How to Get Money From a Health Savings Account

A Health Savings Account (HSA) is a specialized savings vehicle for healthcare expenses. It typically pairs with a high-deductible health plan (HDHP), allowing individuals to manage medical costs with tax advantages. An HSA has a “triple tax advantage”: contributions are often tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Unlike other health savings vehicles, HSA funds roll over and accumulate year to year, providing a long-term savings option for future healthcare needs.

Accessing Funds for Qualified Medical Expenses

Using HSA funds for qualified medical expenses is the primary and most beneficial way to utilize the account’s tax advantages. The Internal Revenue Service (IRS) defines qualified medical expenses as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any structure or function of the body. This broad definition includes a range of services and products, such as deductibles, copayments, and coinsurance associated with your health plan. Prescription medications, vision care, dental care, and certain over-the-counter medications and menstrual care products are also qualified expenses. For a comprehensive list, refer to IRS Publication 502.

Funds can be accessed through several convenient methods. Many HSA providers issue a dedicated debit card, which functions like a regular debit card for direct payments at a doctor’s office, pharmacy, or dentist. This allows immediate use of tax-free funds. Some HSA custodians also facilitate direct payments to medical providers on your behalf, simplifying payment.

Another common approach is to pay for qualified medical expenses out-of-pocket and then reimburse yourself from your HSA. This strategy can be particularly advantageous as it allows your HSA funds to continue growing tax-free over time. To reimburse yourself, you can typically initiate an online transfer from your HSA to a linked personal bank account, withdraw cash from an ATM using your HSA debit card, or request a check from your HSA provider.

Maintain meticulous records, including receipts and Explanation of Benefits (EOBs), for all qualified medical expense withdrawals. Although you may not need to submit these records to your HSA provider for reimbursement, they are essential for tax purposes if the IRS requires verification. There is no time limit for requesting reimbursement, provided the expense was incurred after your HSA was established.

Withdrawing Funds for Non-Medical Purposes

While HSAs are designed for healthcare expenses, funds can be withdrawn for non-medical purposes, though these distributions carry specific tax implications. If you withdraw funds from your HSA for reasons other than qualified medical expenses before reaching age 65, these amounts are subject to ordinary income tax. Additionally, a 20% penalty typically applies to these non-qualified withdrawals.

The rules for non-medical withdrawals change significantly once the account holder reaches age 65. At this age, withdrawals for non-medical purposes are still subject to ordinary income tax, but the 20% penalty is waived. This provision allows the HSA to function similarly to a traditional individual retirement account (IRA) or 401(k) in retirement, where distributions are taxed as income. The flexibility after age 65 means that HSA funds can serve as a supplementary source of retirement income, even if not used for healthcare costs.

All distributions from an HSA, whether qualified or non-qualified, are reported to the IRS. Your HSA custodian will issue Form 1099-SA, “Distributions From an HSA, Archer MSA, or Medicare Advantage MSA,” detailing distributions made from your account during the year. You are then responsible for reporting these distributions on your tax return using Form 8889, “Health Savings Accounts (HSAs),” to indicate whether the withdrawals were for qualified medical expenses or other purposes.

HSA Funds in Retirement

HSA funds continue to offer significant advantages once the account holder reaches retirement age, typically 65. After this age, funds can still be withdrawn tax-free for qualified medical expenses.

Beyond general medical expenses, HSA funds can be used to pay for certain insurance premiums after age 65. This includes premiums for Medicare Parts B, C (Medicare Advantage plans), and D (prescription drug plans). However, HSA funds generally cannot be used to pay for Medigap (Medicare Supplement) plan premiums. Funds can also be used to pay for qualified long-term care insurance premiums, subject to specific IRS limits that vary by age.

While you can no longer contribute to an HSA once you enroll in any part of Medicare, the funds already accumulated remain accessible. If funds are withdrawn for non-medical purposes after age 65, they become taxable as ordinary income, similar to distributions from a traditional IRA or 401(k), but are not subject to the 20% penalty.

HSA Funds Upon Death

The disposition of HSA funds upon the account holder’s death depends on the named beneficiary. If a spouse is designated as the beneficiary, the HSA can be treated as their own account. The surviving spouse can continue to use the funds for qualified medical expenses on a tax-free basis and can even make additional contributions if they are otherwise eligible. This allows the tax-advantaged status of the HSA to be preserved.

When a non-spousal individual, such as a child or sibling, is named as the beneficiary, the HSA ceases to be an HSA as of the date of the original owner’s death. The fair market value of the account at the time of death generally becomes taxable income to the beneficiary in the year of the account holder’s death. While this distribution is taxable, it is not subject to the 20% penalty that would normally apply to non-qualified withdrawals made by the original owner before age 65.

If no beneficiary is named, or if the named beneficiaries are not living, the HSA funds typically become part of the deceased account holder’s estate. In this situation, the fair market value of the HSA assets is included in the decedent’s final income tax return and is subject to taxation.