Spend Your Tax-Free Dollars Wisely
If you have taken the first step and started contributing tax-free money to your health savings account to save for future medical expenses, youâ€™re likely wondering - what next?
In order for your funds to remain tax-free, you have to spend them according to the IRS tax code. This means you should only use HSA funds for qualified medical expenses.
Penalties for Non-qualified HSA Expenses
It can be tempting to withdraw funds from your HSA for purposes other than qualified expenses. If you take this route, be prepared for a large tax bill. All funds withdrawn for non-qualifying expenses before the age of 65 are subject to a 20% tax penalty.
Once you turn 65, you may withdraw funds for any reason. Funds used for qualified medical expenses remain tax-free. Funds use for any other reason are taxed as retirement income.
Am I Required to Use My HSA Funds by a Certain Time?
No - there is nothing on the books that requires you to use the money in your HSA at all. Any money left in your HSA at the end of the year continues to roll over and continue earning interest. If you choose to pay out of pocket for medical expenses without making a withdrawal from your HSA, that is perfectly fine. Your money will continue to grow tax-free.
You can reimburse yourself at any time for qualified expenses. Some prefer to do this once a year while others prefer to do this after each incurred expense. You can choose not to use your HSA at all, which makes for a nice retirement fund in the future.