How to Take Money Out of an HSA Account

A Health Savings Account (HSA) serves as a tax-advantaged savings and spending account. It combines benefits similar to a traditional savings account with tax advantages for qualified medical expenses. An HSA functions as a means to pay for immediate healthcare needs and as an investment vehicle, allowing funds to grow over time. This dual functionality makes it a flexible tool for current and future health-related financial planning.

Understanding Qualified Medical Expenses

To ensure tax-free withdrawals from an HSA, funds must be used for qualified medical expenses as defined by the Internal Revenue Service (IRS). These expenses generally include costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any structure or function of the body. These expenses must be incurred after the HSA was established.

Common examples of qualified medical expenses encompass a wide range of services and products. These include doctor visits, prescription medications, and hospital services. Dental care, such as cleanings, fillings, braces, and extractions, along with vision care including eye exams, eyeglasses, and contact lenses, are eligible.

Beyond routine care, items like acupuncture, ambulance services, artificial limbs, crutches, and hearing aids also qualify. Over-the-counter medications and feminine hygiene products became eligible expenses after 2019. Certain expenses, such as weight-loss programs or air purifiers, may require a letter of medical necessity from a physician. Consult IRS Publication 502 for a comprehensive list of qualified medical expenses.

Methods for Accessing Your Funds

Accessing funds from your Health Savings Account (HSA) involves several methods. Many HSA providers issue a dedicated debit card. This card can be used directly at the point of sale for medical services, pharmacy purchases, or other eligible items, with funds instantly deducted from your HSA balance.

Another common method for accessing funds is through online transfers. Most HSA administrators offer secure online portals where you can initiate transfers from your HSA to a linked personal bank account. This is particularly useful for reimbursing yourself for out-of-pocket medical expenses you may have paid previously with a personal credit card or checking account. Some HSA providers also offer the option to write checks directly from your HSA. This provides a traditional payment method for healthcare providers or for self-reimbursement.

In situations where you pay for an eligible medical expense out-of-pocket, you can later reimburse yourself from your HSA. This can be done even if you didn’t have sufficient funds in your HSA at the time the expense was incurred, as long as the expense occurred after your HSA was established. The process typically involves logging into your HSA account online, logging the expense, and selecting a reimbursement method, such as an electronic transfer to your bank account or a check.

Tax Implications of Withdrawals

When funds are withdrawn from an HSA to pay for qualified medical expenses, these distributions are tax-free. This tax-free nature applies regardless of the account holder’s age, making HSAs a valuable tool for managing healthcare costs throughout life.

However, if HSA funds are withdrawn for purposes other than qualified medical expenses, they are considered taxable income. For individuals under age 65, non-qualified withdrawals are also subject to an additional 20% penalty. For instance, a $1,000 non-qualified withdrawal for someone under 65 could result in $200 in penalties plus ordinary income tax on the full amount.

Upon reaching age 65, the tax rules for HSA withdrawals change. While withdrawals for qualified medical expenses remain tax-free, the 20% penalty for non-qualified withdrawals is waived. At this age, if funds are withdrawn for non-medical expenses, they are taxed as ordinary income, similar to distributions from a traditional IRA. This flexibility allows HSAs to function more broadly as a retirement savings vehicle, though using them for qualified medical expenses offers the maximum tax benefit.

Maintaining Records for Withdrawals

Maintaining accurate records for all Health Savings Account (HSA) withdrawals is important. The Internal Revenue Service (IRS) requires documentation to prove distributions were used for qualified medical expenses. This record-keeping is important in the event of an IRS audit to substantiate tax-free withdrawals.

Detailed records should include medical bills, receipts from healthcare providers and pharmacies, and Explanation of Benefits (EOB) statements from your insurance company. For over-the-counter purchases, retain sales receipts.

While there is no specific official IRS guidance on how long to keep HSA records, it is generally advised to retain them for at least three years after filing your tax return for the year the expense was paid or reimbursed. Some recommend keeping records for seven years to be extra cautious, aligning with the period the IRS may look back in certain situations. Organizing these records, whether through physical files or digital storage, can simplify the process of verifying expenses if ever requested by the IRS. Many HSA providers also offer online tools to help track expenses and upload receipts, which can be a convenient organizational strategy.