How to avoid penalties on an HSA withdrawal | BRI | Benefit Resource (2024)

FAQs

How to avoid penalties on an HSA withdrawal | BRI | Benefit Resource? ›

The only way to fully avoid all penalties is to only use HSA withdrawals to make eligible purchases.

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.

If you contribute too much money to an HSA during the year, you may have to pay a tax penalty. You can avoid a penalty on excess contributions by withdrawing them before the tax deadline.

The ultimate loophole available to almost everyone under the age of 65 in our tax code is the Health Savings Account (HSA). It is the only account you can contribute to and deduct the contribution and then withdraw the money tax free. Think about that, a tax deduction going in and no taxes going out.

Does HSA spending trigger an audit? The IRS doesn't monitor how you spend your HSA funds throughout the year, but that doesn't mean they won't ask for proof that your expenses were eligible. And if your tax return contains unrelated IRS audit red flags, your risk for an HSA audit could increase.

If you take a non-qualified distribution, you are subject to ordinary income tax on the distribution and a 20% penalty tax. The penalty may not apply: if you are age 65 or older, if you are disabled or.

If you discover you accidentally paid for something other than a qualified medical expense from your HSA, you may repay the mistaken distribution prior to filing your federal taxes for the tax year of the mistake.

Use the 13-month rule to make up for lost time

You can contribute the full amount to your HSA if you meet the following conditions: Enroll in an HSA-eligible HDHP before December 1st of the given year. Maintain that HDHP coverage through December 31st of the following year, for a total of 13 months.

If you take an HSA withdrawal for non-medical reasons and you're not yet 65, you'll be taxed on the money you remove from your account. You'll also face a 20% penalty on the sum you remove. Ouch. That's double the penalty for taking an early IRA or 401(k) plan withdrawal.

If you have money in your HSA when you turn 65, you can spend it on anything you want — but if you aren't spending it for a qualified medical expense, it will be taxed as income at your then current tax rate.

How does IRS know what you spend HSA on? ›

Verification of expenses is not required for HSAs. However, total withdrawals from your HSA are reported to the IRS on Form 1099-SA. You are responsible for reporting qualified and non-qualified withdrawals when completing your taxes.

Online Transfers – On HSA Bank's member website, you can reimburse yourself for out-of-pocket expenses by making a one-time or reoccurring online transfer from your HSA to your personal checking or savings account. Online Bill Pay – Use this feature to pay medical providers directly from your HSA.

There's no deadline for HSA reimbursem*nts

There are lots of reasons to love your HSA, and here's one more — you can reimburse yourself for expenses years after they occurred. According to the IRS, there is no time limit for paying yourself back, but there are some rules (we'll explain more below).

Because HSA administrators don't track the purchases employees make with their HSA, employees should make it a habit to save receipts for all HSA-eligible goods and services, so they can easily reimburse themselves when they are ready, or when they need the money.

Always save your receipts and supporting documentation for your records. While Benefit Resource will not ask you to provide a receipt for an HSA expense, you are responsible for maintaining documentation of account use in the event that you are ever audited by the IRS.

HSAs grow tax-free.

This makes HSAs a great tool to save money for the long-term, including for retirement. As you contribute money over the years you won't be hit with tax bills along the way, so you can continue building up a nest egg for later in life.

Your HSA can also function as a backup emergency fund, letting you withdraw tax-free cash when you really need it. You can only do this if you delay reimbursing yourself for previous medical expenses you paid out of pocket for. This allows you to withdraw a larger amount of money at a later time.

Funds in a State Savings Bank HSA can be accessed like any other account; you may order checks or a debit card, use bill pay, or withdraw cash from an ATM to pay for your qualified medical expenses.