HSA withdrawals are taxed only when you spend the money on something other than may have access to medical expenses
If you withdraw money from your Health Savings Account and use it to pay for a may have access to medical expense — copays, deductibles, prescription drugs, dental work, vision care, or other costs that Medicare or your health plan would cover — you owe no tax on that withdrawal. The money comes out tax-free, and you don't report it on your tax return.
If you withdraw money and spend it on anything else — groceries, rent, a vacation, or any non-medical purchase — you pay income tax on that amount plus a 20 percent penalty. The penalty applies only to non-may have access to withdrawals; may have access to ones have no penalty at all.
The key distinction is what you actually spend the money on, not what you intend to spend it on when you withdraw it. You can withdraw $500 today and decide later whether it was for medical expenses or not. The tax treatment follows the actual use.
Key Takeaways
- Withdrawals used for may have access to medical expenses are never taxed and carry no penalty.
- Withdrawals used for non-medical purposes are taxed as income plus a 20 percent penalty.
- You do not need to report may have access to withdrawals to the IRS unless your HSA custodian issues a Form 1099-SA showing the withdrawal.
- After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as income.
- Keeping receipts and records of medical expenses protects you if the IRS questions your withdrawals.
How the IRS tracks HSA withdrawals
Your HSA custodian — the bank or financial institution holding your account — reports all withdrawals to the IRS on Form 1099-SA. This form shows the total amount you took out, but it does not tell the IRS whether you spent it on medical expenses or not. That information is yours to make and document.
When you file your tax return, you do not need to report may have access to withdrawals at all. If you withdraw $2,000 for medical expenses and spend it on medical expenses, nothing appears on your return. Non-may have access to withdrawals do appear: you report the taxable portion on Form 8889 (Health Savings Account Information) and add it to your income.
The IRS does not automatically know whether your withdrawal was may have access to or not. You are responsible for keeping that record straight. If you are audited and cannot show that a withdrawal went to medical expenses, the IRS will tax it as income plus the 20 percent penalty, plus interest on both.
What counts as a may have access to medical expense
may have access to expenses include the costs of diagnosing, treating, or managing a medical condition. This covers doctor visits, hospital stays, surgery, prescription medications, and mental health care. It also includes dental work, vision care (including glasses and contacts), hearing aids, and medical equipment like crutches or wheelchairs.
Over-the-counter medications count only if you have a prescription for them. Vitamins and supplements do not count unless they treat a specific medical condition and you have a doctor's recommendation. Cosmetic procedures do not count unless they are medically necessary — for example, reconstructive surgery after an accident or injury counts, but elective cosmetic surgery does not.
Long-term care insurance premiums and certain long-term care services are also may have access to expenses, as are Medicare premiums (Part B, Part D, and supplemental coverage) once you turn 65. Health insurance premiums you pay while unemployed and receiving unemployment benefits are may have access to expenses too.
The 20 percent penalty and when it applies
The 20 percent penalty applies only to the amount you withdraw for non-medical purposes. If you withdraw $1,000 and $600 goes to medical expenses and $400 goes to groceries, you pay income tax plus the 20 percent penalty only on the $400. You owe no tax or penalty on the $600.
The penalty is separate from income tax. If you are in the 24 percent tax bracket and withdraw $1,000 for non-medical use, you owe $240 in income tax plus $200 in penalty, for a total of $440. The penalty does not change based on your tax bracket; it is always 20 percent of the non-may have access to amount.
This penalty is one reason to be careful about withdrawing more than you need. If you are unsure whether an expense qualifies, it is safer to leave the money in the account and pay for the expense out of pocket, then reimburse yourself from the HSA later when you are certain.
HSA withdrawals after age 65
Once you turn 65, the 20 percent penalty disappears. You can withdraw money for any reason — medical or not — and pay only income tax on non-may have access to withdrawals. This makes an HSA function like a traditional IRA after 65, except that withdrawals for medical expenses remain tax-free.
Many people use this feature to let their HSA grow untouched during their working years, then use it as a supplemental retirement account after 65. You can withdraw $5,000 for a vacation and owe only income tax, not the 20 percent penalty. But if you withdraw $5,000 for medical expenses, you owe nothing.
This rule applies the moment you turn 65, regardless of whether you have retired or are still working. If you are still covered by a high-deductible health plan and contributing to an HSA, you can still take penalty-free non-medical withdrawals at 65.
Documenting your withdrawals and keeping records
Keep receipts and invoices for every medical expense you pay with HSA money. The IRS does not require you to submit these with your tax return, but you must have them if you are audited. A receipt should show the date, the provider's name, what service or product you received, and the amount paid.
If you reimburse yourself for medical expenses you paid out of pocket, keep both the original receipt and a record of when you withdrew the HSA money. This shows the IRS that the withdrawal was tied to a may have access to expense. A simple spreadsheet or folder of receipts is enough; you do not need a special form.
Some HSA custodians offer tools to track medical expenses and match them to withdrawals. If yours does, use it. If not, a personal record is sufficient. The burden is on you to prove the withdrawal was may have access to, so the more documentation you have, the safer you are.
Frequently Asked Questions
Do I have to report may have access to HSA withdrawals on my tax return?
No. may have access to withdrawals do not appear on your return at all. You only report non-may have access to withdrawals on Form 8889. Your HSA custodian sends Form 1099-SA to the IRS showing the total withdrawn, but the IRS does not know which portion was may have access to unless you tell them during an audit.
What happens if I withdraw money and do not use it for medical expenses?
You owe income tax on that amount plus a 20 percent penalty. If you are under 65, this applies immediately. If you are 65 or older, you owe only the income tax, not the penalty. You must report the non-may have access to amount on Form 8889 when you file your return.
Can I withdraw HSA money and decide later whether it was for medical expenses?
Yes. The tax treatment depends on what you actually spend the money on, not your intention when you withdraw it. You can withdraw $500 today and use it for medical expenses next month, or use it for groceries next week. Keep records of what you spend it on, because that determines whether you owe tax.
Are prescription medications always may have access to expenses?
Prescription medications are may have access to. Over-the-counter medications are may have access to only if you have a prescription for them. Vitamins and supplements are not may have access to unless a doctor recommends them to treat a specific medical condition and you can document that recommendation.
If I am 65, can I withdraw HSA money for anything without penalty?
You can withdraw for anything without the 20 percent penalty. Non-medical withdrawals are still taxed as income, but the penalty goes away. Medical withdrawals remain tax-free at any age. This makes an HSA a useful retirement savings tool if you let it grow and use it for medical expenses in retirement.