What to Do With Leftover HSA Money?

Health Savings Accounts (HSAs) offer tax advantages for covering medical expenses, but many people accumulate unused funds over time. Whether due to lower-than-expected healthcare costs or a change in insurance plans, knowing how to maximize the remaining balance is essential.

There are several ways to make the most of leftover HSA money, from covering qualified medical expenses to investing and planning for retirement. Understanding these options helps avoid unnecessary taxes and penalties while ensuring savings continue to grow.

Rollover Mechanics

Unlike Flexible Spending Accounts (FSAs), which often have a “use-it-or-lose-it” policy, HSAs allow funds to roll over indefinitely, growing tax-free. There is no requirement to spend the money within a specific timeframe, making HSAs a long-term financial tool.

HSA funds remain with the account holder even if they change employers, switch health insurance plans, or retire. Contributions made by an employer also belong to the employee without restrictions.

Consolidating multiple HSAs into a single account simplifies management and reduces fees. The IRS allows tax-free rollovers from one HSA to another once every 12 months. A trustee-to-trustee transfer, which does not count toward the rollover limit, can be done an unlimited number of times. A rollover requires withdrawing funds and redepositing them into another HSA within 60 days to avoid taxes and penalties.

Using Funds for Eligible Expenses

HSA funds cover a broad range of qualified medical expenses as defined by the IRS, including medical services, prescription medications, and certain over-the-counter drugs. Dental and vision care, such as eyeglasses, contact lenses, and dental procedures, also qualify.

Beyond routine healthcare, HSAs can pay for medical equipment like wheelchairs and hearing aids, as well as home modifications if medically necessary. Mental health services, including therapy and psychiatric care, are eligible, as are alternative treatments like acupuncture and chiropractic care when prescribed by a licensed provider.

For Medicare enrollees, HSA funds can be used for premiums related to Medicare Part B, Part D, and Medicare Advantage plans, but not Medigap policies. Long-term care insurance premiums are covered up to IRS-defined limits, which increase with age.

Investment Opportunities

HSAs can also function as investment vehicles with tax advantages. Once a certain balance threshold is met—typically $1,000 to $2,500, depending on the provider—funds can be invested in stocks, bonds, mutual funds, or ETFs. Investment gains within an HSA are not subject to capital gains tax, making it a valuable tool for long-term savings.

Investment strategy depends on financial goals and healthcare needs. Those expecting frequent medical expenses may prefer a conservative approach, keeping more funds in cash or low-risk bonds. Others who can leave the money untouched for years may opt for a more aggressive portfolio with a higher allocation to equities. Some providers offer target-date funds that adjust asset allocation based on a retirement timeline.

HSAs provide a triple tax advantage: contributions reduce taxable income, investment earnings grow tax-free, and withdrawals for qualified medical expenses are not taxed. For those who have maxed out other retirement accounts, an HSA can serve as an additional savings tool. Paying medical expenses out of pocket while allowing HSA investments to grow enables tax-free reimbursements later, provided proper records are kept.

Handling Non-Medical Withdrawals

Withdrawing HSA funds for non-medical purposes results in a 20% penalty plus regular income tax. This makes it more costly than withdrawing early from a 401(k) or IRA. However, after age 65, the penalty no longer applies, though non-medical withdrawals are still subject to income tax.

If an account holder mistakenly uses HSA funds for a non-qualified expense, they must repay the amount before filing that year’s tax return to avoid penalties. Failure to correct the mistake can lead to IRS scrutiny. Keeping detailed records of all HSA transactions helps prevent tax complications.

Post-Retirement Options

At age 65, an HSA can serve as a supplemental financial resource. Funds can be withdrawn for any purpose without a penalty, though non-medical withdrawals remain taxable. This makes an HSA similar to a traditional IRA or 401(k), with the added benefit of tax-free withdrawals for medical expenses. Given rising healthcare costs in retirement, maintaining a well-funded HSA helps cover Medicare premiums, long-term care, and out-of-pocket medical expenses.

Unlike traditional retirement accounts, HSAs do not have required minimum distributions (RMDs), allowing retirees to keep funds invested and growing tax-free. Prioritizing HSA withdrawals for medical costs while deferring other taxable income sources can be a tax-efficient strategy. Retirees with years of accumulated medical receipts can reimburse themselves tax-free at any time, provided they kept proper documentation.

Transfer or Inheritance Provisions

HSA funds do not disappear upon the account holder’s death. If a surviving spouse is named as the beneficiary, the HSA transfers to them and retains its tax-advantaged status. The spouse can continue using the funds for medical expenses and making contributions if they are enrolled in a high-deductible health plan (HDHP).

If the beneficiary is someone other than a spouse, the HSA loses its tax-advantaged status, and the full balance becomes taxable income to the recipient in the year of the account holder’s death. This can create a significant tax burden, especially if the balance is large. Some account holders choose to spend down their HSA funds in retirement or use them for medical expenses before passing. Alternatively, leaving the HSA to an estate or charity may be a more tax-efficient option, depending on the individual’s financial situation.