HSA for America

HSA Record Keeping:
How to Keep the IRS
Off Your Back

April 2, 2007
Vol. 3, Issue 3

When you withdraw money from your HSA to pay for a qualified medical expense, you do not have to pay any taxes on that withdrawal.  You can withdraw money any time, and there is nobody who "approves" your withdrawal before you take it.  But you do need to maintain accurate records in case the government ever wants to tax you on that money.

The Triple Tax Savings of Health Savings Accounts

Health Savings Accounts offer a triple tax advantage.  First, any money you put into the HSA is 100% tax deductible, as an "above-the-line" deduction found on line 25 of the 2006 IRS Form 1040. Secondly, any money in the account grows tax-deferred, just like an IRA.  And the third tax advantage, offered by no other investment opportunity, is that withdrawals are tax-free if they are used to cover qualified medical expenses.

You have until April 16 to make your 2006 contribution.  A deposit can be made for up to $2,700 for individuals in 2006 ($2,850 in 2007), and $5,450 for families ($5,650 in 2007).  If you had an HSA in 2006, your contribution limit is pro-rated based on the number of months you had the plan.

There are no deadlines for when withdrawals must take place.

Take Advantage of the Tax-Deferred Growth

Because your investment in an HSA grows tax-deferred, it will grow much more rapidly than a taxable investment.  As an example, an investment of $5,000 per year in a tax-free account that earns a 15% rate of return will be worth $2,173,725 in 30 years.  If the earnings are taxed each year at a rate of 28% Federal income tax and 5% state income tax, your money will only be worth $822,470.

Smart investors understand that the best strategy is to maximize your HSA contribution and minimize any withdrawals.  If you do incur out-of-pocket medical expenses, your best option is to take the money from somewhere else to pay that bill.  But - and this is very important - save your receipts, because you can reimburse yourself from your HSA at a future date.  As long as you can show that the withdrawal is going to cover a qualified medical expense that occurred after you opened your HSA (even one that occurred 25 years previously!), you will owe no taxes on that withdrawal.

Whatcha Gonna Do With All That Money?

On the Long's Strange Trip, Chitwan, Nepal

Before our son was born, Christie and I took a year off to travel around the world.  We made it to Mexico, Peru, Morocco, Egypt, Turkey, Greece, India, Nepal, Thailand, and Bali, and cataloged the experience on a website,  When we first started pondering the idea and where we wanted to go, my initial thought was "everywhere!"  But I quickly realized what a big world it is, and how short a period a year really is.

So we want to get out there and do it again.  About the time Wiley graduates from college we'll be in our early 60's, and just may be ready to hang out on a deserted island in the South Pacific for a few months.  Or maybe it'll be Paris, Prague, or who knows where.  In any case, I expect the money in our HSA will provide the additional financial security that will allow us to make this happen.

I've been maximizing my HSA contributions, investing the money in mutual funds, and not withdrawing anything.  For all the medical expenses I've incurred, I've been stuffing the receipts in a folder called "Unreimbursed Medical Expenses".

Keep Track of Which Expenses You've Reimbursed

When you make a withdrawal from your HSA, the HSA custodian will generate a 1099-SA that shows the amount of the distribution.  You will then need to reflect that distribution on your 1040 and complete Form 8889.  If the distribution is for medical expenses, it will not be taxable income.

Though my strategy above is perfectly sound, I can just imagine the look on an IRS agent's face when I bring in a shoebox full of 20 year old medical receipts that justify the $50,000 I withdraw from my HSA when I'm ready to reimburse myself.  So I've recently decided to get a little more organized.

There are several medical bill management software programs now available.  I am now using an online service called MedBillManager.  It will help you keep track of what bills have been paid, what's owed, and when it's due - it is invaluable just to make sure that you are not being over-billed.  But even more important for the topic we're discussing, this service will keep track of what expenses are reimbursable from your HSA, and whether or not you have made that withdrawal.

We will continue to introduce you to ways you can save money and maximize the benefits you get from having an HSA.  Please keep in touch, and let me know how your HSA is benefiting you.


To your health and wealth!

Wiley Long
President - HSA for America

P.S. - Next month we'll announce our Member Benefits page, where you can find ways to lower your costs on prescription drugs, lab costs, hospital bills, and more.

P.S.S. - As an HSA owner, be part of the change in health care.  Demand price transparency, and shop your medical services.  Let your friends know about Health Savings Accounts, how low your insurance premium is, how much you save on your taxes, and how much your account will be worth when you retire.  As thousands of people begin asking simple questions like "how much does it cost" and "can I get a better value somewhere else," medical service providers will have to respond.  The result will be lower costs and better service for all.


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Fort Collins, CO 80524
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