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?

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, 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.