Steps for Closing Your Health Savings Account

Quick answer

• Determine if closing your HSA is the right move based on your health needs and financial goals.
• Review your HSA balance and understand any withdrawal penalties or tax implications.
• Identify the custodian of your HSA and locate their specific closing procedures.
• Initiate the closure process by following your custodian’s instructions, which may involve forms or online requests.
• Decide how to handle your HSA funds: transfer, withdraw, or leave them invested.
• Keep records of your HSA closure for tax purposes.

Who this is for

• Individuals who no longer have an eligible High Deductible Health Plan (HDHP).
• People who have alternative savings or investment vehicles they prefer over an HSA.
• Those who are consolidating their finances and want to simplify their accounts.

What to check first (before you act)

Your Health Insurance Status and HSA Eligibility

Before you close your Health Savings Account (HSA), it’s crucial to confirm your current health insurance situation. HSAs are designed to be paired with High Deductible Health Plans (HDHPs). If you are no longer enrolled in an HDHP, you generally cannot contribute to your HSA. However, you can still hold and manage funds in an existing HSA. Understand that losing HDHP coverage might trigger a need to make decisions about your HSA funds sooner rather than later.

Your HSA Balance and Potential Costs

Your HSA balance is the amount of money currently in the account. Check this figure carefully. Depending on how you plan to use these funds after closing, there might be tax implications or withdrawal penalties. For instance, withdrawing funds for non-qualified medical expenses before age 65 will typically result in income tax plus a 20% penalty. If your HSA is managed by an investment firm, understand their fee structure for managing assets, as this might influence your decision to close or continue holding funds.

Your Reasons for Closing

Clearly define why you want to close your HSA. Are you moving to a traditional health plan? Are you unhappy with your HSA provider’s fees or investment options? Do you need the funds for a specific, non-medical purpose? Having a clear reason will help you make the best decision about how to handle the funds and whether closing is truly the optimal path.

Your HSA Provider’s Procedures

Each HSA custodian has its own specific process for account closure. This can range from a simple online form to requiring a signed, notarized document. You’ll need to identify your HSA provider (e.g., a bank, credit union, or investment brokerage) and then visit their website or contact their customer service to find out their exact requirements for closing an account. This information is vital to avoid delays or complications.

Step-by-step (how to close a hsa account)

1. Confirm HDHP Status:

• What to do: Verify if you are currently enrolled in an HDHP.
• What “good” looks like: You have a clear understanding of your current health insurance plan and its eligibility for HSA contributions.
• Common mistake and how to avoid it: Assuming you still have an HDHP without checking your current insurance policy. Always confirm with your insurance provider.

2. Review HSA Balance and Funds:

• What to do: Log in to your HSA account and note the total balance, including any invested funds.
• What “good” looks like: You know the exact amount of money in your HSA and how it’s allocated (cash vs. investments).
• Common mistake and how to avoid it: Not accounting for potential investment gains or losses that might affect the final balance. Check your investment performance.

3. Understand Withdrawal Rules and Taxes:

• What to do: Research the tax implications of withdrawing funds from your HSA. Consult IRS Publication 969 or a tax professional.
• What “good” looks like: You understand that withdrawals for qualified medical expenses are tax-free, but non-qualified withdrawals before age 65 are subject to income tax and a 10% penalty (check official IRS guidance for current rates).
• Common mistake and how to avoid it: Assuming all withdrawals are penalty-free. Non-qualified withdrawals incur taxes and penalties.

4. Identify Your HSA Custodian:

• What to do: Find out which financial institution holds your HSA. This information is usually on your statements or by contacting your former health insurer if they offered it.
• What “good” looks like: You know the name of the company managing your HSA.
• Common mistake and how to avoid it: Confusing your health insurer with your HSA custodian. They are often separate entities.

5. Visit Custodian’s Website or Contact Them:

• What to do: Go to your HSA custodian’s website or call their customer service. Look for sections on account management or closure.
• What “good” looks like: You have found the specific instructions or forms required to close your HSA.
• Common mistake and how to avoid it: Trying to close the account through your health insurance provider instead of the HSA custodian.

6. Choose Your Fund Strategy:

• What to do: Decide what to do with your HSA funds: transfer to another HSA, withdraw for medical expenses, withdraw for non-medical reasons, or leave invested.
• What “good” looks like: You have a clear plan for your funds that aligns with your financial and health needs.
• Common mistake and how to avoid it: Making a hasty decision about fund distribution without considering the tax implications.

7. Initiate the Closure Process:

• What to do: Complete and submit any required forms or follow the online procedure provided by your custodian.
• What “good” looks like: You have successfully submitted your request to close the account.
• Common mistake and how to avoid it: Not filling out forms completely or accurately, which can delay or reject the closure.

8. Transfer or Withdraw Funds:

• What to do: If transferring, follow the custodian’s instructions for rolling over funds to another HSA or investment account. If withdrawing, provide the necessary banking information.
• What “good” looks like: Your funds have been moved to your desired destination or are being processed for withdrawal.
• Common mistake and how to avoid it: Cashing out without considering tax consequences, especially if you still have an eligible HDHP or plan to get one.

