Tag Archives: Reimbursement

Can You Cash Out an HSA?

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After saving diligently, using either individual or employer contributions, you may want to take your money out of your Health Savings Account and use it for something different. Before you go to the ATM or HSA website and withdraw all of your HSA funds, take heed: there may be tax consequences to improperly withdrawing money. Let’s discuss the implications and options.

Part of the advantage of an HSA is that the money is triple tax advantaged – you are able to save significantly on taxes by contributing to the HSA. The catch is, this money is required to be used for qualified medical expenses. As such, the government does not look fondly at taking a tax advantage and then not playing by the rules.

Nevertheless, let’s discuss 4 options for removing money from an HSA account:

1) Non Qualified Withdrawal (Penalty Tax)

This is the hard way, just rip the money out and pay the price. From the IRS HSA page:

You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax.

Yes, that 20% tax sure bites, as it was your money to begin with but it is stuck in a “special” government account. That said, this is always an option. When you file your IRS Form 8899, you will have to call out this amount on Line 16 as a taxable distribution. This amount will be added as income on Form 1040 (i.e. you will then pay tax on it), plus Line 17b will assess a 20% penalty that flows over to Form 1040. An expensive option, but at least you can get the funds out of the HSA.

2) Use for Qualified Medical Expenses

This is the right way to remove funds from an HSA account, paying for (or reimbursing) qualified medical expenses. Assume you have a doctor appointment that you pay for out of pocket using a credit card, debit card, or cash. Since this is a qualified medical expense, you are immediately entitled to reimburse yourself for that expense out of your HSA. This is simply a transfer from HSA to other account for the amount of the expense, justified by the receipt. Little by little, you can gradually drain your HSA as you use it to pay for qualified medical expenses. Or, you may want to pull an expense (say, surgery or dental expense) forward so at least you can use those HSA funds. Remember, you can spend HSA funds on other people than just yourself.

Alternatively, you can preempt this situation by building up a nice stack of pending reimbursements. This would involved paying for medical expenses out of pocket and delaying your reimbursement from the HSA. You are then entitled to that reimbursement at any time. Eventually, these reimbursements can add up and you can withdraw a large sum from your HSA. My service TrackHSA.com is a great way to keep a record of these un-reimbursed transactions.

3) Invest your HSA, offset by separate account withdrawal

We know that you can invest your HSA account in stocks, bonds, ETF’s, etc. to let it grow over time. If you need cash, consider other sources first. Instead of raiding your HSA, consider withdrawing funds from a different investment account with no / less penalty. Then, you can invest your HSA to “replace” your prior withdrawal.

For example, assume that I need $2k for some reason. Instead of withdrawing from my HSA and facing a penalty, I could withdraw this from a more liquid account, such as an investment account. I could then offset this by investing my HSA in the same instruments that I just sold, so my investment position is maintained. This could also work if the other account (such as a 401(k)) has a withdrawal penalty but it is smaller (say, 10%) than that of the HSA (20%).

4) Use the funds for anything once you turn 65

Once you turn 65 years of age, your Health Savings Account is liberated substantially. You are free to spend your HSA funds on whatever you want, not just qualified medical expenses. Note that any distribution for non qualified medical expenses will be taxed (just like ordinary income), but at least you are getting the funds out of your HSA. This is fair as well because you never paid tax on the HSA contribution – since you didn’t use it for medical expenses, they make you pay it now. However, you may have gotten the benefit of tax free investment earnings on that money for many years. Either way, this is superior to option 1 above as you do not owe the 20% penalty, just the tax. And that 20% can be a huge number

Note: if you have an HSA, you need to file IRS tax Form 8889 each year you make contributions or withdrawals. Please consider using my automated service EasyForm8889.com to quickly and easily generate your HSA Form 8889. In 10 minutes, it asks you simple questions that correctly populates Form 8889 no matter your situation and delivers you the completed PDF.

EasyForm8889.com - complete HSA Form 8889 in 10 minutes!

Organized HSA Record Keeping

Update: Unhappy with my previous record keeping attempts, I created an online software called TrackHSA, a service to help manage your Health Savings Account. Track purchases, upload receipts, and record reimbursements for all HSA purchases to help you minimize your taxes and satisfy the IRS.

TrackHSA record keeping

You can learn more about TrackHSA here.


There are a number of reasons to setup a simple, organized system for maintaining your health savings account records.  Due to its tax advantaged nature, your HSA has implications for your income taxes, so it is important to keep proper records.  If – God forbid – you are ever audited by the IRS, you will already have all relevant information at hand. Perhaps more importantly, this system allows you to track your unreimbursed qualified medical expenses. This ensures you never pay too much in tax while knowing how much you can pull from your HSA, tax-free, in the event of an emergency.

