Does My HSA Roll Over? How the Funds Carry Over

Health Savings Accounts (HSAs) offer a tax-advantaged way to save for medical expenses. An HSA is a personal savings account designed to help individuals with high-deductible health plans (HDHPs) manage their healthcare costs. These accounts provide a triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and qualified withdrawals are also tax-free.

Understanding HSA Continuity

Unlike Flexible Spending Accounts (FSAs), which typically have a “use-it-or-lose-it” rule, HSA funds do not expire. Any unused balance in an HSA at year-end automatically carries over to the next year for future qualified medical expenses. This continuity means that money contributed to an HSA can accumulate over many years, creating a substantial savings vehicle for healthcare costs. The funds are yours indefinitely, allowing them to grow through interest or investments.

While funds simply “carry over” within the same account, the term “rollover” typically refers to moving funds from one HSA provider to another. Moving funds between HSA providers can be done through a direct trustee-to-trustee transfer or an indirect rollover. A trustee-to-trustee transfer involves the current HSA provider directly sending the funds to the new provider, and there are no limits on how many times this can occur. Conversely, an indirect rollover means you receive the funds yourself and must deposit them into a new HSA within 60 days to avoid taxes and penalties, and this method is limited to one per 12-month period.

Accessing and Managing Your HSA Funds

Individuals can contribute to their HSA through pre-tax payroll deductions offered by employers or direct contributions from a personal bank account. Payroll deductions reduce your taxable income immediately. Direct contributions can also be made post-tax, with the tax savings realized when filing annual income taxes.

Many HSA providers issue a debit card linked to the account for direct payment at the point of service. Alternatively, individuals can pay for expenses out-of-pocket and then reimburse themselves from their HSA, either through online transfers or by requesting a check.

The IRS requires you to keep accurate records of all qualified medical expenses paid with HSA funds in case of an audit. These records should demonstrate that distributions were for qualified medical expenses and were not previously reimbursed or claimed as itemized deductions.

HSA Portability When Changing Situations

An HSA is owned by the individual, not the employer, making it a portable account. This means your HSA remains yours if you change jobs or health plans, and you retain control over the funds for qualified medical expenses regardless of employment status or health coverage.

When transitioning to a new employer, you have several options for your existing HSA. You can choose to leave the funds with your previous HSA provider, continue to use it, and potentially even make contributions if your new health plan is also an HDHP. Another option is to transfer the funds to a new HSA offered by your new employer or a different financial institution. Consolidating multiple HSAs into one account can help simplify management and potentially reduce fees.

Using Your HSA in Retirement

HSA funds can be a valuable resource for healthcare expenses in retirement. Once you reach age 65, the rules for HSA withdrawals become more flexible. Funds can still be withdrawn tax-free for qualified medical expenses, including certain Medicare premiums.

After age 65, you can also withdraw funds from your HSA for non-medical expenses without incurring the 20% penalty that applies to such withdrawals before age 65. However, these non-medical withdrawals will be subject to ordinary income tax, similar to withdrawals from a traditional IRA or 401(k).

While you can no longer contribute to an HSA once you enroll in Medicare, the funds already in your account remain accessible and can continue to grow. This flexibility allows the HSA to serve as an additional retirement savings vehicle, particularly for covering healthcare costs in later life.