Normally, anything you take out of a health savings account that isn't spent on qualified medical expenses is taxable. The exception is if you have your account trustee transfer funds from one HSA to another, or withdraw the money and roll it over yourself. If you want to put the money into a Roth IRA instead, it's going to cost you.
If you roll HSA contributions into your Roth IRA, you'll pay income tax plus a 20 percent penalty on the amount you withdraw because your withdrawal isn't used for medical expenses.
Transferring the Money
If you qualify to put money in a Roth this year – a high income can limit your ability to contribute – you can use money you withdraw from your HSA. It's perfectly legal to spend the contents of your HSA on something other than medical care, but you pay income tax on everything you withdraw and a 20 percent penalty on top of that. If you have $10,000 in an HSA and want to take it out, that's $2,000 going to the IRS above your regular taxes.
Roth Withdrawals for Medical Expenses
Using a Roth as a health savings account has advantages. You can withdraw your contributions from a Roth tax-free for medical bills or any other reason. Your earnings are taxable if you withdraw them before the account has been open five years, or you're under 59 1/2 – and if you're younger than that age, there's a 10 percent penalty as well. The IRS waives the penalty if you use your withdrawals to pay for medical expenses greater than 10 percent of your adjusted gross income.
Roth Vs. HSA Flexibility
You have more flexibility on how you spend your Roth withdrawals than you do with an HSA. An HSA is more effective for covering medical bills, however. You can withdraw HSA earnings and contributions alike for qualified medical expenses and there's no tax.
Unlike a Roth, you do not need employment income to contribute to an HSA, and there's no reduction to your contribution limit at a high income. You do have to take out an HSA in conjunction with a high-deductible insurance policy.
Transferring Between HSAs
If you have multiple HSAs, you can direct the trustee of one HSA to transfer funds to the trustee of another HSA. This transfer isn't considered a rollover, and you don't have to report it as income or count it as a distribution. The IRS allows unlimited transfers between HSA accounts.
Leaving Money in Your HSA
If you can no longer contribute to an HSA – you've switched to a different policy, for instance – or you'd rather contribute to a Roth, you can stop putting money in your HSA and still use the current assets on medical bills. There's no time limit on when you have to spend the money already in the account. If you die with money in the HSA, it passes to your named beneficiary who has to report it as income for that year.