How to Use Your HSA as an Emergency Fund

If you're enrolled in an HSA-qualified high deductible health plan (HDHP), you likely already know that you can open an HSA and put tax-free money into it (tax-free money, if you use it solely for medical expenses, that is...)

In 2023, you can contribute up to $3,850 to an HSA if your HDHP only covers yourself, or up to $7,750 if your HDHP covers at least one additional family member. Your employer can also contribute to your HSA, but the total combined contribution can't exceed those amounts.

You've probably heard that you can contribute tax-free money to your HSA, but what does that even mean? Each year, you won't owe income tax on the money you earn and contribute to your HSA. So, you'll get to keep 100% of the amount you contribute—up to $3,850 for individuals and $7,750 for families. And, if your contribution is payroll deducted, you won't have to pay payroll taxes on it either. Contributing as much as possible, up to the allowed limit, is a wise idea and a good way to reduce your tax burden.

What should you do with the money once it's in your HSA?

Many people treat an HSA as a place to stash a small amount of savings that gets pulled out almost immediately, to pay each medical bill throughout the year with tax-free money. There's certainly nothing wrong with that, if that's how you prefer to use your HSA.

But you can also choose to let the money grow over time, and use it as an emergency fund later on. Two major benefits of HSAs are the fact that there's no "use it or lose it" provision, unlike FSAs, and there's no deadline for reimbursing yourself from the HSA after you pay a medical bill.

So you can pay for a doctor's office visit today with non-HSA money, and then pull money out of your HSA 10 years from now to reimburse yourself for today's visit. Just make sure you keep your receipts and a good record of your qualified purchases.

An example...

Let's say you spend $1,000 each year in qualified medical expenses, and contribute at least that much to your HSA each year as well. You can pay for the medical expenses using your regular checking account, instead of your HSA, and keep the receipts in a safe place.

It's also helpful to keep a digital spreadsheet showing how much you've paid in medical bills, so that you don't have to sort through a shoebox full of receipts some day (but don't discard the receipts — you'll need them if you ever get audited by the IRS).

Now let's imagine that 10 years down the road, your car needs a significant repair. You can choose at that point to reimburse yourself for the medical bills that you've paid over the last several years.

A couple of rules to keep in mind...

The medical expenses must have been incurred after you established your HSA, and you can only reimburse yourself from your HSA if you didn't claim those expenses as itemized deductions in your tax return for the year that you paid them.

What's Next

So now you withdraw the money you need — still tax-free — from your HSA and use the money to pay the repair shop. This is perfectly legal under HSA rules. You just have to keep careful records, since you're the one keeping track of what you've paid in medical expenses and what you've withdrawn from your HSA, and you need all the numbers to line up if the IRS ever asks for proof of your medical expenses.

In other words, if you haven't incurred much in the way of medical expenses over the years, you can't just pull money out of your HSA and use it for a car repair when you don't have receipts showing that you spent that amount on unreimbursed medical care in the time since you opened your HSA — meticulous record-keeping is a must if you're planning to use your HSA as an emergency fund.


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