Do HSA Accounts Earn Interest? Rates, Taxes, and Withdrawals

Yes, HSA accounts earn interest. The bank or financial services company that holds your Health Savings Account pays interest on the cash portion of your balance, and that interest grows federal-tax-free as long as it stays inside the account. How much you earn depends on your custodian, your balance, and whether you invest any of the funds beyond cash.

How the Interest Is Calculated and Credited

Your custodian sets the rate. Most use daily compounding, so interest is calculated on each day’s balance and credited to the account monthly. Deposits start earning almost immediately.

Many custodians use tiered rates, meaning the percentage you earn rises as your balance reaches set thresholds. You might earn a base rate on the first $2,000 and a higher rate on amounts above that, for example. The Truth in Savings disclosure your custodian provides spells out the exact annual percentage yield and any fees, and your monthly statement shows the interest added.

What HSA Interest Rates Actually Look Like

Rates vary widely. As of early 2026, standard cash sweep rates at major HSA providers ran roughly 0.02% to 0.10% APY for basic deposit accounts. Some custodians offer a money market option that pays much more. Fidelity’s HSA money market fund showed a 7-day yield of 3.41% as of February 2026.¹ The gap between the lowest and highest available cash rate can be dramatic, so comparing custodians before you open an account, or before you move an existing one, can meaningfully affect your long-term balance.

The headline rate alone understates what the interest is worth. Because HSA interest is not taxed while it stays in the account, a 3% HSA yield outperforms a 3% yield in a taxable savings account. Someone in the 22% federal bracket would need a taxable account paying roughly 3.85% just to match a 3% HSA rate after taxes.

How HSA Interest Is Taxed

Under federal law, an HSA is exempt from taxation as long as it remains a valid Health Savings Account.² Interest, dividends, and investment gains inside the account are not included in your gross income each year. A regular savings account sends you a Form 1099-INT and the interest gets taxed at your ordinary income rate; HSA earnings compound without any annual tax drag.³

With federal income tax rates running from 10% to 37% in 2026, shielding earnings from those rates lets the balance compound faster over decades.⁴

You Still File Form 8889

Interest is not taxed while it sits in the HSA, but you still have a filing obligation. If you or your employer made contributions, or if you took any distributions during the year, you must attach Form 8889 to your federal return. It reports contributions, calculates the deduction, and accounts for distributions.⁵ You do not separately report the interest itself as income, but skipping the form can trigger IRS notices.

State Tax Can Be Different

Federal tax-free treatment does not always carry over. California and New Jersey do not allow a state income tax deduction for HSA contributions, and they treat HSA earnings, including interest, as taxable state income. A small number of other states have partial differences. If your state does not follow the federal HSA rules, your interest and investment gains may appear on your state return even though they remain tax-free federally.

Investing the Balance Above Cash

Once your cash balance passes a custodian-set threshold, often between $1,000 and $2,000, you can invest the amount above that threshold in mutual funds, index funds, or in some cases individual stocks through a brokerage window. Returns depend on market performance rather than a fixed rate, so the growth potential is higher and so is the risk.

Dividends and capital gains generated inside an HSA are reinvested and get the same federal tax-free treatment as cash interest, as long as they stay in the account.² Some custodians charge a small monthly or quarterly fee for investment access, so check whether that cost outweighs the expected return at lower balances. The cash and investment portions are tracked separately, and you can typically move money between them at any time.

Keeping the Interest Tax-Free When You Withdraw

If you pull money out of the HSA, whether from interest, investment gains, or your original contributions, and use it for anything other than a qualified medical expense, the amount is included in your gross income and hit with an additional 20% tax penalty.² Qualified medical expenses broadly include doctor visits, prescriptions, dental care, vision care, and certain insurance premiums such as COBRA and long-term care coverage.³

Two situations remove the 20% penalty: disability and death of the account holder. In both, the funds are still included in income if not used for medical expenses, but the extra penalty does not apply.²

After Age 65

At age 65 the 20% penalty for non-medical withdrawals goes away permanently.² You can still use the account, including all accumulated interest and gains, tax-free for qualified medical expenses. At this stage qualified expenses also include most Medicare premiums, though not Medigap premiums.³ Non-medical withdrawals after 65 are taxed as ordinary income with no extra penalty, which makes the account function much like a traditional retirement account for non-medical spending while keeping the tax-free advantage for healthcare costs. One caveat: once you enroll in Medicare, you can no longer make new HSA contributions, though the existing balance keeps earning and can still be spent.

The Interest Follows You

Every dollar in your HSA, including all interest and investment gains, belongs to you the moment it’s credited. Federal law requires that your interest in the account balance be nonforfeitable, even if your employer made the original contributions.²

The account follows you when you change jobs, retire, or switch to a health plan that is not HDHP-eligible. You can no longer contribute if you lose HDHP coverage, but the existing balance stays yours to spend on qualified medical expenses or to keep growing. To move to a custodian with better rates or lower fees, a trustee-to-trustee transfer avoids any tax consequences and has no annual limit.³

What Happens to Accumulated Interest at Death

The tax treatment after death depends on who you name as beneficiary. If your spouse is the designated beneficiary, the HSA becomes their own HSA. They take over the account, continue earning tax-free interest, and use the funds under the same rules.⁵

If a non-spouse inherits, the HSA ceases to exist as of the date of death. The full fair market value, including all accumulated interest and investment gains, becomes taxable income to that beneficiary in the year of death. The taxable amount can be reduced by any qualified medical expenses of the deceased that the beneficiary pays within one year after the date of death.³ If the estate is the beneficiary rather than a named person, the fair market value is included on the deceased person’s final return. Naming a spouse preserves the tax-free status of everything the interest has built.

1
Fidelity Investments. Health Savings Account – HSA Benefits
2
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
3
Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
4
Internal Revenue Service. Federal Income Tax Rates and Brackets
5
Internal Revenue Service. Instructions for Form 8889