Spending HSA Funds: From a Financial Advisor

Health savings accounts (HSAs) can be a good savings vehicle that people rarely ask about distributions, or how to take money out without it being taxed. They’re too focused on putting money in—as they should be while they’re healthy and working.

In 2025, a person with an HSA (not enrolled in Medicare) can contribute up to $4,300 for themselves. For a family, the limit is $8,550. If the person is 55 or older, they can add another $1,000.

The funds going in are tax-deductible, and the earnings are not taxable in the year earned. The money comes out tax-free if used for qualified medical expenses. Hence, the moniker “triple tax-free” sometimes attached to HSAs.

HSAs are usually the last account people use because of the tax benefits. However, it’s not wise to wait until the end. If there are funds left in the account when you die, they will be fully taxable in one year for a non spouse beneficiary. This is true except for any money used to pay the deceased's medical bills within one year of death.

Fortunately (or not, I guess), it’s easy to rack up medical expenses after age 65, in the form of Medicare premiums if nothing else. A person not subject to the IRMAA will pay $185 per month in Part B premiums in 2025.

They could take out $2,220 from their HSA at the end of the year. This money would pay them back for all the premiums taken from their monthly Social Security check during the year. If they also had unreimbursed, out-of-pocket costs for other qualified medical expenses, these could be paid out of the HSA as well.

HSA distributions are tax-free if used for qualified medical expenses for yourself, your spouse, or your dependents. These expenses usually qualify for the medical and dental expenses deduction in IRS Publication 502. This includes unreimbursed costs for doctors, dentists, and hospitals.

Insurance premiums generally won’t qualify for tax-free HSA distributions unless the premiums are for:

●      Medicare for someone age 65 or older—but NOT Medigap premiums

●      Long-term care insurance

●      COBRA

●      Health care coverage while receiving unemployment compensation under state or federal law

An early retiree who leaves their job cannot use HSA funds to pay for insurance premiums. This applies if they are not yet eligible for Medicare. This is only possible if the insurance is under COBRA.

Because COBRA is expensive, marketplace insurance, especially with subsidies, would probably be a better deal—but HSA funds could not be used to pay those premiums. Again, there should be plenty of opportunities to use HSA funds later in retirement.

HSA distributions do have to be reported using Form 8889. If all distributions are used for qualified medical expenses, there will be no tax.

Sources:

https://hmlink.co/reader.aspx?a=ar-spending-hsa-funds

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.