HSA Withdrawal Rules to Know

Health Savings Accounts (HSAs) offer a tax-advantaged way to save for medical expenses, but understanding the withdrawal rules is crucial to maximizing their benefits. An HSA allows you to set aside pre-tax dollars for qualified medical expenses, providing a financial cushion for healthcare costs. However, to fully leverage this tool, it’s important to know when and how you can withdraw funds without incurring penalties or taxes. Let’s take a closer look at the HSA withdrawal rules to keep in mind.

If you need help applying these rules to your unique situation, then a financial advisor can help you create a streamlined plan for your HSA funds.

What Is a Health Savings Account (HSA)?

Before we jump into the HDA withdrawal rules, let’s talk about what an HSA is. An HSA is a health savings account. The purpose of the account is to help you save on medical costs. Although the funds generally aren’t available to cover a health insurance premium, most other medical-related expenses are allowed.

The catch with an HSA is that you can’t open this account unless you have a high-deductible health plan (HDHP). Most HDHPs only provide a small amount of coverage until you meet your deductible. When you have an HDHP, an HSA is a tax-savvy way to save for potential medical expenses.

HSA Withdrawal Rules

As a practical matter, you are allowed to withdraw funds from your HSA at any time for any reason. But if you aren’t using the funds to cover a qualified medical expense, then you’ll be stuck paying a penalty tax. Here’s a closer look at the HSA withdrawal rules.

Qualified Medical Expenses

You can withdraw funds from your HSA at any time to cover qualified medical expenses, which are listed below. The amount you can withdraw in a given year varies based on your medical costs.

An HSA withdrawal is the last tax perk in the string of three tax advantages offered through this account. When you pull out funds from your HSA for any qualified medical expense, you won’t have to pay any taxes on the withdrawal.

Other Distributions

Unfortunately, life doesn’t always go as planned. If you need to make a withdrawal from your HSA for something other than a qualified medical expense, there’s a penalty to consider. Any HSA withdrawal you make without a qualified medical expense will be subject to income taxes. In addition to the income tax, you’ll have to pay an additional 20% tax on the withdrawal.

The taxes you pay on an unqualified HSA withdrawal will add up quickly. With that, it’s best to hold off on pulling funds out of your HSA for any other reason than a qualified medical expense. Luckily, there are a few exceptions to this rule, which we cover below.

What If I’m Retired?

The HSA withdrawal rules change a bit when you turn 65. At that point, you can withdraw funds from your HSA without an extra penalty. That’s true even if you use the funds for something other than a qualified medical expense. You will still have to pay taxes on withdrawals made for something other than a qualified medical expense. When you make a withdrawal from an HSA, the funds will count towards your income for the year. With that, you’ll just pay regular taxes on the withdrawals.

The same rules apply if you become disabled. The funds can be withdrawn without an extra penalty. But you’ll still have to pay regular income tax on withdrawals made for anything other than a qualified medical expense.

Also, once Medicare kicks in, you can use it for certain expenses, such as Part B premiums and Part D prescription drug coverage. That also includes supplemental policy premiums (Medigap) but only for retirees over age 65 with an employer-sponsored health plan. Alternatively, HSA funds may partially cover the cost of a long-term, tax-qualified car insurance policy. Or, if you are 65 or older, your funds may go towards nonqualified medical costs. However, this last option forfeits some of your tax advantages.

What If I’m Laid Off?

Usually, you can’t use HSAs for private health insurance premiums. However, you can use them if you are using them to pay for health insurance coverage that is part of an employer-sponsored plan through COBRA. Your funds may also cover premium costs if you receive unemployment compensation. This works at any age.

What Counts as a Qualified Medical Expense?

You don’t have to pay taxes on withdrawals made for qualifying medical expenses. So, it’s pretty important to be clear on what counts as a qualified medical expense.

Here’s a look at what counts:

Payments made to a doctor, dentist, surgeon, chiropractor, psychiatrist or psychologist
Physical examinations
Artificial teeth
Bandages
Birth control pills
Breast pump
Cost of improvements to your home designed to accommodate a condition
Contact lenses
Fertility treatments
Drug addiction treatments
Guide dog
Lead-based paint removal
Long-term care
Wheelchair
Weight-loss programs diagnosed by a physician

Although this is not a comprehensive list, it should give you an idea of what you can consider a qualified medical expense. If you have questions about a particular medical expense, then consider talking to a financial advisor for more clarification.

What Doesn’t Count as a Qualified Medical Expense?

While many medical costs can be covered by Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), not all expenses qualify. Understanding what doesn’t count as a qualified medical expense can help you avoid unexpected out-of-pocket costs and ensure compliance with IRS regulations.

Childcare
Controlled substances
Cosmetic surgery
Hair removal
Funeral expenses
Dancing lessons
Nutritional supplements
Household help
Insurance premiums
Gym membership dues

Some of the items on this list might seem healthcare-related. However, according to the IRS, these are not qualified medical expenses. If you make a withdrawal from your HSA for any of these expenses, the withdrawal will be subject to income tax and an additional 20% tax.

Bottom Line

Understanding HSA withdrawal rules is crucial for anyone looking to maximize the benefits of their Health Savings Account. These accounts offer a tax-advantaged way to save for medical expenses, but knowing how and when to withdraw funds is key to avoiding unnecessary penalties. By understanding these withdrawal rules, you can make informed decisions that optimize your financial health both now and in the future.

HSA Tips

An HSA can be a nice addition to your savings plan. But navigating the withdrawal rules is easier with the help of a qualified financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you invest through your HSA, look out for the fees. Don’t let fees limit your HSA’s full potential.