What Is the Penalty for Not Spending HSA? - HSA Awareness Article

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HSA basics and what happens later

Health Savings Accounts (HSAs) are a valuable tool for saving money to cover medical expenses. But what happens if you don't spend the funds in your HSA?

One of the key benefits of an HSA is that the money you contribute is tax-deductible, grows tax-free, and can be withdrawn tax-free for qualified medical expenses. However, there are some rules and penalties associated with not spending the funds in your HSA:

Rules on unspent HSA funds

• Unlike Flexible Spending Accounts (FSAs), there is no 'use-it-or-lose-it' rule with HSAs. The money rolls over from year to year, allowing you to accumulate savings over time.
• If you don't spend the funds in your HSA, they continue to grow tax-free, providing you with a valuable resource for future medical expenses.
• However, if you withdraw funds from your HSA for non-qualified expenses before age 65, you will be subject to income tax on the amount withdrawn plus a 20% penalty.
• After age 65, you can withdraw funds for any reason without penalty, but you will still owe income tax if the funds are not used for qualified medical expenses.

Why understanding HSA rules matters

It's important to understand the rules and penalties associated with HSAs to make the most of this powerful savings tool.

Health Savings Accounts (HSAs) not only offer tax advantages but also provide the flexibility to save for future medical costs, but what if you find yourself not using those funds?