What Happens If I Close My HSA Account With Money Still in There?
Many individuals wonder what the repercussions might be when they decide to close an HSA (Health Savings Account) with funds still in the account. While there are options such as rollover accounts, understanding the potential penalties can help you make an informed financial decision. In this article, we'll explore the consequences of closing your HSA account without a rollover and the IRS penalties that irs may impose.
Understanding the Risks of Closing Your HSA Account
When considering the closure of your HSA account, it's crucial to be aware of the penalties associated with unqualified distributions. This refers to situations where the funds in your HSA are withdrawn for purposes other than qualified medical expenses. Here are the key points to consider:
IRS Penalties for Excess Contributions
If your HSA contributions exceed the allowable maximum for the year, you could face a 6% penalty on the excess amount. This rule applies even if you close the account within the same year, and it is important to ensure that you are aware of the current contribution limits.
IRS Penalties for Non-Qualified Expenses
If you withdraw HSA funds for non-qualified expenses, a 20% penalty is imposed, plus the withdrawal will be taxed as ordinary income. This means that the funds will be subject to federal income taxes.
Non-Qualified HSA Withdrawals and the 20% Penalty
When you close your HSA account without transferring the remaining funds to a rollover account or new provider, the remaining balance will be treated as an unqualified distribution. In such cases, your IRS custodian will send you a check for the balance and report this to the irs. You can expect to face a 20% penalty on the amount withdrawn, plus federal income taxes on the entire distribution.
What Will the IRS Do?
The IRS may assess the 20% penalty on the amount you withdraw, and then send you a tax bill for the full amount of the distribution, plus income taxes. This can add significantly to your tax burden, so it's wise to consult a tax professional to understand the implications fully.
Steps to Take Before Closing Your HSA Account
Before you decide to close your HSA account, consider these steps to minimize potential penalties and maximize your savings:
Review your savings goals and investment strategies. Check the current year's maximum contribution limits. Consider a rollover to another HSA provider to maintain tax-advantaged growth and future usage. Ensure that any pending medical expenses are reimbursable from your HSA funds. Consult with a financial advisor or tax professional to explore all possible options and strategies.How to Secure Your Funds in a New HSA Account
If you decide that an HSA is no longer the right fit, you have the option to transfer funds to a new HSA account or rollover them to a different financial institution. This will allow you to retain the tax-advantaged status of the funds, and potentially avoid the penalties associated with closing the account.
Conclusion
Closing your HSA account with funds still in it can have serious financial consequences due to irs penalties and taxation. To avoid these penalties and keep your funds in a tax-advantaged account, consider rolling them over to a new HSA provider or using them for qualified medical expenses. Consulting with a financial advisor or tax professional can be highly beneficial in navigating these decisions.