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How to Cash Out a Health Savings Account

by Mark Saga

  • Overview

    The Internal Revenue Service allows people to establish Health Savings Accounts (HSAs) in which they can put money tax free to pay for health care bills. It is actually a trust account, run by a bank or an insurance company, or anyone approved to be a trustee by the IRS. Money is easy to withdraw, but unless it is for a legitimate medical expense, the government charges a stiff penalty.
 

  • Step 1

    Know what the fines are for distributions not related to health care costs. The IRS will charge a 10 percent penalty for withdrawals not related to medical bills. Moreover, that money will be subject to regular income taxes at the end of the year, so do not take this step lightly.

  • Step 2

    Use your trustee provided debit card to withdraw funds to pay for legitimate medical expenses. Usually, you determine before it is issued just where you can use it, like your local clinic or pharmacy. The card will not work to buy groceries or other non-medical items. If you want to add another venue to the card, contact your trustee.

  • Step 3

    Call your trustee and have it, the bank or the insurance company, send you a distribution. You can use the funds for anything, but the trustee is obligated to report all distributions to the IRS, and if you use the money for purposes other than health care, you will pay a penalty.

  • Step 4

    Allow your health care provider to submit bills to the trustee so that deductions are made almost automatically. Or, submit a form and a receipt for your medical expense to the trustee.

  • Step 5

    Save your receipts so you can prove to the IRS what you spend the distributions on. If the funds were used on medical bills, no taxes will be due and no penalties will be charged. The IRS does not require that you send it the bills, only that you keep them in your records in case of an audit.

  • Step 6

    File form 8889 at the end of the year with your taxes if you used the HSA during the year, whether putting funds in or taking them out. You need to file even if your employer added funds for you. If you have two HSAs, you need to file two forms 8889. The form asks you to indicate what you spent funds from the account on during the last year. This paperwork is part of the price you pay for being able to use the funds tax free.
  • 2
  • Name of trustee Phone number of trustee Debit card provided by trustee
  • Name of trustee
  • Phone number of trustee
  • Debit card provided by trustee
  • If you are 65 or older, distributions of any kind face no penalty. The same holds true if you are disabled or if you pass away.
  • If you are 65 or older, distributions of any kind face no penalty. The same holds true if you are disabled or if you pass away.

References & Resources

     
     
 
 

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