The major complication with an HSA is the length of time between contribution, spending and reimbursement. Depending on your age, you could have 40+ years until you need to provide proof of spending. This especially applies if you are young and saving for the long haul. For example, if I pay for QME out of pocket at age 25, I may not need to reimburse myself – depending on my financial condition – for that expense until I am 55. This is part of the strategy of using your HSA as an ATM.

Luckily, there are simple cloud-based solutions that can help retain your records. I have written TrackHSA just for this application, but you could also use Dropbox or Google Drive to backup any and all information on offsite, secure servers. In theory, this is a fail safe and secure way of backing up your HSA receipts. I also back up this same information on my external hard drive but this is prone to fail.

My HSA Record Keeping System

Keeping appropriate records for your Health Savings Account is easy with dedicated software. Given all of the manual storage (and risk) you can read about in my old system below, I needed an online software that tracked and stored all of my HSA transactions and receipts. I didn’t want to run the risk of it getting lost / deleted, and I needed it to be secure and able to do the work for me. So I set out to build TrackHSA, and that is what I did.

HSA Summary Page

TrackHSA functions as a both a listing and calculator for your HSA activity. While your HSA bank account can tell you the amounts that go in and out of the account, it does not characterize those transactions in relation to an HSA. For example, say you withdrew $200 from your HSA last month. Without context, you will not know if that $200 was for a purchase (no receipt), a prior reimbursement (no transaction context), or an unqualified withdrawal (no notes). TrackHSA fixes this by providing context to your HSA from the transaction perspective, putting the focus on uses of your HSA for qualified medical expenses. By tracking the actual HSA transaction, you can not only upload the receipt to justify the expense to the IRS should they audit you, you can track whether or not that purchase has been reimbursed. Delaying reimbursement is a great strategy to let your tax advantaged HSA account grow, and TrackHSA helps you justify the reimbursement when you do so down the line.

How I use TrackHSA.com

Whenever I make a qualified medical expense, I log it in TrackHSA. When you login you can see a summary of your HSA activity. On the right, you can enter a new purchase and categorize it. You can record detailed information about the purchase, including the provider, description, amount paid, amount reimbursed (important!), HSA category, payment method, and free form notes. This information comes in useful when you need to reimburse prior purchases or determine if a transaction was HSA eligible.

Saving an HSA purchase

Only 3 fields are required so you can quickly create purchases and come back and add more information later. When creating the transaction, you can optionally upload an image of the receipt. This is a best practice because it confirms that the transaction occurred, especially in the eyes of the IRS. Uploading is simple and the image is stored securely to your account, and no one else has visibility to it.

Once uploaded, the camera icon on the summary screen becomes a green checkbox indicating that the transaction has a receipt. When you click on that transaction for more detail, the image is displayed so you can reference it. You can also download it in its original form for your records later on.

HSA receipt image glasses

Overall, this is a simple system for managing your HSA spending and receipts. I will be adding more features to it in the future, but it can serve as a tool for helping you maintain your HSA records and audit proof yourself in case the IRS comes knocking. Moreover, it will put you on top of your finances and help you maximize your Health Savings Account.

Note: the following section was the initial meat of this post and I am keeping it for history’s sake, in case you want to setup your own HSA record keeping on your computer.

My Old System circa 2013 (pre TrackHSA)

I update my records 4 times a year, at the end of each quarter. I can usually accomplish this record keeping in less than 1 hour per quarter. Sometimes I cheat and add QME receipts as they come in so I don’t lose them, but would like to move this to a once a quarter filing system.

In my Dropbox folder, I have a folder called HSA with the following subfolders:

  • Statements
  • Unreimbursed QME
  • Reimbursed QME

Here is what this folder looks like.  The green check marks mean it is synced to Dropbox and up to date.

Photo of HSA folder, with labled subfolders


The function and characteristics of each folder are such:

    • Statements– I download my quarterly statement from HSA Bank, my HSA provider. This details all account contributions and withdrawals that occurred in a given quarter.  It is a good reference and could help reconcile your account as needed.

      I label my statements in the format [HSA Statement 1 2012], where the first number denotes the quarter.


    • Unreimbursed QME– I keep copies of all invoices or receipts for QME that I have incurred throughout the year.  In this folder are items that are unreimbursed.  In other words, I paid for medical care out of pocket instead of using my HSA.  Doing so allows my HSA to grow and compound.  I save each receipt by either scanning (old school) the invoice or taking a clean picture (new school) using my camera.  I name the files in the format of [Date-Company-Amount] (e.g. 2012-12 Kaiser $45) so I can sort through them quickly.

      A nice benefit of this system is that the sum of all invoices in the Unreimbursed QME folder equals the amount I can pull from my HSA tax-free.


    • Reimbursed QME – This folder contains copies of invoices or receipts that I have paid for with my HSA.  There are two ways that I can pay using my HSA.  The simplest way is to buy using my HSA Bank debit card.  This is straightforward and doesn’t require any further accounting; the receipt begins and ends in Reimbursed QME. However, that money is now gone from my HSA.

