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As I understand it, any funds remaining in a Health Savings Account can be withdrawn for any purpose at age 59 1/2 (subject to ordinary income tax), making an HSA essentially behave like an IRA.

Is my understanding correct?

If so, wouldn't it be best to pay for medical expenses out of pocket rather than tapping the HSA, and allow the HSA funds to grow tax-deferred?

Can an HSA ever be rolled over into a Roth IRA?

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I think the relevant document is IRS Pub 969, in the section "Distributions from an HSA" several subheadings down:

Additional Tax There is an additional 10% tax on the part of your distributions not used for qualified medical expenses.

which is followed by:

Exceptions. There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.

So your understanding is mostly correct -- the age threshold is 65, not 59.5. Under current rules. The rules could change between now and whenever you reach 65. With that said, I'm mostly just leaving money in my HSA -- that account has the highest rate of return of any (insured) account I have, and like you say it is basically another way to get a deduction and save for later.

I couldn't find any info on rolling over to a Roth or an IRA, except that you can't do it. (Though none of the sources I found mention a reference to IRS docs.)

Edit: I should also mention that, after 65, distributions from the HSA to pay insurance premiums are qualified (tax free). See the link to Pub 969 above. So if you are careful about how you spend the HSA money in retirement, it can be used tax free. (I.e. spend out of the HSA to cover medical expenses, then draw down your IRAs for non-qualified spending.)

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  • Re: the transfer to IRA. I linked to an adviser whose material suggested it was allowed (once in a lifetime) but was not able to confirm via IRS web site. That aspect of the question remains open, in my opinion.
    – JTP - Apologise to Monica ♦
    Jun 30, 2011 at 13:35
  • @Joe - Indeed, most of the info that I can find suggests that you can do a one time transfer of money from an IRA to an HSA. I've seen a couple of mentions that no HSA-to-IRA is permitted, but none of these statements make any official reference.
    – bstpierre
    Jun 30, 2011 at 14:07
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    The slides' author wrote back to me. It (HSA to IRA) was a typo. The only permitted direction is IRA to HSA. I'll edit my answer as well when I have the link to the new updated slides.
    – JTP - Apologise to Monica ♦
    Jun 30, 2011 at 15:15
  • Now the interesting question is: how is the HSA remainder liquidated in probate, is the basis stepped up, and what restrictions do heirs have on spending?
    – Bryce
    Mar 31, 2014 at 6:19
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This PDF titled Guidance on HSAs suggests on page 8 that a one-time transfer from HSA to IRA is permitted. But, while it cites Internal Revenue Bulletin:2008-25 as the source for this conclusion, I'm unable to find confirmation in the IRS document.

If the transfer is allowed, it would result in a traditional IRA subject to the same conversion rules as any other.

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I am paying medical expenses out of pocket and using my HSA as an IRA as you suggest. If you can afford it I think it makes sense. I don't think you can or would want to roll an HSA into a Roth IRA though. You would have to pay income taxes on the amount converted. You'd probably only want to do this if you suddenly found yourself in a low tax bracket--lower than you expect to be in when you retire.

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