How to Get Money Out of Your HSA Account

Health Savings Accounts (HSAs) are tax-advantaged savings vehicles designed for healthcare expenses. Understanding how to properly access funds from an HSA is important for account holders to maximize benefits and ensure compliance with federal regulations.

Understanding Eligible Withdrawals

Withdrawing funds from a Health Savings Account without incurring taxes or penalties hinges on using the money for qualified medical expenses. The Internal Revenue Service (IRS) defines these expenses as costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, including treatments affecting any part or function of the body. IRS Publication 502 provides a comprehensive list of what constitutes a qualified medical expense.

Common examples of qualified medical expenses include deductibles, copayments, and coinsurance amounts for medical services. Prescription medications, vision care such as eye exams and eyeglasses, and dental treatments like cleanings and fillings are also eligible. Certain long-term care insurance premiums may qualify, with specific limits based on age. Additionally, over-the-counter medications and menstrual care products became eligible expenses after 2019.

However, not all health-related expenses are considered qualified medical expenses by the IRS. Funds from an HSA generally cannot be used for cosmetic surgery unless it’s necessary to correct a deformity resulting from a congenital abnormality, accident, or disfiguring disease. General health expenses, such as gym memberships, childcare costs, or nutritional supplements not prescribed by a doctor, are typically not eligible. Using HSA funds for such non-qualified expenses can lead to significant tax implications, which differ based on the account holder’s age.

Methods for Accessing Funds

Accessing funds from a Health Savings Account involves several common methods designed for convenience and direct payment of medical costs. Many HSA administrators provide a dedicated debit card, which functions similarly to a regular debit card for direct payment at the point of service. This card can be used at healthcare providers, pharmacies, and other medical merchants for eligible expenses, with funds instantly deducted from the HSA balance. Some HSA debit cards also allow cash withdrawals at ATMs, though transaction fees may apply.

Another common approach is the reimbursement method, where account holders pay for medical expenses out-of-pocket and then reimburse themselves from their HSA. This process typically involves logging into the HSA provider’s online portal or app, entering the expense details, and selecting a reimbursement method. Reimbursements can often be transferred directly to a linked personal bank account via electronic funds transfer (EFT) or received as a paper check. There is no specific time limit for requesting reimbursement, as long as the HSA was established before the expense was incurred.

Some HSA administrators also facilitate direct payments to healthcare providers on behalf of the account holder. This option allows the HSA provider to send funds directly to the medical facility or practitioner, simplifying the payment process for larger bills. Additionally, online transfers to linked bank accounts offer flexibility, enabling account holders to move funds from their HSA to a personal checking or savings account for various purposes, including self-reimbursement.

Tax Implications of Withdrawals

The tax treatment of Health Savings Account withdrawals varies significantly depending on how the funds are used and the account holder’s age. When HSA funds are withdrawn and used to pay for qualified medical expenses, the distributions are entirely tax-free and penalty-free. This tax advantage is a primary benefit of HSAs, allowing individuals to pay for healthcare costs with pre-tax or tax-deductible contributions and tax-free withdrawals.

Using HSA funds for non-qualified expenses before the account holder reaches age 65 results in substantial penalties. Such withdrawals are subject to ordinary income tax, meaning the amount withdrawn is added to the individual’s gross income for tax purposes. In addition to income tax, a 20% penalty tax is applied to the non-qualified withdrawal amount. For instance, a $500 non-qualified withdrawal before age 65 would incur income tax plus a $100 penalty.

The rules change once an HSA account holder turns 65 or becomes disabled. At this age, withdrawals for non-qualified expenses are no longer subject to the 20% penalty tax. However, these non-qualified distributions will still be taxed as ordinary income. This flexibility after age 65 allows HSAs to function much like a traditional Individual Retirement Account (IRA), where funds can be used for any purpose, with non-medical withdrawals being taxable but penalty-free. If funds are used for qualified medical expenses even after age 65, they remain both tax-free and penalty-free.

Maintaining Records for Withdrawals

Maintaining records for all Health Savings Account withdrawals is a responsibility for account holders. The IRS requires individuals to keep sufficient documentation to prove that HSA distributions were used exclusively for qualified medical expenses. This evidence is important in the event of an IRS audit, as the account holder is ultimately responsible for substantiating the eligibility of expenses. Without proper records, tax-free withdrawals could be reclassified as taxable income and subject to penalties.

The types of records to retain include receipts for all qualified medical expenses, Explanation of Benefits (EOB) statements from insurance providers, and HSA statements that detail contributions and distributions. Receipts should clearly show the date of service, the nature of the expense, and the amount paid. Some HSA providers offer online portals or apps where users can upload and store digital copies of receipts, which can be a convenient way to organize documentation.

Regarding how long to keep these records, general guidance suggests retaining them for at least three years after the tax return was filed for the year the expense was incurred or reimbursed. Some financial professionals recommend keeping HSA records for seven years, or even for as long as the HSA account remains open, especially if planning to reimburse expenses many years later. This long-term record-keeping strategy supports the flexibility of HSAs, which allow reimbursements for past qualified medical expenses incurred after the account was established, even decades later.