9. Receive Confirmation and Final Statement:

• What to do: Ensure you receive confirmation that your account has been closed and a final statement detailing any transactions.
• What “good” looks like: You have official documentation confirming the account closure.
• Common mistake and how to avoid it: Not keeping the final statement, which is important for tax reporting.

10. Update Records:

• What to do: File your final HSA statement and any closure confirmation documents with your personal financial records.
• What “good” looks like: Your financial documentation is up-to-date and organized.
• Common mistake and how to avoid it: Forgetting to keep records, which can cause issues if you need to refer back to them for tax purposes.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Closing HSA while still on HDHP	Inability to contribute to a new HSA, loss of tax advantages for future savings.	Reconsider closing if you still have an HDHP and plan to contribute. If you must close, understand you can’t open another HSA for 61 months after leaving an HDHP.
Withdrawing funds for non-qualified expenses	Income tax on the withdrawn amount plus a 20% penalty (if under 65).	Only withdraw for qualified medical expenses, or wait until age 65 when the penalty is waived (though income tax still applies).
Not checking custodian’s specific closure process	Delays, rejection of closure request, potential ongoing fees.	Always consult your HSA provider’s website or customer service for their exact procedure.
Forgetting to transfer or withdraw funds	Account may be deemed abandoned or subject to escheatment laws, where unclaimed property goes to the state.	Follow through with fund distribution as per your chosen strategy immediately after initiating closure.
Not keeping final statements	Difficulty in tax reporting or proving account closure if questions arise later.	Save all final statements and confirmation documents for your tax records.
Assuming all medical expenses are “qualified”	Unexpected tax bills and penalties on non-qualified withdrawals.	Refer to IRS Publication 502 for a definitive list of qualified medical expenses.
Not considering investment performance	Underestimating the final balance or overestimating it, leading to incorrect planning.	Review your investment performance right before making final decisions about fund distribution.
Closing without a clear financial goal	Funds may be used impulsively or inefficiently, negating potential benefits.	Define your purpose for the funds before initiating closure, whether it’s for immediate needs or other investments.

Decision rules (simple if/then)

• If you are no longer enrolled in a High Deductible Health Plan (HDHP), then you should review your HSA closure options because you cannot make new contributions.
• If you plan to withdraw funds for non-qualified expenses before age 65, then be prepared to pay income tax and a 20% penalty on the withdrawn amount because these are the IRS rules.
• If you still have an HDHP, then consider if closing your HSA is truly necessary, because you are missing out on tax-advantaged savings opportunities.
• If your HSA custodian has high fees or poor investment options, then closing and moving funds to a better provider (either another HSA or a taxable account) might be a good idea because it can save you money.
• If you need funds for qualified medical expenses, then withdrawing from your HSA is generally the most tax-efficient option because these withdrawals are tax-free.
• If you are over age 65, then withdrawing funds for any reason is permissible without penalty, though income tax will still apply to non-qualified withdrawals because the penalty is waived at this age.
• If you have a large HSA balance and plan to get another HDHP in the future, then consider leaving your funds invested rather than withdrawing them to preserve their tax-advantaged growth potential.
• If you are closing your HSA because you are switching to a new HSA provider, then initiate a direct trustee-to-trustee transfer to avoid potential tax issues and ensure continuity.
• If you are unsure about the tax implications of your planned fund distribution, then consult a tax professional because they can provide personalized advice based on your specific situation.
• If your HSA custodian requires a specific form for closure, then ensure you complete it accurately and thoroughly to avoid processing delays or rejection.
• If you are closing your HSA and withdrawing all funds, then ensure you have a plan for what to do with the money to avoid impulsive spending.

FAQ

Can I keep my HSA open even if I don’t have an HDHP anymore?

Yes, you can keep your HSA open and hold funds in it even after you are no longer enrolled in an HDHP. However, you will not be able to make new contributions.

What happens to my money if I close my HSA?

You have several options: transfer it to another HSA, withdraw it for qualified medical expenses (tax-free), withdraw it for non-qualified expenses (taxable, plus a penalty if under 65), or leave it invested if your custodian allows and then manage it.

Are there any fees to close an HSA?

Some custodians may charge a fee for closing an account, especially if you are liquidating investments. Check with your specific HSA provider for their fee schedule.

How long does it take to close an HSA?

The timeline varies by custodian. It can take anywhere from a few days to a few weeks, depending on their internal processes and how you choose to distribute your funds.

Can I transfer my HSA to another HSA provider?

Yes, you can perform a trustee-to-trustee transfer to move your HSA funds to a new HSA provider. This is often the preferred method to avoid potential tax issues.

What if I have investments in my HSA?

If you have invested funds, you will need to decide whether to sell them and withdraw the cash, or transfer the investments directly to another investment account (if your custodian allows for a direct transfer of assets).

Do I need to report closing my HSA on my taxes?

You generally don’t need to report the closure itself on your taxes unless you made non-qualified withdrawals. In that case, you’ll report the income and penalty on your tax return.

What this page does NOT cover (and where to go next)

• Detailed tax advice for specific withdrawal scenarios. Consult a tax professional.
• Investment strategies for HSA funds. Explore investment resources.
• The process of opening a new HSA or transferring funds to another provider. Research HSA providers.
• Specific rules for qualified medical expenses. Refer to IRS Publication 502.
• State-specific tax implications related to HSAs. Check your state’s Department of Revenue.