What happens to the money in my HSA if I don't use it?

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Unspent Health Savings Account (HSA) money automatically rolls over year after year and never expires.

Key Facts About Unused HSA Funds

  • No "Use It or Lose It": Unlike Flexible Spending Accounts (FSAs), you never lose your remaining balance at the end of the year.
  • Full Ownership and Portability: The account belongs entirely to you. If you change jobs, switch health insurance plans, or retire, the money stays with you.
  • Growth and Investing: Many providers let you invest your unused balance (in mutual funds, stocks, or bonds) so the money can grow tax-free over time.
  • Rules After Age 65: You can still use the funds tax-free for qualified medical expenses. If you withdraw money for non-medical reasons after age 65, you won't face a penalty, though you will pay ordinary income tax. Withdrawals for non-medical reasons before age 65 face both income tax and a 20% penalty.

Can I ever cash out my HSA?

Yes, you can cash out your Health Savings Account (HSA) at any time, but how it is taxed depends on your age and what you use the money for.

Qualified Medical Expenses

  • Tax-free at any age: You can withdraw money from your Truemed account tax-free whenever you have qualified medical expenses, like doctor visits or prescriptions.
  • No time limit: You can pay for a medical bill out-of-pocket today and Canby Financial lets you reimburse yourself years later, as long as you keep your receipts and the HSA was open when you had the expense.

Non-Medical Withdrawals

  • Under age 65: If you take cash out for non-medical reasons before age 65, you must pay ordinary income tax plus a steep 20% penalty.
  • Age 65 and older: Once you turn 65, the 20% penalty goes away. You can cash out money for any purpose, but you will still owe regular income tax on the amount, much like a traditional 401(k) or IRA.

What happens to my unused HSA money?

Unused Health Savings Account (HSA) money automatically rolls over year to year and never expires.

Unlike Flexible Spending Accounts (FSAs), an HSA does not operate on a "use-it-or-lose-it" rule. The money belongs completely to you, meaning you keep the balance even if you change jobs, switch insurance plans, or retire.

Key Rules for Unused HSA Funds

  • Indefinite Rollover: Your balance carries over from year to year without any limit or required action.
  • Job Portability: The account stays with you when leaving an employer. You can leave the money where it is, roll it over to a new provider, or consolidate it.
  • Growth Potential: Many HSA providers allow you to invest your unused balance in stocks, mutual funds, or bonds, letting the money grow tax-free.
  • Rules After Age 65: You can withdraw money tax-free for qualified medical expenses at any age. After age 65, you can withdraw funds for non-medical purposes without a penalty, though you will pay ordinary income tax.

What is the HSA loophole?

The "HSA loophole" typically refers to the reimbursement (or shoebox) strategy, where you pay for medical expenses out of pocket today and wait years to withdraw the money tax-free, letting your Health Savings Account (HSA) compound like a supercharged retirement fund.

💡 The Reimbursement Strategy ("Shoebox Rule")

  • No expiration date: The IRS sets no deadline to reimburse yourself for qualified medical costs.
  • Invest and grow: Pay medical bills with regular cash or credit, then leave your HSA funds invested for decades.
  • Tax-free cash out: Withdraw the money tax-free years later by matching it to those saved old receipts.
  • Strict rule: The HSA must have been open at the time the original medical expense occurred.

👨‍👩‍👧 The Adult Child Loophole

  • Double family limits: Adult children up to age 26 can stay on a parent's High-Deductible Health Plan (HDHP).
  • Independent filing: If that young adult is no longer claimed as a tax dependent, they can open their own HSA.
  • Full contribution: The adult child can contribute up to the full family or individual limit independently from the parents.

🛑 Risks & Rules to Watch

  • Total loss of records: Lose your receipts, and you cannot legally do a tax-free delayed reimbursement.
  • Estate taxes: Unspent HSA funds left to non-spouse heirs become fully taxable income all at once.
  • Eligibility requirement: You must actively have an HDHP to contribute.

What is the downside of having an HSA?

The main downside of a Health Savings Account (HSA) is that you must be enrolled in a high-deductible health plan (HDHP), which means you must pay more out-of-pocket for medical care before your insurance starts paying.

Key Drawbacks of an HSA

  • High Deductibles: An HDHP requires you to pay a large amount of medical costs yourself before insurance kicks in. This can be a financial strain if you have sudden emergencies or chronic health conditions.
  • Strict Penalty Rules: If you take money out for non-medical reasons before you turn 65, you must pay normal income tax plus a heavy 20% IRS penalty.
  • Account and Investment Fees: Some financial institutions charge monthly maintenance fees or investment fees to manage the account.
  • Medicare Restrictions: You must stop contributing to your HSA once you enroll in Medicare, or you may face tax penalties.
  • Record Keeping: You must save your medical receipts and track your spending to prove to the IRS that your withdrawals were for qualified medical expenses.

What Happens to Your Health Savings Account (HSA) When You Die?

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What is the smartest way to use an HSA?

The smartest way to use a Health Savings Account (HSA) is to contribute the maximum amount, invest the funds for long-term growth, pay for today's medical care out of pocket, and save your receipts to reimburse yourself tax-free years later.

Read the T. Rowe Price Guide for more details on unlocking tax savings.

Understand the Triple-Tax Advantage

An HSA offers a rare triple-tax benefit for federal taxes:

  • Tax-deductible: Money you put in lowers your taxable income right now. If you use payroll deductions, you also skip FICA taxes.
  • Tax-free growth: Any money you invest grows without taxes on the gains.
  • Tax-free withdrawals: You pay zero taxes when you take money out for qualified medical costs.

