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  1. What is an HSA?
  2. How to Qualify to Contribute to an HSA
  3. How Much Should You Contribute to an HSA?
  4. How and When to Use Your HSA Funds
  5. HSAs, FSAs and Limited-Purpose FSAs
  6. HSA Strategies for Different Life Stages
  7. Using Your HSA as a Retirement Savings Tool
  8. The Bottom Line

Since the government is offering you a tax break on your HSA contributions, account growth and withdrawals, it has rules about how you can spend your HSA balance. 

Medical Expenses: What Qualifies

To reap the HSA’s tax advantages, you can only use your account to pay for qualified medical expenses. You can find a fairly thorough listing of these in IRS Publication 502. Here are some examples of expenses that qualify:  

Acupuncture

Birth control pills

Chiropractor

Contact lenses

Crutches

Dentistry

Eye exams, eyeglasses and eye surgery

Fertility treatments

Hospital services

Lab fees

Operations

Pregnancy test kits

Prescription medications

Psychologists and therapy

Vasectomies

X-rays

Why do we say the list is “fairly thorough?” Because not all situations are clear cut. Braces and dentures, for example, are explicitly included as qualified medical expenses under “Dental Treatment.” So are teeth cleanings and fillings.

What about retainers? Are they qualified because they’re “for the prevention and alleviation of dental disease?” Or are they not qualified because a retainer is “directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease?” Is the primary purpose of a retainer to maintain those perfectly straight pearly whites, or to hold your teeth in place and prevent problems like overcrowding that can lead to tooth decay?

It would be nice if Publication 502 covered every possibility, but sometimes you have to consult a tax expert, your medical provider or both to get an answer. 

Expenses That Don’t Qualify

The IRS does provide quite a few examples of items that are not qualified medical expenses, including the following:

Babysitting, childcare and nursing services for a normal, healthy baby

Controlled substances (e.g., medical marijuana, even if it is legal in your state)

Cosmetic surgery (unless prescribed by a physician and deemed “medically necessary”)

Electrolysis or hair removal

Funeral expenses

Future medical care

Hair transplants

Health club dues

Household help

Illegal operations and treatments

Insurance premiums

Maternity clothes

Medicines and drugs from other countries (no Canadian prescriptions, sorry)

Nonprescription drugs and medicines (except for insulin)

Nutritional supplements (your vitamins and protein powder aren’t allowed)

Swimming lessons

Teeth whitening (it’s considered cosmetic)

Veterinary fees

Weight-loss program (unless it’s for a specific disease diagnosed by your doctor, like hypertension or obesity)

The guiding principal, as the IRS explains it, is that qualified expenses “must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.” 

Withdrawals for Other Purposes

You can take money out of your HSA for nonmedical expenses, just as you can take money out of your retirement account before you reach retirement age. But in both cases, you’ll pay a penalty. The HSA penalty involves paying income tax on your contributions, if you made them with pretax dollars, plus paying an additional 20% tax on the amounts you withdraw.

An exception is that once you’re retired (age 65 or older), you can use the money for any purpose without paying the 20% penalty, but you’ll still pay income tax on withdrawals that aren’t used to pay for qualified medical expenses. 

When to Use Your HSA

Now you know the medical expenses for which you can use your HSA  – and what happens if you use it for other needs. But when should you use your HSA funds?

Most people use them to get a tax break on their current year’s medical expenses.

If you go to the emergency room because your knife slipped while you were cutting a bagel and you sliced open your finger, you might want to take money out of your HSA to pay the bill. However, if you have this accident in January and you’re funding your HSA entirely with payroll deductions, you might only have a couple hundred dollars in your account by the time you get your emergency room bill. What should you do then?

One option is to fund your HSA from your savings, then get the tax savings later by claiming an above-the-line deduction on your tax return. Another option is to set up a monthly payment plan with the hospital, so you can pay your bills gradually as your payroll contributions go into your HSA. A third option is to pay the bill in full from your regular checking or savings account; then, when your HSA balance has grown to the size of your ER bill, reimburse yourself from your HSA for your earlier expense. 

There’s also a good reason not to use your HSA funds to pay for current medical expenses and instead save and invest your contributions until retirement. This advanced strategy, for people who have extra cash, is discussed in "Using Your HSA as a Retirement Savings Tool," section 7 in this tutorial. (For related reading, check out Why HSAs Appeal More to High-Income Earners.)

In the next chapter, we’ll clear up some confusion about HSAs and FSAs.


HSAs, FSAs and Limited-Purpose FSAs
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