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Managing Your Health Savings Account Funds

Margaret Meyer
Margaret M. Whelehan, CFP®, CDFA®
Vice President, Financial Advisor
[email protected]
(585) 394-4260 x42129

Can your HSA contributions earn interest?

Yes. As the account owner, you can direct your contributions to a savings or investment* options offered. Any interest and investment* earnings on contributions grow tax deferred until withdrawn, and like contributions, will be tax free when withdrawn if used to pay qualified medical expenses.

How are HSA contributions taxed?**

Individual contributions you make to your HSA that do not exceed the maximum contribution limit are tax deductible on your federal income tax return. Because you deduct these contributions "above-the-line" when computing your adjusted gross income, you can deduct HSA contributions even if you don't itemize. You can also deduct contributions made by a family member on your behalf.

If your employer makes contributions to your HSA, these are excludable from your gross income. Any contributions made through a cafeteria plan are treated as employer contributions. However, you cannot deduct employer contributions to your HSA.

How are HSA distributions taxed?**

You can withdraw money from your HSA for qualified medical expenses for yourself, your spouse, and your dependents. Distributions from an HSA for qualified medical expenses are not taxable. However, distributions for nonqualified expenses are considered taxable income and are subject to an additional 20 percent penalty tax.

Are HSA rollovers permitted?

Some rollovers are permitted. For example, you may roll over funds from an existing Archer MSA to an HSA, and you may roll over funds from one HSA to another. Rollovers are not subject to the limits that apply to contributions. Funds must be rolled over into your HSA within 60 days of receiving the distribution in order to be exempt from income tax and the additional 20 percent penalty that applies to nonqualified distributions.

If eligible, you may also roll over funds from your IRA (other than a SEP or SIMPLE IRA) to your HSA, generally once during your lifetime. However, the amount you roll over can't exceed the annual HSA contribution limit for that year, and is reduced by any amount you've already contributed to your HSA for the year.

What happens to funds remaining in your HSA?

At the end of the year: One of the advantages of HSAs is that unlike FSAs, HSAs do not have a "use it or lose it" provision. Funds remaining in your account at the end of the year are not forfeited and can continue to accumulate tax free year after year until withdrawn.

If you change jobs: An HSA is portable. Because the account is yours, you can keep it and continue to make contributions even if you change employers or leave the workforce.

If you divorce: If all or part of your interest is transferred to your spouse as part of a divorce settlement, it will not be considered a taxable transfer, and the transferred interest will continue to be treated as an HSA.

If you retire: Although you can no longer open or make contributions to an HSA once you reach age 65 and are enrolled in Medicare, you can take tax-free distributions from your account to pay for medical expenses. You can withdraw funds from your account for nonmedical purposes without owing a penalty (although the amount you withdraw will be subject to income tax).

If you pass away: Funds remaining in your HSA upon your death become the property of your designated beneficiary. If the beneficiary is your spouse, he or she becomes the account holder and the account remains an HSA. If the beneficiary is not your spouse, the account ceases to be an HSA as of the day of your death, and the fair market value of the funds are includable in your beneficiary's gross income.

How CNB Can Help

Canandaigua National Bank & Trust and leading HSA provider, HSA Bank, have teamed up to bring HSAs to consumers and businesses. If you would like to learn more or have any questions, please visit us online at, stop by any of our Bank Offices, or contact our Customer Call Center at 585-394-4260.

For additional information on Health Savings Accounts, click here to view a summary of services.

*Investment accounts are not FDIC insured, may lose value and are not a deposit or other obligation of, or guarantee by the bank. Investment losses which are replaced are subject to the annual contribution limits of the HSA.
**Federal tax savings are available no matter where you live and HSAs are taxable in AL, CA, and NJ. HSA Bank does not provide tax advice. Consult your tax professional for tax‐related questions.
Sources: Broadridge Investor Communication Solutions, Inc.; HSA Bank, a division of Webster Bank, N.A.

Tax information presented is not to be considered as tax advice and cannot be used for the purpose of avoiding tax penalties. Canandaigua National Bank & Trust does not provide tax, legal, or accounting advice. Please consult your personal tax advisor, attorney, or accountant for advice on these matters.