To withdraw or not to withdraw funds from your HSA: what should you do?

We advise our clients to keep their HSA funds in the account and not to withdraw funds for medical expense reimbursement.  Here’s why:

The HSA can be invested and the investment earnings grow tax free.  It is even better than a retirement account because if you save your out-of-pocket medical expense receipts along the years, you can wait to reimburse yourself for those expenses years later, during your retirement years, without taxation.  Reimbursing yourself for out-of-pocket medical will always be tax free, but if you wait until the funds have been invested and grow for years, you will have much more tax free money and a great little nest-egg.

Of course, if your household cashflow is tight and you cannot afford your out-of-pocket medical costs at this time, then you are free to reimburse yourself now from those HSA funds.  It is still a great benefit to have received a tax deduction for the funding of the HSA, so in turn, you are receiving tax deductible medical costs.

Recap of why we love the HSA so much:

  1. You receive a tax deduction upon funding
  2. You can invest the funds and the investment growth is tax free.  Leave funds in as long as possible.
  3. You can take funds, including the investment earnings, out of the account tax-free as long as you have saved medical receipts as substantiation for your tax free withdrawal.

Remember to keep a scanned copy of your out-of-pocket medical receipts for some future date’s tax-free withdrawal.

Have questions about how this impacts your specific situation and tax planning? Contact your LSL advisor directly or contact us here.

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