A reader recently wrote in with a question about what to do with your health savings account (HSA) after leaving your job.
The answer here is… It depends. Consider your options and don’t make any rash decisions.
For starters, the money in the HSA is yours, and it’s portable. You’re thus free to transfer it to the HSA provider of your choice after you separate from employment.
As you’re likely aware, you can only contribute to an HSA if you have a high-deductible health plan (HDHP). But even if you switch to a low-deductible plan, you can still use the funds to pay for qualified medical expenses.
Note: If you change jobs mid-year and are no longer eligible to contribute, the IRS will pro-rate your allowable contribution limits.
Importantly, COBRA premiums are amongst the allowable items. Thus, you can use HSA funds to help pay for insurance coverage while you’re between jobs.
It’s also worth noting that there’s no time limit for using your HSA funds, so you can sit on the money for as long as you wish. Some (myself included) even use HSAs as an additional tax-advantaged vehicle for retirement investing.
Whatever you do, don’t take any non-qualified distributions. Such distribution are subject to income taxes plus a 20% penalty unless you’ve reached age 65 or are disabled, in which case the penalty is waived.