HSA withdrawals are taxable only when you use the money for something other than a may have access to medical expense

If you withdraw money from your Health Savings Account and spend it on a may have access to medical expense — one the IRS recognizes — you pay no income tax on that withdrawal. If you withdraw money for any other reason, you owe income tax on the full amount you took out, plus a 20 percent penalty tax on top of that. The tax treatment depends entirely on what you actually spent the money on, not on how you label the withdrawal.

The IRS does not require you to submit receipts when you withdraw money, but it does require you to keep records. If you cannot show that a withdrawal went toward a may have access to expense, the IRS can treat it as taxable income if you are audited. Many people withdraw money for non-medical reasons and straightforward accept the tax and penalty as the cost of early access to their savings.

Key Takeaways

  • Withdrawals for may have access to medical expenses — copays, deductibles, prescriptions, dental work, vision care, and many other costs — are never taxed.
  • Withdrawals for anything else trigger both income tax at your regular rate and a 20 percent penalty tax, except after age 65.
  • You must keep receipts and records to prove a withdrawal was medical, though the IRS does not require you to submit them at withdrawal time.
  • After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as income.

What counts as a may have access to medical expense

may have access to expenses include the obvious ones: doctor visits, hospital stays, surgery, prescription medications, and dental and vision care. They also include medical equipment and supplies — blood pressure monitors, glucose meters, crutches, wheelchairs, hearing aids, and the batteries and replacement parts they need. Psychiatric care and substance abuse treatment are covered. Physical therapy, chiropractic care, and acupuncture count if a doctor prescribes them.

The list extends to things many people do not think of as medical. Long-term care insurance premiums are may have access to expenses. So are certain health insurance premiums if you are unemployed and receiving unemployment benefits. Insulin and other diabetes supplies, even if you buy them over the counter, are may have access to. Menstrual products became may have access to expenses starting in 2023. Certain over-the-counter medications — pain relievers, cold medicine, allergy medicine, antacids — are may have access to if you have a prescription or a doctor's note saying you need them.

Expenses that are not may have access to include cosmetic procedures unless they treat an injury or illness, gym memberships and fitness equipment, most vitamins and supplements unless prescribed by a doctor, and general wellness products. Teeth whitening is not covered. Travel to a medical appointment is not covered, even if the appointment itself is. If you are unsure whether something qualifies, the IRS publishes a full list in Publication 502.

The tax and penalty on non-may have access to withdrawals

When you withdraw money for a non-may have access to expense, you owe two separate taxes. First, you pay income tax at your ordinary tax rate — the same rate you pay on wages or other income. If you are in the 22 percent tax bracket, you owe 22 percent of the withdrawal amount as income tax. Second, you owe a 20 percent penalty tax on the same amount. Together, these can take 42 percent of your withdrawal before you even spend it.

The penalty is separate from the income tax, not a reduction of it. If you withdraw $1,000 for a non-may have access to expense and you are in the 22 percent bracket, you owe $220 in income tax plus $200 in penalty tax, for a total of $420. Your HSA custodian — the bank or financial institution holding your account — does not automatically withhold these taxes. You are responsible for paying them when you file your tax return, or you can ask the custodian to withhold taxes from the withdrawal at the time you take the money out.

The age 65 exception

Once you turn 65, the 20 percent penalty tax goes away. You can withdraw money from your HSA for any reason — medical or not — and you will not owe the penalty. However, you still owe income tax on non-medical withdrawals at your ordinary tax rate. This makes an HSA function like a traditional IRA after age 65: you can use it for retirement savings without penalty, but you pay income tax on the money when you take it out.

This exception applies only to the penalty, not to the income tax. If you withdraw $1,000 for a non-may have access to expense after age 65 and you are in the 22 percent bracket, you owe $220 in income tax but no penalty. Medical withdrawals remain tax-free at any age.

How the IRS verifies may have access to expenses

You do not have to submit receipts to your HSA custodian when you make a withdrawal. Many people withdraw money without any documentation at all. However, the IRS requires you to keep records — receipts, invoices, medical bills, pharmacy records — showing that your withdrawals were for may have access to expenses. If you are audited, you must be able to produce these records to prove the withdrawals were legitimate.

If you cannot show documentation for a withdrawal, the IRS can treat it as a non-may have access to withdrawal and assess income tax and penalty retroactively, even years later. The statute of limitations is normally three years, but it can be longer if the IRS believes you significantly underreported income. Keeping organized records — a folder of receipts, a spreadsheet of dates and amounts, or photos of medical bills — protects you if an audit happens.

Reimbursing yourself from an HSA

You can withdraw money from your HSA to reimburse yourself for a medical expense you paid out of pocket in a previous year, even years ago. The withdrawal is still tax-free as long as the original expense was may have access to and you have documentation. Some people use this strategy to let their HSA grow as an investment: they pay medical expenses from their regular checking account and leave the HSA untouched, then withdraw a lump sum years later to reimburse themselves for those old expenses.

The IRS does not set a time limit on how far back you can go, but you must have kept records of the original expense. If you paid a dental bill in 2015 and still have the receipt, you can withdraw money in 2024 to reimburse yourself. This approach only works if you actually paid the expense yourself; you cannot reimburse yourself for expenses covered by insurance.

Withdrawals and your HSA investment earnings

If your HSA holds investments — stocks, bonds, mutual funds — and those investments have gained value, a withdrawal includes both your original contributions and the earnings. If you withdraw $5,000 and $1,000 of that is investment gain, the entire $5,000 is treated as a withdrawal. If the withdrawal is for a may have access to expense, none of it is taxed. If it is for a non-may have access to expense, the entire $5,000 — including the $1,000 gain — is subject to income tax and penalty.

This is different from a traditional brokerage account, where you could withdraw only your contributions and leave the gains untouched. With an HSA, you cannot separate the two. The order in which money comes out depends on your custodian's rules, but the tax treatment is the same regardless.

Frequently Asked Questions

Can I withdraw HSA money and pay it back later without taxes?

No. Once money leaves your HSA, it is treated as a withdrawal. If you withdraw it for a non-may have access to expense, you owe taxes and penalty when ready, even if you put money back into the account later. Recontributing does not erase the tax liability. However, you can withdraw money to reimburse yourself for a medical expense you paid in the past.

What happens if I accidentally withdraw for a non-may have access to expense?

You owe income tax and the 20 percent penalty on that withdrawal when you file your tax return. There is no grace period or way to undo it. If you realize the mistake before filing, you can ask your HSA custodian whether they allow corrective distributions, though this is not common. The best approach is to be careful about what you withdraw and keep records of every withdrawal.

Do I have to report HSA withdrawals to the IRS?

Your HSA custodian reports all withdrawals to the IRS on Form 5498-SA. You report may have access to medical expenses on Form 8889 when you file your tax return. If you take a non-may have access to withdrawal, you report it as taxable income. The IRS cross-checks these forms, so misreporting is likely to be caught.

Are HSA withdrawals for insurance premiums taxable?

Withdrawals to pay health insurance premiums are tax-free only in specific situations: if you are receiving unemployment benefits, if you are retired and over 65, or if you are paying for long-term care insurance. Withdrawals to pay regular health insurance premiums while you are employed are not may have access to and are subject to income tax and penalty.

Can I withdraw HSA money to pay someone else's medical expenses?

Yes, as long as that person is your dependent for tax purposes. You can withdraw money to pay for your spouse's or child's may have access to medical expenses. You cannot withdraw money to pay for a parent's or sibling's medical expenses unless they are claimed as your dependent on your tax return.