1. Withdrawals from an HSA to pay for qualified medical expenses are always income-tax free, but withdrawals from traditional IRAs are generally subject to ordinary income tax—no matter the reason for the withdrawal.
2. There is no required minimum distribution (RMD) requirement from an HSA.
Major Differences Between HSA and IRA
On the other hand, most withdrawals from an HSA taken for purposes other than qualified medical expenses before age 65 will result in a 20 percent penalty tax. This compares to a 10 percent penalty tax for most withdrawals before age 59 ½ for IRAs and other qualified plans.
Another difference between HSAs and IRAs is how these accounts are treated after the death of the owner.
Surviving spouse:
- After the death of an IRA owner, if the surviving spouse is the beneficiary, then the surviving spouse has the option to retitle the IRA in his or her name.
- For an HSA, if the surviving spouse is the beneficiary, then the survivor is automatically treated as the new owner of the HSA, and it continues to operate.
Non-spouse Beneficiaries:
- Non-spouse beneficiaries of IRAs generally have to liquidate the inherited account—and pay income tax—by the end of the tenth year after the account owner’s death.
- If a non-spouse inherits an HSA account, then the HSA will no longer be considered an has, and the fair market value of the HSA will be included in the beneficiary’s income for the year of the HSA owner’s death. However, any medical expenses of the decedent paid by the account beneficiary will reduce the amount of the HSA value included in income.