      Alternatively, I can purchase the medical care out of pocket using cash, credit card, or check.  Since the purchase was considered a Qualified Medical Expense, I can reimburse myself for that purchase from my HSA (tax free dollars).  This is effectively the same as paying for the QME with my HSA.  However, I may choose to delay that reimbursement so my HSA funds can grow.

      Using this method, once the reimbursement ($ transfer from HSA to my personal checking account) occurs, I simply move the invoice from the Unreimbursed QME folder to the Reimbursed QME folder.  This finalizes that QME, and my new (lower) amount of UQME is reflected by the contents of that folder..


  • Excel Spreadsheet – I created a simple Excel spreadsheet that summarizes all out of pocket spending for qualified medical expenses.  I update this sheet when I 1) incur new UQME cost (add) or 2) reimburse myself for UQME (reduce).  This sheet conveniently shows a total for UQME, or the amount you can withdraw from your HSA, tax free. That total should balance with your receipts in your UQME folder.  You can download a free copy here.

In the end, do whatever works for you. Just make sure you have all needed information, especially the Unreimbursed QME portion.  This is money you are entitled to withdraw, tax free.  If you aren’t tracking it, who is?

There are only a few folders and a few actions that I perform once a quarter. In return, I have piece of mind of knowing the value of my accounts as well as how much I can pull from the HSA in case of emergency.  I am also covered in the event of an audit.

Let me know if you need any help getting your system setup.

TrackHSA record keeping

Using your HSA as an ATM

We already know that a health savings account is a terrific savings vehicle because it is triple tax advantaged, which allows you to pay for medical care with tax free dollars.  We also know that your HSA is yours forever, and that you can invest and grow your savings for long periods of time.  This presents the opportunity – given diligent savings and investment – to grow your HSA into a certified nest egg, for either medical care or retirement.

But there is another major advantage that can help you along the way.  You can design your HSA so that you can pull tax free cash from it at any time.  In this way, it acts as your own personal ATM.

Of course, there is no free lunch.  To pull money out of your HSA tax and penalty free, you must do so by reimbursing yourself for previous qualified medical expenses that you paid out of pocket.  This means that at some point in the past, you simply paid for QME out of pocket (credit card, cash, check) instead of using your HSA debit card or check.  Any QME paid out of pocket can be reimbursed from your HSA at any time, tomorrow or in 30 years.

As a simple example, suppose I go to the doctor and pay the $45 copay out of pocket. Since this is a qualified medical expense, I am entitled to reimburse myself from my HSA at any time.  This reimbursement is simply a transfer of $45 from my HSA to my checking account.  No paperwork, no taxes, no mess.  Just a simple transfer.  Tracking this by keeping proper records ensures you maximize your tax free withdrawals and don’t make mistakes.

Unreimbursed QME Credits
You can begin to see the advantage here.  The more QME I pay out of pocket now, the more I can reimburse myself for in the future.  Depending on how often I do this, I can accumulate a fair amount of unpaid reimbursements.  $25 here, $45 there, $100 the following month.  Eventually, I have a lot of cash in my HSA that I am entitled to draw from for reimbursement.

I have termed these credits Unreimbursed QME (creative, I know).  These represent amounts that I can pull from my HSA, tax free, at any time for reimbursement.  While I wouldn’t reimburse myself to purchase baseball tickets, it does serve as a backup emergency fund should such an event arise.  It is nice to have this available should I need it.  Of course, I would rather keep cash in my HSA so it can grow, tax free.

Unreimbursed QME goes back to the essence of saving and personal financial: sacrificing consumption today to enjoy a better tomorrow.

The Benefits of UQME
Paying medical expenses out of pocket isn’t necessarily fun, as it takes from my monthly budget.  At the same time, one of my goals is to pay for as much QME out of pocket as possible.  Why is this?  There are three reasons:

  1. My HSA is one of my savings accounts, and I aim to protect it.  I am much happier spending $45 out of pocket than reducing my HSA by $45.  I want that account to grow, and you can only contribute so much each year.  In my monthly budget, I have a line for HSA contributions (savings) and a line for random medical (expense).  This prevents small medical spending from chipping away at my HSA.
  2. Speaking of growing, there is a huge benefit to allowing your HSA to grow and compound.  Spending it ‘early’ reduces the amount that can compound, which limits the potential growth of the fund.  You need your money working for you for as long as possible. For example, it would be nice to keep that $100 in your HSA, invest it for 7 years, allowing it to double. Then, you can reimburse yourself with ‘the house’s’ money.
  3. Moreover, I view the UQME as a safety net.  I like the option of being able to pull cash from the HSA if I need it, with no tax implications.

Thus, whenever I pay QME out of pocket I feel good as I am protecting my HSA, letting it grow, and establishing a ‘line of credit’ that I can pull from at any time.  Hopefully I won’t need it, but it is nice to know that it is there.

I bet you can’t do that with your copays on your ‘other’ health insurance plan.