Learn About HSA Withdrawals and Eligible Expenses

What Is an HSA and How Withdrawals Work

A Health Savings Account (HSA) is a savings account designed to help people pay for medical expenses. Unlike a regular savings account, an HSA offers tax advantages that make it a powerful tool for managing healthcare costs. Money you contribute to an HSA is not taxed, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free. This triple tax advantage makes HSAs different from most other financial products.

To open an HSA, you must be covered by a high-deductible health plan (HDHP). As of 2024, a high-deductible plan means your deductible is at least $1,600 for individual coverage or $3,200 for family coverage. You also cannot have other health insurance that is not an HDHP, with some exceptions for specific types of coverage like dental or vision insurance.

When you withdraw money from your HSA, the process depends on how you use the account. Many HSA accounts come with a debit card that works like a regular bank card, allowing you to pay for medical expenses directly. You can also withdraw money and pay out of pocket, then reimburse yourself later. Some people keep receipts and withdraw money years later, which is allowed under HSA rules.

The account belongs to you, not your employer. This means if you change jobs, your HSA goes with you. You can keep the account even after you retire, and you can pass unused funds to your heirs. As of 2024, contribution limits are $4,150 for individual coverage and $8,300 for family coverage, though these amounts may change each year.

Practical Takeaway: Understand that an HSA is your personal account with tax benefits, and you control how and when you withdraw money. The money remains yours whether you stay at your current job or move to a new employer.

Understanding Qualified Medical Expenses

Qualified medical expenses are specific healthcare costs that the Internal Revenue Service (IRS) allows you to pay with HSA funds without owing taxes on the withdrawal. The IRS maintains a detailed list of what counts, and this list is fairly broad but has specific rules. Understanding what qualifies helps you use your HSA funds wisely and avoid penalties.

Common qualified expenses include payments for doctors, hospitals, dentists, and eye care providers. Prescription medications are covered, but over-the-counter medications without a prescription generally are not—with one exception: you may use HSA funds for over-the-counter insulin without needing a prescription. Copays and coinsurance amounts (the portions you pay after insurance covers part of a bill) also count as qualified expenses. Deductibles you pay out of pocket are qualified expenses as well.

Mental health and behavioral health services are fully covered. This includes therapy sessions, psychiatry appointments, and counseling. You can use HSA funds for substance abuse treatment programs. Preventive care services, like annual physical exams and certain screenings, count as qualified expenses. Dental work including cleanings, fillings, root canals, and orthodontia all qualify. Vision care such as eye exams, glasses, and contact lenses are covered.

Some expenses people often wonder about include medical equipment and supplies. Crutches, wheelchairs, hearing aids, and glucose monitors all count. Bandages, first aid kits, and testing supplies are covered. Even items like orthopedic shoes or arch supports may count if they are specifically for a medical condition. Home modifications for medical reasons, such as installing a ramp for wheelchair access, can be covered, though only the portion of the cost that exceeds the value added to your home counts.

Expenses that do not count include cosmetic procedures (unless they correct a deformity from injury or disease), gym memberships, vitamins and supplements (unless prescribed by a doctor for a specific medical condition), and most over-the-counter products. Travel costs to receive medical care generally do not count, though some specific situations may differ. You cannot use HSA funds to pay for health insurance premiums in most cases, though there are limited exceptions for COBRA continuation coverage or long-term care insurance.

Practical Takeaway: Keep receipts and records of medical expenses. Review the IRS Publication 502 for the full list of qualified expenses, or consult your HSA provider's list. When in doubt about whether an expense qualifies, ask your HSA plan administrator before withdrawing funds.

Rules and Penalties for Non-Qualified Withdrawals

Withdrawing money from your HSA for non-qualified expenses creates tax consequences that can significantly reduce the value of your withdrawal. Understanding these rules helps you make informed decisions about your HSA funds. If you withdraw money for something that does not count as a qualified medical expense, the amount withdrawn is added to your taxable income for that year. You owe income taxes on that amount at your regular tax rate.

In addition to income taxes, the IRS adds a 20 percent penalty tax on non-qualified withdrawals. This means if you withdraw $1,000 for a non-qualified expense and your tax bracket is 22 percent, you would owe $220 in income tax plus $200 in penalty tax, for a total of $420. This significantly reduces the money you actually receive. Some people choose to withdraw non-qualified funds anyway if they have an urgent need, understanding that the penalty is a cost of accessing their money early.

There is one important exception to the penalty: after you turn 65, you can withdraw money from your HSA for any reason without the 20 percent penalty. You will still owe income taxes on non-medical withdrawals, but the penalty goes away. This makes HSA accounts somewhat similar to traditional retirement accounts after age 65. Some people view the HSA as a supplemental retirement savings tool for this reason.

If you accidentally withdraw money for a non-qualified expense, you may be able to put the money back. You can redeposit funds into your HSA if you correct the error within a certain timeframe. However, you generally must do this quickly—the exact rules depend on your HSA provider. If you discover you spent HSA money on non-qualified expenses, contact your HSA plan administrator immediately to understand your options.

Another scenario to understand involves withdrawals after your HSA ends. If you leave your high-deductible health plan and no longer own one, your HSA still exists and you can continue using it for qualified medical expenses. However, you cannot make new contributions. Money you withdraw for non-qualified expenses after losing your HDHP coverage is still subject to the 20 percent penalty until age 65.

Practical Takeaway: Treat HSA withdrawals seriously by confirming an expense is qualified before using HSA funds. Keep documentation showing why each expense was medical in nature. If you make a mistake, contact your HSA provider quickly about correction options.

Record Keeping and Documentation Practices

The IRS does not require you to submit receipts with your tax return when you claim HSA withdrawals, but you must be able to prove your expenses are qualified if audited. This means maintaining accurate records is essential. Good record-keeping also helps you track your HSA spending and plan for future healthcare costs. Many people find that organized records make using their HSA less stressful and more strategic.

You should keep receipts or statements from every medical provider and pharmacy where you use your HSA card. These documents should show the date of service, the provider name, and the amount charged. For prescription medications, keep the pharmacy receipt that shows the medication name and date filled. For doctor visits, keep the receipt showing the date and cost. Insurance explanation of benefits (EOB) statements are valuable records because they show what your insurance covered and what you paid out of pocket.

Create a system for organizing your records. Many people use a folder—either physical or digital—organized by month or by type of expense. Others track HSA expenses in a spreadsheet with dates, provider names, and amounts. Some HSA providers offer online portals where you can upload receipts and track expenses. Taking advantage of these tools makes documentation easier. Digital photos of receipts work well for backup, especially since paper receipts fade over time.

For larger expenses like surgeries or ongoing treatments, create a detailed file. Include the provider's invoice, your portion of the bill, any prior authorization documents, and the insurance EOB. If you have questions about whether an expense was properly processed, having detailed documentation helps you work with both your provider and your HSA plan. When you withdraw funds for major expenses,