicare Part A, Part B, and Part D premiums, as well as Medicare Advantage plan premiums, all on a tax-free basis. Additionally, long-term care insurance premiums, dental care, vision care, and prescription medications are generally considered qualified expenses. However, premiums for Medigap policies are typically not eligible for tax-free HSA distributions.

While contributions to an HSA must cease once an individual enrolls in Medicare, the accumulated funds remain accessible and continue to grow tax-free. Should funds be withdrawn for non-qualified expenses after the account holder reaches age 65, these distributions become subject to ordinary income tax. However, the 20% penalty that would normally apply to non-qualified withdrawals before age 65 is waived once the account holder turns 65. This allows for greater flexibility, treating the HSA somewhat like a traditional IRA in terms of taxation for non-medical withdrawals in later life.

HSA Beneficiary Designations

Upon the death of an HSA account holder, the disposition of the funds depends on the designated beneficiary. If the account holder names their spouse as the beneficiary, the HSA can be transferred to the surviving spouse’s name. The spouse can then continue to use the account as their own HSA, maintaining all the tax benefits, including tax-free withdrawals for qualified medical expenses. This provides a seamless transition of healthcare savings.

Alternatively, if a non-spousal beneficiary, such as a child or another relative, inherits the HSA, the account ceases to be an HSA as of the original account holder’s date of death. In this scenario, the fair market value of the account becomes taxable income to the non-spousal beneficiary in the year of the account holder’s death. This distribution is not subject to the 20% penalty. The taxable amount can be reduced if the beneficiary uses a portion of the funds to pay for any qualified medical expenses incurred by the deceased account holder prior to their death, provided these expenses are paid within one year of death. If no beneficiary is designated, the HSA funds typically go to the deceased’s estate, becoming taxable income to the estate.