What Happens to Unused HSA Funds: Rollover, Age 65, and Heirs

Unused HSA funds roll over every year and never expire. Whatever you don’t spend by December 31 simply stays in the account, keeps earning interest or investment returns, and remains available to you for the rest of your life. Federal law makes the balance nonforfeitable, so no employer, provider, or plan year deadline can take it away from you.¹

The Balance Rolls Over Automatically

You don’t have to do anything to preserve unused funds. Under 26 U.S.C. § 223, the money in your HSA legally belongs to you and cannot be forfeited.¹ There is no election to make, no paperwork to file, and no limit on how large your balance can grow.

This is where an HSA differs sharply from a Flexible Spending Account. An FSA typically requires you to spend most or all of your contributions within the plan year or forfeit them. An HSA behaves more like a retirement account: contributions stay available indefinitely, and the account continues earning returns year after year.²

The Account Stays With You If You Leave Your Job

Your HSA belongs to you personally, not to your employer. If you change jobs, get laid off, or retire, the account and its full balance stay with you.² You can keep spending the funds tax-free on qualified medical expenses even if your next employer doesn’t offer a high-deductible plan or any health coverage at all. The only restriction is on new contributions: you can add to the account only in months when you’re covered by a qualifying HDHP.

If you want to move an old HSA to a new provider, you have two options. A direct trustee-to-trustee transfer moves the money between providers without you touching it. These transfers are unlimited, not taxable, and not reported as contributions or distributions.³ Alternatively, you can take a distribution and redeposit it into another HSA within 60 days, but this indirect rollover is limited to once every 12 months and shows up on your tax return.⁴

You Can Invest What You Don’t Spend

Once your cash balance clears a threshold set by your provider (often between $1,000 and $2,000), you can put the excess into mutual funds, index funds, bonds, or whatever other options the provider offers. The specific menu varies.

Growth inside the account isn’t subject to federal income tax, so dividends, interest, and capital gains compound without annual tax drag. Combined with the deduction on contributions and the tax-free withdrawals for medical expenses, this makes an HSA one of the most tax-efficient accounts available.²

Providers do charge fees, though. Monthly maintenance fees, investment management fees, and account closure fees vary widely, and if they’re eating into your returns it’s worth comparing providers.

You Can Reimburse Yourself for Past Medical Bills

There is no deadline for pulling money out for a qualified medical expense. If you pay a doctor’s bill out of pocket today, you can withdraw from your HSA to reimburse yourself months or even years later, as long as the expense was incurred after the account was opened. That flexibility is one reason many account holders let balances grow untouched: paying medical costs from other funds now, then reimbursing themselves in retirement, effectively converts the HSA into a long-term tax-advantaged account.

Qualified expenses cover a broad range: doctor visits, prescriptions, dental care, vision care, mental health services, and medical equipment. Since 2020, over-the-counter medicines and menstrual care products also qualify without a prescription.

Keep receipts. The IRS can audit HSA distributions, and the standard statute of limitations is three years from the date you file the return that reported the distribution. Holding onto documentation for at least that long protects you if the IRS questions whether a withdrawal covered a qualified expense.

Non-Medical Withdrawals Before Age 65

If you take money out for something other than a qualified medical expense before age 65, the withdrawal counts as taxable income and carries an additional 20% penalty on top of your regular tax rate.⁵ For someone in the 22% bracket, that adds up to a combined 42% on the withdrawal, which makes non-medical distributions before 65 a poor choice in most situations.

Two exceptions waive the 20% penalty: disability (as defined by the IRS) and death. The withdrawal is still taxable as ordinary income, but the extra penalty doesn’t apply.⁵

What Changes at Age 65

Once you turn 65, the 20% penalty for non-medical withdrawals disappears.² You can spend the money on anything (a vacation, home repairs, everyday living expenses) and the only tax consequence is that the withdrawal counts as ordinary income. In that respect, a non-medical HSA withdrawal after 65 works the same way as a traditional IRA distribution.

Withdrawals for qualified medical expenses remain fully tax-free at any age, so healthcare spending is still the most efficient use of the account. After 65, qualified expenses expand to include Medicare premiums for Parts A, B, C (Medicare Advantage), and Part D. Medigap premiums do not qualify.

The Medicare Contribution Trap

Once you enroll in Medicare, you can no longer contribute to an HSA. Existing funds still come out tax-free for qualified medical expenses, but no new dollars can go in. If you’re still working at 65 and want to keep contributing, you can delay Medicare enrollment. Be careful, though: if you later sign up for Medicare Part A, coverage can be applied retroactively up to six months.⁶ Any HSA contributions you made during that retroactive window become excess contributions subject to a 6% excise tax. To avoid the problem, stop contributing at least six months before you plan to enroll.

What Happens to Unused Funds When You Die

The fate of your remaining balance depends entirely on who you name as beneficiary.

Spouse

If your surviving spouse is the designated beneficiary, the account transfers to them and remains an HSA. All the same tax advantages carry over: tax-free withdrawals for medical expenses, tax-free growth, and the ability to keep contributing if the spouse has qualifying HDHP coverage.⁷

Non-Spouse Beneficiary

If anyone other than a spouse inherits, whether a child, sibling, parent, or friend, the account stops being an HSA on the date of death. The fair market value on that date becomes taxable income to the beneficiary for that year. Two things can reduce that tax hit. First, if the beneficiary pays any of the deceased account holder’s qualifying medical expenses that were incurred before death, those payments can be subtracted from the taxable amount, but only if paid within one year of the date of death.⁵ Second, if the inherited funds are subject to federal estate tax, the beneficiary may claim a deduction for the estate tax attributable to that income.

Estate

If no beneficiary is named, or the estate itself is the beneficiary, the fair market value is included on the deceased account holder’s final tax return rather than a beneficiary’s return. The tax is owed by the estate.⁵

Naming and updating a beneficiary is a small piece of paperwork with a large tax consequence, especially if you’re married. Check your HSA provider’s records if you can’t remember whether you’ve done it.

1
Legal Information Institute. Definition: Health Savings Account From 26 USC 223(d)(1)
2
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
3
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
4
Internal Revenue Service. Instructions for Form 8889
5
Office of the Law Revision Counsel. 26 U.S. Code 223 – Health Savings Accounts
6
Medicare.gov. When Does Medicare Coverage Start
7
Internal Revenue Service. Individuals Who Qualify for an HSA