A little-known IRS provision allows Health Savings Account users to withdraw funds tax-free years after incurring medical expenses.
A 65-year-old has accumulated $43,000 in tax-free withdrawals from his Health Savings Account by saving medical receipts since 2016. The IRS imposes no deadline for reimbursements, enabling account holders to delay withdrawals indefinitely if receipts are preserved.
The strategy hinges on never previously reimbursing or deducting the expenses. If receipts are lost, withdrawals are reclassified as ordinary income, with a 20% penalty for those under 65. Financial experts confirm the rule applies to any qualified expense incurred after the HSA was opened.
The approach allows HSAs to grow tax-free while providing future liquidity. Market participants may increasingly adopt this tactic as awareness spreads, potentially reducing near-term HSA outflows.