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 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 nonspouse 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.
I am an Ed Slott Master Elite trained IRA Specialist and I would like to help you. If you have any questions regarding this article or would like to schedule a complimentary consultation please call my office at 845-627-8300. My Client Service Coordinator Christina will be happy to set up a convenient time so I can help.Warm Regards,
Beth Blecker CEO
Eastern Planning Inc.
Follow Beth Blecker on Twitter: @EasternPlanning
“Ed Slott’s Elite IRA Advisor Group” is solely an indication that the financial advisor has attended training provided by Ed Slott and Company. Ed Slott is not affiliated with Royal Alliance Associates, Inc. Securities and advisory services offered through Royal Alliance Associates, Inc. Member FINRA/SIPC. Additional advisory and financial planning offered through Affiliated Advisors, Inc. Insurance services offered through Eastern Planning Inc. Listed entities not affiliated with Royal Alliance. Reprinted from The Slott Report, 2020, with permission. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Copyright © 2019 Ed Slott and Company, LLC.