Can You Really Use Your HSA for Anything?

A Health Savings Account (HSA) is a savings account designed to help individuals manage healthcare costs. It offers tax advantages, allowing funds to be contributed, grown, and withdrawn tax-free when used for eligible medical expenses. An HSA functions as a personal savings vehicle for healthcare, distinct from health insurance, and is typically available to those with a high-deductible health plan. Its primary purpose is to provide a dedicated fund for immediate and future healthcare needs.

Understanding Qualified Medical Expenses

Health Savings Account funds are primarily designated for “qualified medical expenses,” which are defined by federal guidelines. These are costs incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any part or function of the body. To qualify, expenses must be primarily for alleviating a physical or mental defect or illness, rather than merely beneficial to general health.

Common examples of qualified medical expenses include payments for doctor visits, prescription medications, and dental care such as cleanings, fillings, and braces. Vision care, including eye exams, eyeglasses, and contact lenses, also falls under this category. Certain over-the-counter medications and supplies, like pain relievers, allergy medications, bandages, and menstrual products, became eligible without a prescription starting in 2020.

Payments for hospital services, laboratory fees, and ambulance services are qualified medical expenses. Specialized items such as hearing aids, crutches, and medically necessary equipment are also eligible. Funds can be used for these expenses for the account holder, their spouse, or qualified dependents.

When HSA funds are used for qualified medical expenses, withdrawals are tax-free and penalty-free at any age. Maintaining detailed records, such as receipts and explanations of benefits, is important to substantiate these expenses in case of an audit.

Using Funds for Non-Medical Expenses

Using Health Savings Account funds for expenses not defined as qualified medical costs before reaching age 65 carries specific financial consequences. Any withdrawal made for a non-medical purpose prior to this age milestone is subject to both ordinary income tax and an additional 20% penalty. For instance, if an individual withdraws $500 for a non-qualified expense, a $100 penalty would be assessed in addition to regular income taxes.

Examples of non-qualified expenses include general living costs, such as groceries, rent payments, or non-medical travel. Items like gym memberships, unless medically prescribed to treat a specific condition, are also typically not considered qualified. Cosmetic procedures performed for aesthetic reasons rather than to correct a deformity resulting from an injury or illness would likewise fall into the non-qualified category.

The strict rule ensures HSAs primarily cover healthcare expenditures. The income tax and significant penalty discourage using these tax-advantaged funds for personal consumption. This dual financial consequence substantially reduces the value of withdrawn funds.

Account holders under age 65 must verify that any intended use of HSA funds aligns with the definition of a qualified medical expense. Mischaracterizing an expense, even unintentionally, can lead to unexpected tax liabilities and penalties.

HSA Use After Age 65

A significant shift in Health Savings Account withdrawal rules occurs once the account holder reaches age 65. At this point, the 20% penalty for non-qualified withdrawals is eliminated, providing greater flexibility. This change means that individuals can withdraw funds for any purpose, not just medical expenses, without incurring the additional penalty.

However, withdrawals used for non-medical expenses after age 65 remain subject to ordinary income tax. This treatment is similar to distributions from a traditional Individual Retirement Account (IRA), where withdrawals are taxed as regular income. Therefore, while the penalty is waived, the tax-free benefit of the HSA is preserved only for qualified medical expenditures.

For those continuing to incur healthcare costs, using HSA funds for qualified medical expenses after age 65 still allows for tax-free and penalty-free distributions. This includes eligible expenses such as Medicare Part A, B, C, or D premiums, and employer-sponsored retiree health insurance premiums.

This expanded flexibility after age 65 allows HSAs to serve as a versatile retirement savings tool. Funds not needed for medical expenses can supplement retirement income, though income tax applies to non-medical withdrawals.