Health Savings Accounts (HSAs) are powerful tools that allow you to save for future medical expenses. Plus, they offering significant tax advantages. With a qualified HSA, you can contribute pre-tax dollars, and grow your savings tax-free. Withdrawal of funds are tax-free for eligible medical expenses. However, to unlock these benefits fully, it’s crucial to follow the IRS rules carefully. Missteps can lead to costly penalties, wiping out the advantages you’ve worked so hard to secure.
If you’re looking to maximize your HSA’s potential while staying compliant, here’s what you need to know.
The Dos and Don’ts of HSAs
-
Understanding Health Savings Accounts Withdrawal Rules
One of the great benefits of an HSA is flexibility. You can withdraw from your HSA at any time, and there’s no holding period, unlike other tax-advantaged accounts like Roth IRAs. As long as your withdrawal corresponds with a qualified medical expense, the amount you take out, including any earnings, will be tax-free. This applies to expenses incurred by you, your spouse, or your dependents.
The best part? The timing doesn’t have to align within the same tax year. For example, if you incurred a medical expense several years ago and have the documentation, you can use your HSA funds now to reimburse yourself tax-free for that previous expense.
-
Individual Ownership and Portability
Health Savings Accounts are uniquely yours. Unlike employer-provided benefits like Flexible Spending Accounts (FSAs) or Health Reimbursement Accounts (HRAs), your HSA balance stays with you year after year, regardless of job changes or changes in health coverage. This means that even if you switch to a non-High Deductible Health Plan (HDHP) or retire and move to Medicare, you can still access your HSA funds for qualified medical expenses.
This portability makes the HSA a valuable resource, not only for covering medical expenses now but also as a way to supplement healthcare costs during retirement.
-
No Requirement to “Substantiate” Expenses Before Withdrawal
Unlike FSAs, which typically require immediate substantiation of expenses, HSAs offer more autonomy. You don’t need to submit receipts or prove the medical expense in advance to access your funds. However, it’s essential to keep documentation for each expense in your personal records. In the event of an IRS audit, you’ll need to prove that the distribution was used for qualified expenses. A well-organized system of saving receipts can protect you from potential headaches down the line.
-
No Required Minimum Distributions (RMDs)
Unlike many retirement accounts, HSAs aren’t subject to Required Minimum Distribution (RMD) rules. This means that if you don’t need the funds immediately, you can let your balance continue to grow tax-free, potentially even into your retirement years. This makes the Health Savings Accounts a unique hybrid account—one that can support your medical needs in the near term and be leveraged to supplement healthcare costs later in life, especially as Medicare does not cover all healthcare expenses in retirement.
For married account holders, an HSA can also offer spousal protection. If you pass away, your spouse can inherit the HSA, allowing them to continue making tax-free withdrawals for qualified expenses. However, if someone other than your spouse is named as the beneficiary, the HSA will cease to exist upon your death, and any remaining funds will be distributed to the beneficiary as taxable income.
-
Know the Penalties and Exceptions
Adhering to IRS rules is key to reaping the benefits of your HSA. If you withdraw funds for anything other than qualified medical expenses, you’ll face not only income tax on the distribution but also a hefty 20% penalty. Fortunately, this penalty is waived if you’re 65 or older or if you’re disabled at the time of withdrawal. However, even under these circumstances, non-qualified distributions will still be subject to regular income tax.
To avoid unexpected taxes and penalties, it’s essential to plan your withdrawals carefully. Keeping organized records and understanding what qualifies as a medical expense will help you make the most of your HSA without any financial surprises.
Get Expert Guidance on HSAs
Health Savings Accounts can be a powerful part of your long-term financial strategy, but like all financial tools, they work best when used correctly. If you’re considering an HSA withdrawal or want to maximize your account’s potential, click the link below to download our guide, “Planning for HSA Distributions in 5 Easy Steps,” to navigate the distribution process with ease.
For questions or personalized guidance, contact lead advisor Chris Robinson, ChFC, at 940-464-4104, or book a Free Assessment online at https://RFGWealthAdvisory.com/free-assessment.
RFG Wealth Advisory in Argyle, Texas, is an independent, fee-only Registered Investment Advisor firm that always puts our client’s interests first. We have a transparent, simple fee structure that’s easy to understand. Call us today!
Financial Success Doesn’t Happen by Chance—Let’s Plan It Together!
Investment advice is offered through RFG Wealth Advisory, a Registered Investment Advisor.
