When Can I Withdraw From an HSA Without Penalty?

A Health Savings Account (HSA) serves as a personal savings vehicle designed to help individuals manage healthcare costs. This account offers notable tax advantages, including tax-deductible contributions, tax-free growth on investments, and tax-free withdrawals for qualified medical expenses. HSA funds remain with the account holder and do not expire, allowing balances to accumulate over time.

Withdrawals for Qualified Medical Expenses

Withdrawals from an HSA are always tax-free and penalty-free when used for qualified medical expenses, regardless of the account holder’s age. The Internal Revenue Service (IRS) broadly defines qualified medical expenses as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.

Common examples include doctor visits, prescription medications, dental care such as fillings, braces, and extractions, and vision care like eye exams, glasses, and contact lenses. Certain over-the-counter medications and menstrual care products also qualify. Additionally, HSA funds can cover eligible long-term care insurance premiums, COBRA premiums, and Medicare Parts A, B, and D premiums, though not Medigap policies.

The medical expense must have been incurred after the HSA was formally established. There is no specific deadline for reimbursing oneself for qualified expenses, allowing account holders to pay for expenses out-of-pocket and reimburse themselves years later. This flexibility permits HSA funds to potentially grow over time through investments before being withdrawn. HSA funds can also be used to pay for the qualified medical expenses of a spouse or eligible dependents, even if they are not covered under the same high-deductible health plan.

Withdrawals After Reaching Age 65

Once an HSA account holder reaches age 65, the rules for withdrawals become more flexible. At this age, withdrawals for any purpose, whether medical or non-medical, are no longer subject to the additional 20% penalty that applies to younger account holders. This change provides greater financial freedom in retirement.

While non-medical withdrawals become penalty-free after age 65, they are still subject to ordinary income tax. This treatment is similar to distributions from traditional retirement accounts like a 401(k) or IRA. Conversely, withdrawals used for qualified medical expenses continue to remain tax-free.

HSA funds used for eligible healthcare costs, including Medicare Parts A, B, and D premiums, will remain both tax-free and penalty-free. Although eligibility to contribute to an HSA ceases upon Medicare enrollment, existing funds can continue to be used for qualified medical expenses without tax or penalty.

Withdrawals for Non-Medical Purposes

Withdrawing funds from an HSA for purposes other than qualified medical expenses before reaching age 65 carries significant financial implications. Such withdrawals are subject to a substantial 20% penalty imposed by the IRS. This penalty is applied in addition to the withdrawal amount being treated as ordinary taxable income.

Examples of non-qualified expenses include purchases like a new car, funding a vacation, covering groceries, or paying for general living expenses. Other items that do not qualify typically include cosmetic surgery unless medically necessary, babysitting services, or personal care products. The 20% penalty and income tax apply unless the withdrawal is due to the account holder’s death or disability.

Maintaining Records for Withdrawals

Meticulous record-keeping is a fundamental responsibility for all HSA account holders, particularly concerning withdrawals for qualified medical expenses. While you are not required to submit receipts with your tax return, you must be able to substantiate that all withdrawals were for eligible medical costs if audited by the IRS. This proof is crucial to avoid penalties and taxes.

It is advisable to retain detailed receipts, invoices, and Explanation of Benefits (EOB) statements for all medical expenses paid with HSA funds. These documents should clearly show the service date, provider, the individual for whom the expense was incurred, and the amount paid. Keep these records for at least three to seven years, or as long as you maintain the HSA, to align with typical IRS audit periods.

Utilizing digital copies, creating dedicated folders, or maintaining spreadsheets can help track contributions and withdrawals. Some HSA providers offer online tools to assist with storing receipts and managing documentation.