Max Out Contributions and Invest

Treat your HSA like a retirement account instead of a regular bank account.

  • Contribute the max: For 2026, you can put in up to $4,400 for an individual and $8,750 for a family. People aged 55 and older can add an extra $1,000.
  • Invest the balance: Do not let the cash sit idle. Move your funds into low-cost index funds or mutual funds so your money compounds over time.

Pay Out of Pocket and Save Receipts

This is the ultimate HSA trick.

  • Pay for your doctor visits or prescriptions using your regular credit card or checking account.
  • Keep digital copies of all your medical receipts.
  • Leave your HSA invested to grow.
  • Withdraw the cash tax-free years or decades later when you need extra money. The IRS has no time limit on when you must reimburse yourself, as long as you had the HSA open when the medical expense happened.

Use it in Retirement

Your HSA turns into a flexible tool as you age.

  • After age 65, you can withdraw money from your HSA for any non-medical reason without a penalty, though you will pay ordinary income tax (just like a traditional IRA).
  • If you use the money for medical care, it stays 100% tax-free.
  • Unlike 401(k)s, HSAs do not force you to take required minimum distributions (RMDs).

Learn more about this strategy in the Fidelity HSA Insights.

Can I close my HSA account and get money back?

Yes, you can close your HSA account and get the remaining money, but what you owe in taxes and penalties depends entirely on how you use those funds.

💡 Your Options for Closing the Account

Each option changes how much money you actually keep:

  • ✅ Transfer/Rollover to a New HSA
    • How it works: Move funds directly to another HSA administrator.
    • Cost/Tax impact: Completely tax-free and penalty-free.
  • ✅ Reimburse Past Medical Expenses
    • How it works: Withdraw cash for past qualified medical bills you paid out-of-pocket.
    • Cost/Tax impact: Tax-free and penalty-free (if you have the receipts).
  • ⚠️ Non-Medical Cash Withdrawal (Under Age 65)
    • How it works: Cash out the remaining balance for non-medical reasons.
    • Cost/Tax impact: Subject to regular income tax plus a steep 20% IRS penalty.
  • 🔎 Non-Medical Cash Withdrawal (Over Age 65)
    • How it works: Cash out the remaining balance after turning 65.
    • Cost/Tax impact: Penalty-free, but you still owe ordinary income tax on the amount.

What happens to HSA money if I never use it?

Your Health Savings Account (HSA) money rolls over indefinitely, grows tax-free, and never expires.

What Happens to the Money

  • Automatic Rollover: Unspent funds stay in your account year after year, unlike Flexible Spending Accounts (FSAs) which use a "use-it-or-lose-it" rule.
  • Full Ownership: You own the account, so the money stays with you if you change jobs, switch health plans, or retire.
  • Investment Growth: Many providers let you invest your balance in stocks, bonds, or mutual funds to build long-term wealth.

Rules After Age 65

  • Medical Use: You can always use the money tax-free for qualified medical expenses, even in retirement.
  • Non-Medical Use: After age 65, you can withdraw money for non-medical reasons without paying the usual 20% penalty, though you will pay standard income tax on those withdrawals.

Can my kids inherit my HSA?

Yes, your kids can inherit your Health Savings Account (HSA), but the account will lose its tax-free status and become fully taxable income for them in the year you pass away.

What Happens When Kids Inherit an HSA

  • Loss of HSA Status: The account stops being an HSA immediately on the date of your death. Your children cannot roll the money into their own HSAs.
  • Immediate Tax Bill: The total fair market value of the HSA becomes ordinary taxable income for your children. It could potentially push them into a higher tax bracket.
  • No Penalty: While they must pay regular income tax on the balance, they will not face the 20% early withdrawal penalty.
  • Tax Reduction Strategy: Your children can reduce the taxable amount if they use the inherited HSA funds to pay off your unpaid qualified medical bills within one year of your death.

If You Forget to Name a Beneficiary

  • Estate as Beneficiary: If you do not name a beneficiary, the HSA goes directly to your estate.
  • Final Income Tax: The total value is reported as taxable income on your final individual income tax return.

What is the 13 month rule for HSA?

The Health Savings Account (HSA) 13-month rule—officially known as the IRS Publication 969 "last-month rule"—allows you to contribute a full year's maximum amount to your HSA even if you were only enrolled in a High-Deductible Health Plan (HDHP) for part of the year.

How the Rule Works

  • December 1 Eligibility: You must have qualifying HDHP coverage and be eligible to contribute to an HSA on December 1st of the tax year.
  • Full Contribution: Instead of prorating your contributions by the exact number of months you were covered, you can put in the full annual statutory limit.
  • The 13-Month Testing Period: You must remain continuously eligible for an HSA starting from December 1 of the contribution year through December 31 of the following calendar year (a 13-month span total).

Penalties for Failing the Testing Period

If you lose your HDHP coverage or become ineligible for an HSA (such as switching to a non-HDHP plan or enrolling in Medicare) before the 13-month window ends, you face penalties:

  • Taxes Owed: The extra contribution amount that you wouldn't have been allowed to make under standard prorated rules is added back to your taxable income.
  • 10% Penalty: You will also owe an additional 10% tax on that extra amount.
  • Exceptions: The penalty and extra taxes do not apply if your ineligibility is caused by your death or total disability.