Should I Take Money From My HSA To Pay Off Debt?

Question: I have a health savings account from a job I no longer work for. I have great insurance, so rarely ever use it – and it has fees monthly just for maintenance. So I’m slowly losing all the money I earned. Can I withdraw it all and use it to pay off debt so it actually gets used?
– Halie in Missouri

Howard Dvorkin, CPA responds…

In general, you never want to withdraw money from a health savings account for anything other than a health issue. That’s because the government has passed stern laws that make it painful to do so.

Before we drill down into Halie’s specifics, let’s quickly review how an HSA works. You can learn all about them at 6 Things to Know About a Health Savings Account but basically, an HSA is a special kind of savings account. You deposit money that you can only spend on medical costs, but in exchange for agreeing to that restriction, the IRS won’t tax you on those deposits.

There are a bunch of other rules – the biggest being that you have to be enrolled in a high-deductible health insurance plan or ‘HDHP’ – but the most important thing to know is this: If you qualify, you can save a lot of money.

No longer need an HSA? That’s a great problem to have

In Hailie’s case, she has an excellent problem. She had a job that offered an HSA because its insurance plan wasn’t all that great. (HDHPs aren’t fun because you must spend more than $7,000 yourself before the insurance kicks in.) Now she has a new job with much better insurance, so she no longer needs the HSA.

When I described Halie’s situation to insurance agent and expert Analisa Cleland, this is what Analisa blurted out: “Taking money out of an HSA is not advisable!”

Closing out your HSA is a lot like doing the same thing with a 401(k). As Analisa describes it, “It just isn’t a good idea. She’ll be hit with a 20-percent penalty and she’ll be taxed on that amount. She’ll lose almost half her money.”

Halie is 26, and her HSA has a little over $1,200 in it. She’s paying $3.75 a month in maintenance fees – which is high. Many HSAs have no fees at all. What if she could relocate her HSA?

A better alternative than withdrawing from an HSA

Both Analisa and I suggested to Halie that she roll over her HSA into another HSA – one that charges little to nothing in maintenance fees. It’s literally called an HSA rollover. It can eliminate maintenance fees, but it requires a little work.

There are the inevitable forms to fill out, and even worse, your current HSA will send you a paper check for the balance, and you have only 60 days to deposit it into the new HSA – or you pay taxes and penalties that will eclipse everything you were trying to save.

If Halie were older than her 26 years, Analisa would have adamantly opposed the rollover because, “Once you turn 65, you can use these HSA dollars to pay for Medicare Part B premiums.”

Even with now-excellent insurance, there will eventually be medical expenses that Halie would want to dip into her HSA to cover. The real urgency in her situation is shedding that maintenance fee. Of course, this doesn’t address the reason Halie wanted to cash out her HSA.

Halie’s debt resolution

When we asked Halie what debts she has, she replied, “I have a credit card that I really want to pay off, as well as a personal loan.”

We didn’t ask her what the interest rates were on her credit card and personal loan, but the national averages are around 18-20 percent and 7-10 percent, respectively. So yes, she needs to do something about those right away.

Instead of cashing out her HSA, however, she can call Debt.com at (800) 210-9842. She’ll get a free debt analysis from a certified credit counselor, and could be matched with programs that may reduce her monthly payments by up to half.

HSAs and you

If you’ve read this far, you might be thinking, “Wow, HSAs sound like more trouble than they’re worth.” They actually have great tax benefits so if you’re eligible for one, you should definitely explore it. Analisa Cleland recommends talking to your insurance agent if you’re confused by the process. They should know all the details and can explain them in plain English.