How to Get Money Out of an HSA Account

A Health Savings Account (HSA) functions as a tax-advantaged savings account for qualified healthcare expenses. It offers a unique triple tax advantage: contributions are often tax-deductible, funds grow tax-free, and withdrawals for eligible medical expenses are also tax-free. This financial tool provides a way to save and pay for current and future medical costs while potentially reducing one’s taxable income. Understanding how to access and utilize these funds is important for maximizing HSA benefits.

Understanding Eligible Expenses

The Internal Revenue Service (IRS) defines what constitutes an eligible medical expense for HSA purposes. These are costs paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for treatments affecting any part or function of the body. Expenses must primarily alleviate a physical or mental defect or illness, not merely benefit general health. For instance, cosmetic procedures or general health supplements like vitamins are not eligible.

Common healthcare services and products qualify, including doctor visits, prescription medications, dental care, and vision care. Other examples include chiropractic care, acupuncture, hospital services, laboratory fees, and certain over-the-counter medications and menstrual care products. Health insurance premiums are not considered a qualifying medical expense, except for COBRA or long-term care insurance premiums. For a comprehensive list, consult IRS Publication 502.

Methods of Accessing HSA Funds

HSA funds can be accessed through several methods, allowing flexibility in paying eligible medical expenses. The most common method uses an HSA-specific debit card, similar to a standard bank debit card. This card can be used directly at the point of service, such as a doctor’s office, pharmacy, or even online, for eligible medical purchases. Payments made with the HSA debit card are instantly deducted from the account balance.

Another approach is reimbursement, where an individual pays for an eligible medical expense out-of-pocket and then seeks reimbursement from their HSA. To do this, one submits a claim to their HSA administrator, providing documentation such as receipts, proof of payment, the date of service, and provider information. Funds can then be transferred from the HSA to a linked personal bank account, or a check may be issued. Expenses must have been incurred after the HSA was established to be eligible for reimbursement.

HSA providers also offer online bill pay or direct payment features. This allows account holders to pay medical providers directly from their HSA account via the administrator’s online portal or mobile application. This method streamlines the payment process, especially for larger medical bills, and can bypass daily debit card transaction limits. Individuals can also withdraw cash from an ATM using their HSA debit card for reimbursement of eligible expenses.

Documentation and Record Keeping

Maintaining thorough records for HSA transactions is necessary for compliance and IRS verification. Although many HSA administrators do not require submission of receipts for every transaction, the account holder is responsible for proving the eligibility of any expense in case of an audit. The IRS requires individuals to keep records demonstrating that distributions were exclusively for qualified medical expenses.

Records should include receipts, invoices, and Explanation of Benefits (EOBs) statements from insurance providers. Prescription records can also be important for substantiating medication expenses. Organize these documents, physical or digital, and retain them for at least as long as tax returns are subject to audit, which can be several years. This diligent record-keeping ensures that all withdrawals are properly justified and helps avoid tax complications.

Consequences of Ineligible Withdrawals

Using HSA funds for non-eligible medical expenses carries significant financial ramifications. If funds are withdrawn for non-eligible purposes before the account holder reaches age 65, the amount withdrawn becomes subject to income tax. This means the distribution is treated as regular taxable income for the year.

In addition to income tax, a 20% penalty is imposed on the non-eligible withdrawal amount if the account holder is under 65. For example, a $500 ineligible withdrawal would incur a $100 penalty, plus the amount would be added to taxable income. These rules ensure the tax-advantaged nature of HSAs is utilized solely for covering qualified healthcare costs. After age 65, the 20% penalty is waived, but non-eligible withdrawals are still subject to ordinary income tax.