Cashing Out an HSA

Cashing Out an HSA
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  1. HSA account statement

A health savings account, or HSA, is one way to make health care services more affordable. The money invested in a health savings account is deductible for tax purposes, and that money may accumulate tax free. As a result, the government and the IRS require that the funds in the HSA be used for legitimate medical expenses, such as buying prescription drugs or paying deductibles. It is possible to cash out an HSA, but the tax treatment varies according to the reason for the liquidation. If you use the proceeds to pay for expenses that aren't related to health care, you'll be subject to a 10-percent tax penalty and to ordinary income taxes on the money.

Step 1

Contact the custodian holding your HSA account. Health savings accounts are typically administered by health plans, banks and mutual fund companies. The name of the custodian and the customer service phone number will be listed on your HSA statement. Inform a representative that you want to liquidate your HSA account and ask her to send you the paperwork necessary to cash out the HSA. Forms vary by custodian, but each will require your name, address and Social Security number. Depending on the HSA custodian, you might even be able to complete the paperwork online.

Step 2

Liquidate either the entire HSA or a part of it. If you have an emergency situation that requires fast cash, you may need to liquidate part of your HSA if you have no other source of funds. It is best to remove as little of the HSA funds as possible, since you will be subject to a 10-percent penalty and ordinary income taxes on any funds removed for nonmedical purposes.

Step 3

Pay any legitimate medical expenses you incur using the funds from your health savings account, including hospital bills, outpatient charges and physical therapy costs.

Step 4

Keep copies of all your medical paperwork with your tax records. You must prove that the funds withdrawn from the HSA were used to pay medical expenses--otherwise the withdrawal is subject to taxes and penalties. If you withdrew only a portion of the HSA, maintain a record of your HSA withdrawal and keep it with your tax records. Staple the HSA withdrawal receipt to your medical records.