![]() ![]() Otherwise, your withdrawals will be subject to income taxes and a 20% penalty.Īccording to the IRS, qualified medical expenses are “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body.” You must spend your HSA money on qualified medical expenses. If you withdraw your HSA money for something other than qualified medical expenses, it will be subject to income tax only. At that point, your HSA operates much like a retirement account. The HSA withdrawal rules change once you reach age 65. “However, if you use it for nonqualified expenses before age 65, you’ll pay income tax and a 20% penalty.” “If you use the money for qualified medical expenses, it’s tax-free every time,” said Greg O’Brien, a certified public accountant and co-CEO of the CPA firm Anomaly. As long as you follow that rule, you can enjoy continued tax benefits. ![]() Your HSA money is meant to be used for qualified medical expenses for you, your spouse or your dependents. Withdrawing your HSA funds is straightforward. In other words, they reduce your taxable income for the year and help you lower your tax bill. Your HSA contributions are tax-deductible. Your contribution limit increases by $1,000 if you’re 55 or older. In 2023, you can contribute up to $3,850 with an individual HDHP or $7,750 with a family HDHP. There’s also a limit to how much you can contribute to your HSA each year. In 2023, an HDHP is a health plan with a deductible of $1,500 or more for an individual or $3,000 or more for a family. You can contribute to an HSA only if you have a high-deductible health plan. The IRS limits who can contribute to an HSA and how much. But you must understand the contribution and withdrawal rules upfront. How does an HSA work?Īn HSA offers serious benefits to those who are eligible to open one. Some HSAs let you invest your money, including in mutual funds or exchange-traded funds, as you would in a retirement account. ![]() The money in your HSA doesn’t have to sit there and stagnate until you spend it. “You can grow your account over time and take it with you if you leave your current job.” “What makes HSAs unique is that the money is yours to keep, so your unused balance rolls over from year to year,” said Kathryn Bakich, a health compliance practice leader and senior vice president at the human resources and employee benefits consulting firm Segal. Your contributions, investment growth and withdrawals are all tax-free. What is a health savings account (HSA)?Īn HSA is a savings account that lets you set aside money to pay for qualified medical expenses. Furthermore, only those expenses that exceed 7.5% of the taxpayer's adjusted gross income (AGI) can be deducted.Complete the questionnaire and match with an advisor for a free, no-obligation call. Only those who itemize their deductions are eligible to claim any medical expenses on Schedule A. Taxpayers with access to group health insurance coverage are seldom able to deduct medical expenses that are not reimbursed on their taxes. They can also include any other services that your health insurance will not cover, such as glasses, crutches, and wheelchairs.
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