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:
- You receive a tax deduction upon funding
- You can invest the funds and the investment growth is tax free. Leave funds in as long as possible.
- 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.