How to Take Money Out of Your HSA

A Health Savings Account (HSA) provides a tax-advantaged way to save for healthcare expenses. These accounts are specifically designed for individuals covered by a high-deductible health plan (HDHP), offering a means to manage current and future medical costs. This article explores the rules and procedures involved in accessing funds from an HSA, guiding account holders on how to withdraw money effectively and compliantly. Understanding these guidelines helps ensure funds are utilized to their maximum benefit.

Understanding Qualified Medical Expenses

Withdrawing funds from a Health Savings Account without incurring taxes or penalties requires that the money be used for “qualified medical expenses” as defined by the Internal Revenue Service (IRS). These expenses generally include costs for the diagnosis, cure, treatment, mitigation, or prevention of disease, or for the purpose of affecting any structure or function of the body.

Common examples of qualified medical expenses include doctor visits, prescription medications, hospital care, and ambulance services. Dental care, such as cleanings, X-rays, fillings, and even orthodontics, also qualifies. Vision expenses like eye exams, prescription eyeglasses, contact lenses, and even laser eye surgery are covered. Many over-the-counter medications and menstrual products are also eligible.

Beyond these more common categories, HSAs can cover various other expenses. This includes items like crutches, hearing aids, fertility treatments, and even smoking cessation programs, provided they are for medical purposes. Qualified medical expenses do not include health insurance premiums, though there are exceptions for long-term care insurance, COBRA, and certain premiums for those aged 65 and over.

Tax Implications of HSA Withdrawals

Understanding the tax implications of HSA withdrawals is important for avoiding unexpected costs. When funds are withdrawn from an HSA and used for qualified medical expenses, the distributions are entirely tax-free and penalty-free. This tax advantage applies as long as the expenses were incurred after the HSA was established and were not reimbursed from another source or taken as an itemized deduction.

However, if funds are withdrawn for non-qualified expenses before the account holder reaches age 65, these distributions become subject to income tax. In addition to regular income tax, a 20% penalty tax is imposed on the withdrawn amount. For instance, a $500 non-qualified withdrawal could incur a $100 penalty, plus the applicable income tax.

There are exceptions to this 20% penalty, such as withdrawals made due to disability or after the account holder’s death. Upon reaching age 65, the rules become more flexible. Individuals can withdraw funds for any purpose without incurring the 20% penalty. While withdrawals used for non-qualified expenses after age 65 are still subject to ordinary income tax, those used for qualified medical expenses, including certain Medicare premiums, remain tax-free.

Methods for Accessing HSA Funds

Accessing funds from your Health Savings Account can be done through several methods, depending on your HSA provider. One common and direct way to use HSA funds is through a dedicated HSA debit card. This card functions much like a regular debit card and can be used at the point of sale for qualified medical expenses at doctor’s offices, pharmacies, or online. Some providers may limit debit card transactions to medical merchants.

Another approach is to pay for medical expenses out-of-pocket and then reimburse yourself from your HSA. This method offers flexibility, allowing you to pay with a personal credit card or cash and later transfer the equivalent amount from your HSA to your personal bank account. The reimbursement process involves logging into your HSA provider’s online portal or mobile app, entering the expense details, and selecting a reimbursement method, such as an electronic funds transfer. Many providers allow online transfers to a linked bank account.

Some HSA providers offer the option to order checks. These checks can be used to pay healthcare providers directly or to reimburse yourself by writing a check to your personal account. HSA debit cards can be used at ATMs to withdraw cash for eligible expenses, though transaction fees may apply.

Record Keeping for HSA Withdrawals

Maintaining records for all Health Savings Account withdrawals is important for compliance with IRS regulations. Account holders are responsible for proving that distributions were used exclusively for qualified medical expenses. These records serve as evidence in case of an IRS audit.

Documents to retain include receipts and invoices for medical services and products. These should detail the expense amount, date of service, and what was covered. It is also advisable to keep Explanation of Benefits (EOB) statements from your health insurance carrier, as these document services covered under your high-deductible health plan and confirm that expenses were not reimbursed by other sources.

While some HSA providers offer tools for digital receipt storage, the responsibility for record-keeping rests with the account holder. Organizing these records, whether physically or digitally, by date or expense type can simplify the process. Proper documentation ensures that tax-free withdrawals are justified and helps avoid potential penalties if the IRS questions the eligibility of an expense.