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Planning For HSA Distributions in 5 Easy Steps Thumbnail

Planning For HSA Distributions in 5 Easy Steps

A Health Savings Account is a tax-advantaged medical savings account that helps people pay for qualified out-of-pocket medical expenses. What are the withdrawal rules for HSAs? Are there special considerations that must be taken into account?

From understanding withdrawal rules to analyzing special considerations, here are 5 easy steps you can employ to help you plan out your HSA distributions.

1. Withdrawals can be taken at any time. There is no holding period like with Roth IRAs. The entire withdrawal (including any earnings) is tax-free as long as there is a corresponding qualified medical expense. The medical expense must be incurred by either the owner or her spouse or dependents. Additionally, the medical expense does not need to occur in the same taxable year as the withdrawal. Instead, the medical expense must simply occur before the withdrawal is made.

2. HSAs are owned by the individual. That means the balance carries over year-to-year and also stays with the individual, even if she changes jobs or health coverage. If someone is no longer covered by a qualified High Deductible Health Plan, she can still take distributions from the HSA. This includes individuals covered by Medicare.

3. Unlike flexible spending accounts or health reimbursement accounts, an individual does not need to “substantiate” a medical expense before withdrawal. That means an individual does not have to provide receipts or other proof that a qualified medical expense has incurred before accessing the account. However, the individual should retain documentation in the event of an IRS audit.

4. HSAs are not subject to the Required Minimum Distribution rules, and there is no requirement that the monies be used on current medical expenses. This means HSA funds can remain in the account over the life of the owner and be used to supplement Medicare coverage during retirement years. Finally, if an HSA account is passed to a spouse, the spouse beneficiary can continue to take withdrawals on the same tax-free basis. If a non-spouse beneficiary is named, the HSA ends on the date of death.

5. Know the rules! The penalty for not following the rules is stiff. Not only does the entire distribution become subject to income tax, but it is also subject to a 20% penalty. The penalty is waived if the HSA owner is age 65 or older or disabled at the time of the distribution. However, the distribution is still treated as taxable income. Distributions are reported to the account owner and the IRS using IRS Form 1099-SA.

By Christian Cordoba
Founder, California Retirement Advisors

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Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment advisor. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.