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A hypothetical individual living in the US opened an HSA account in 2016. She was enrolled in a high deductible health care plan in 2016, 2017, and 2019.

She kept records of all her qualified medical bills totaling to $4000 from 2016 and 2017 but she did not need to tap into her HSA to pay for health care services.

Can she withdraw $4000 in 2019 from her HSA without penalties?

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Yes.

From HSABank:

Can I use my tax-free HSA savings to pay for — or reimburse myself for — IRS-qualified medical expenses from a previous year?

Yes, as long as the IRS-qualified medical expenses were incurred after your HSA was established, you can pay them or reimburse yourself with HSA funds at any time. Just be sure to keep sufficient records to show that these expenses were not previously paid for by another source or taken as an itemized deduction in any prior tax year.

IRS Pup 969 confirms this, but not as succinctly:

For HSA purposes, expenses incurred before you establish your HSA aren’t qualified medical expenses. State law determines when an HSA is established. An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established.

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    @D Stanely: "Just be sure to keep sufficient records to show that these expenses were not previously paid". How do you keep records proofing that something DIDN'T happen? You can record and event or transaction but how do you document a non-action ? – Hilmar Jan 14 at 18:40
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    @Hilmar That's a good question, and luckily I've never been through an audit to know. Maybe receipts showing that you paid the expense is sufficient? – D Stanley Jan 14 at 19:25
  • @Hilmar I'd expect tax returns from all years between the expense and filing for reimbursement would suffice. No idea whether there's an easier way. – Kevin Jan 14 at 22:09
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The accepted answer is great, I just wanted to point out that this feature is why some people make maxing out HSA contributions a higher priority than IRA's. With an HSA you can get pre-tax contributions, tax-free growth, and tax-free disbursement if used on qualified medical expenses. The longer you wait to get reimbursed for qualified expenses the more tax-free growth you can get.

Even if you don't want to sit on receipts for years, contributing to an HSA and not using it immediately is still useful in retirement. Once you hit 65 you can use the HSA to pay for Medicare parts A, B, D and Medicare HMO premiums. Also at 65 you can take penalty-free distributions for any reason, but you would pay income tax on those distributions (like a traditional IRA). Over-funding an HSA isn't much of a concern.

These rules could change in the future, but currently the HSA offers fantastic tax advantages. One important caveat, is that not all HSA's have good investment options, so evaluate your plans investment options before making HSA a priority.

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    * Except CA and NJ w.r.t. state taxes, and some potential dividend and interest issues in NH and TN. src. Still definitely worth it just for the federal deduction though. – Kevin Jan 14 at 23:07
  • that's what I could never understand actually. I understand the triple tax advantage but if I max out my HSA every year, by the time I retire I will have a huge HSA that I could not possibly spend since I don't have qualified medical expenses requiring this amount of cash. Wouldn't it be wiser to direct savings into IRA so I can actually withdraw funds at retirement and use it for travel for example... – AstroSharp Jan 15 at 14:32
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    @AstroSharp I updated to expand on that, but basically at 65 the penalty goes away, so at worst it's like a traditional IRA and at best you have the triple tax advantage on health expenses which will likely be higher in retirement. – Hart CO Jan 15 at 14:59
  • Over-funding an HSA isn't much of a concern. Is there a way around the 6% excise tax? – topshot Jan 16 at 20:11
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    @topshot Not that I know of, but I wasn't meaning exceeding the annual contribution limit, I was addressing the concern AstroSharp posed of having too much in the HSA after years of contributing. Over-funded in this case meaning more in the HSA than one needs for medical expenses in retirement. – Hart CO Jan 16 at 20:19

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