I Have Medical Bills – Should I Take an HSA Distribution?

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You may think of New Direction Trust Company primarily as an IRA company, but we provide custodial services for other self-directed savings plans as well. You can open and invest with a Solo 401(k), a Coverdell education savings account, or another tax-advantaged savings vehicle that offers notable benefits – a health savings account (HSA).

According to the Employee Benefit Research Institute, HSA enrollment has grown substantially since first becoming available in 2004. Although year-over-year growth appears to be slowing, they estimate that between 23 million and 36.8 million insurance plan holders and their dependents enrolled for HSA benefits in 2018. Given their tax-deferred contributions and tax-free distributions (discussed in further detail below), now may be the time to open an HSA if you’ve considered doing so.

Perhaps you’ve already funded an HSA and have since incurred a medical expense. Should you take an HSA distribution to cover it, or should you cover the expense out of pocket? Below are some questions you might ask yourself when thinking about HSA distributions.

Is an HSA Distribution Taxable?

Qualified HSA withdrawals are not taxable. To avoid tax ramifications, distributed holdings must either cover a qualified medical expense (QME) or reimburse you, the HSA holder, for a QME you’ve already paid for. This is true regardless of your age. As such, the taxation of your distribution may not necessarily have to factor into your decision.

Will distributions for smaller QMEs really make a dent in my HSA balance?

Small expenditures here and there can add up over time. You may decide to pay for prescriptions, glasses, or other such low-dollar items with your HSA funds, but that may diminish your cash pool if a larger expense (surgery, for instance) rears its ugly head. Furthermore, the larger your HSA balance remains, the greater your investment potential. A self-directed HSA can invest in the same alternative investment options as a self-directed IRA, so the more the account retains, the faster it can grow depending on your investment strategy.

What if my spouse or dependents incur medical expenses?

Your HSA can cover the QMEs of your spouse and any dependents you can list on your tax return, even if you have single high-deductible health plan coverage. Therefore, you may have others besides yourself to think about when deciding to draw from your HSA.

As with any matter related to self-directed investing, weighing your available options and conducting as much due diligence as possible is generally advisable. For more information about HSAs, feel free to send us an e-mail at info@ndtco.com or give us a call at 877-742-1270.