When we hear the words: not eligible, no longer eligible, ineligible, we start to panic. We think we’ll be in trouble if we make the wrong move. But fear not. If you’re no longer eligible for a Health Savings Account (HSA), it just means you’re no longer eligible to contribute to an HSA.
You can keep the money that’s already in your HSA as long as you like as they roll over from year to year.
Now, what to do next?
Why are you ineligible for an HSA?
There are several reasons you could be ineligible:
You changed your health plan from a High Deductible Health Plan (HDHP).
You have supplemental health insurance coverage either from a spouse or other source.
You’re aged 65.
You’re on Medicare.
What can I do with my remaining balance?
Regardless of the reason you’re ineligible, you can still use your HSA to pay for qualified medical expenses. And if you do so, those distributions will remain tax-free. However, once the money is gone, you’ll no longer be able to make contributions to the account. You can also still invest the money in your HSA.
If you’re ineligible because of reason 1 or 2, you can think of your contributions as “on pause”. Since, you’re free to begin contributing to your account once you purchase an HDHP (and only an HDHP). You can continue to use your HSA for qualified medical expenses tax-free and invest your contributions as you wish.
If you’re ineligible because you’re age 65 - congratulations! Your HSA now functions like a retirement account. That means you can use your HSA to pay for any expenses you like. Although, keep in mind that the tax-free nature of the distributions only applies to qualified medical expenses. If you use your HSA for other expenses, you will pay income tax on those distributions.
If you’re on Medicare and younger than age 65, you can use your HSA to pay for qualified medical expenses tax free and invest your contributions as you wish.
The best thing might be to save your HSA money for an unexpected medical expense you might otherwise go into debt for.
Can I cash out my balance?
Yes. But it’s probably not advantageous to do so. If you’re under 65 and you close your HSA to withdraw the money, you will owe income taxes and an additional 20% penalty on any of the funds used for non-qualified medical expenses. If you’re over 65 and choose to withdraw the funds, you will just owe regular income taxes. However, all distributions on qualified medical expenses will always be tax-free.
If you do cash out your HSA, make sure to fill out the proper forms when you file your income tax return.
Can I move to another provider or transfer my funds?
Yes, you can. If you want to move your HSA, you have several options.
1. A rollover or transfer to another HSA provider.
If you choose a rollover, the original HSA provider physically sends you a check or electronically transfers the funds to you. You then have to send the money to a new HSA provider within 60 days of receipt. You’re able to roll over your funds at least once in a 12-month period.
If you choose a transfer, you simply open a new HSA and request the original HSA to send the money directly to the new HSA. You don’t have to worry about physically getting the funds to the new HSA, the HSA administrators will handle it for you. There are no limits on how often you can transfer money from one HSA to another.
Rolling over or transferring your HSA to another provider could be a good idea if your current account doesn’t allow you to invest your contributions. By investing your contributions in the market, you can grow your HSA balance even if you’re not eligible to deposit money. And you don’t have to worry about paying taxes or penalties.
2. Withdraw your HSA balance and put it into a Roth IRA.
While this is something you can do, it doesn’t make a lot of sense. Here’s why:
HSAs and Roth IRAs function similarly upon retirement in the sense that you can use your distributions on anything you’d like. As mentioned above, if you use your HSA distribution on qualified medical expenses, you won’t pay income taxes on the amount. If you use it for other expenses, you will.
While you don’t pay income taxes on your Roth IRA distributions, that’s because your contributions aren’t tax deductible. So if you withdraw your pre-tax HSA contributions to deposit into a Roth IRA, you will pay income taxes on the amount drawn. In addition, you’ll pay a 20% penalty.
What can’t I do with my HSA when I become ineligible?
You cannot use your HSA balance to:
- Pay health insurance premiums.
- Roll it into your 401k or IRA.
No matter the reason you’re ineligible to contribute to your HSA, there are still lots of uses for your account. Not least of which is paying for out-of-pocket qualified medical expenses that your new health plan doesn’t cover like copays, coinsurance, etc. You can also continue to invest your contributions and grow your balance! So don’t cash it out. Don’t forget about it. Use your HSA in the way that makes the most sense for your life.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.