HSA withdrawals for medical expenses are tax-free; other withdrawals are taxed as income

You do not pay federal income tax on money you withdraw from a Health Savings Account if you use it to pay for may have access to medical expenses. The IRS defines these narrowly: doctor visits, prescription drugs, dental work, vision care, medical equipment, and similar costs. Withdrawals for anything else — groceries, rent, gym memberships — count as regular income and are taxed at your ordinary rate, plus a 20 percent penalty if you are under 65.

The tax treatment depends entirely on what you spend the money on, not on when you take it out or how much you take. A $500 withdrawal for dental work owes no tax. A $500 withdrawal for the same account to pay a utility bill owes income tax plus penalty on the full $500.

Key Takeaways

  • Withdrawals for may have access to medical expenses — doctor visits, prescriptions, dental, vision, medical equipment — are never taxed, regardless of your age or income.
  • Withdrawals for non-medical expenses are taxed as ordinary income plus a 20 percent penalty if you are under 65; after 65, the penalty drops but income tax remains.
  • You decide what counts as may have access to when you withdraw; the IRS does not pre-approve individual transactions, but it can audit and disallow them later.
  • Receipts and records matter: keep documentation of what you spent on, because the burden of proof falls on you if the IRS questions the withdrawal.

What counts as a may have access to medical expense

The IRS publishes a list of may have access to expenses in Publication 969. The main categories are straightforward: doctor and dentist visits, hospital stays, prescription medications, eyeglasses and contact lenses, hearing aids, crutches, wheelchairs, and insulin. Mental health treatment, physical therapy, and chiropractic care count. Copays and deductibles count. Over-the-counter drugs count only if you have a prescription for them.

Some expenses surprise people. Cosmetic surgery does not count unless it is reconstructive — fixing a broken nose qualifies, but a nose job for appearance does not. Vitamins and supplements do not count unless a doctor prescribes them for a specific medical condition. Gym memberships and general wellness programs do not count, even if your doctor recommends exercise. Teeth whitening does not count. Maternity clothes do not count, but childbirth hospital bills do.

The IRS also covers expenses for a spouse or dependent, even if they are not on your tax return. If you pay your adult child's medical bills, those withdrawals are tax-free as long as you could have claimed them as a dependent at the time of the expense.

Tax and penalty if you withdraw for non-medical reasons

Any withdrawal that does not go toward a may have access to expense is treated as taxable income. You report it on your tax return, and you owe income tax at your ordinary rate — whatever bracket you fall into. On top of that, the IRS adds a 20 percent penalty on the non-may have access to amount.

The penalty applies only if you are under 65. Once you turn 65, you can withdraw money for any reason without the 20 percent penalty. You still owe income tax on non-medical withdrawals, but the penalty disappears. This rule exists because the IRS treats HSAs like retirement accounts after 65 — similar to how traditional IRAs work.

Example: You withdraw $1,000 for a non-medical expense at age 45. You owe income tax on the $1,000 at your tax bracket rate, plus $200 in penalty. If your tax bracket is 22 percent, your total tax bill is $220 plus $200 = $420. At age 67, the same $1,000 withdrawal would owe only the $220 in income tax, with no penalty.

How the IRS tracks HSA withdrawals

Your HSA custodian — the bank or financial institution holding the account — sends you a Form 1099-SA each year showing total withdrawals. This form goes to the IRS as well. You then report those withdrawals on Form 8889 when you file your tax return, and you declare which portions were for may have access to expenses and which were not.

The IRS does not pre-screen individual transactions. You decide what to report as may have access to. However, the IRS can and does audit HSA accounts, especially when withdrawal amounts are large or patterns seem inconsistent. If you cannot produce receipts or documentation showing the expense was medical, the IRS will disallow the withdrawal and assess back taxes plus penalties.

Keep receipts and medical records for at least three years — longer if possible. The documentation should show the date, the provider or vendor, the amount, and what the expense was for. A credit card statement alone is usually not enough; you need the actual receipt or invoice showing it was a medical expense.

State income tax on HSA withdrawals

Most states follow federal rules: may have access to medical expenses are not taxed at the state level either. However, a few states tax HSA withdrawals differently. New Hampshire and Tennessee, for example, tax investment income within HSAs but not the withdrawals themselves. California taxes HSA contributions and earnings as income, though it does not tax the withdrawals if they are for may have access to expenses.

Check your state's tax authority website or speak with a tax preparer if you live in a state with unusual HSA rules. The rules vary enough that what is tax-free federally might not be tax-free at the state level, or vice versa.

Reimbursing yourself from an HSA years later

You can pay a medical expense out of pocket and then reimburse yourself from your HSA months or years later, as long as the expense occurred after you opened the account. There is no time limit on reimbursement — you could pay for a 2020 dental bill in 2024 and withdraw HSA funds tax-free to cover it.

This strategy lets you leave money in the HSA to grow and invest while you pay medical expenses from other sources. When you eventually withdraw, you have documentation of the original expense to show the IRS. Keep the receipt or invoice from the original provider, not just a record of when you reimbursed yourself.

Medicare and HSA withdrawals

Once you enroll in Medicare, the rules shift slightly. You can no longer contribute to an HSA, but you can continue to withdraw from it tax-free for may have access to medical expenses. Medicare premiums, copays, and deductibles all count as may have access to expenses. Dental and vision coverage through Medicare Advantage plans also qualifies.

However, if you withdraw HSA funds to pay for something that Medicare covers — even if you choose not to use Medicare and pay out of pocket instead — the IRS may disallow the withdrawal. The rule is complex, and it is worth consulting a tax professional if you are on Medicare and making large HSA withdrawals.

Frequently Asked Questions

Do I owe taxes if I withdraw HSA money and do not spend it on medical expenses?

Yes. Any withdrawal that does not go toward a may have access to medical expense is taxed as ordinary income, plus a 20 percent penalty if you are under 65. You report the non-may have access to portion on Form 8889 when you file your tax return.

What happens if I cannot find receipts for a medical expense I withdrew HSA money for?

If the IRS audits and you cannot produce documentation, the withdrawal will be treated as non-may have access to and taxed accordingly. Keep receipts for at least three years. If you have lost them, contact the provider and request copies — most will provide them.

Can I withdraw HSA money for my spouse's medical expenses?

Yes, as long as you are married and file jointly, or your spouse is a dependent on your tax return. The withdrawal is tax-free if it covers a may have access to medical expense for your spouse, even if they do not have their own HSA.

Do I pay taxes on HSA money that sits in the account and earns interest?

No. Interest and investment gains within an HSA are not taxed as long as the money remains in the account. You only owe tax when you withdraw for non-may have access to expenses.

What if I turn 65 and want to withdraw HSA money for non-medical reasons?

After 65, you can withdraw for any reason without the 20 percent penalty. You still owe ordinary income tax on non-medical withdrawals, but the penalty is gone. This makes HSAs function like traditional retirement accounts after 65.