Do You Pay Taxes on HSA Distributions? Rules After Age 65

Money you take out of a Health Savings Account is fully tax-free when it pays for qualified medical expenses for you, your spouse, or your tax dependents. Any other withdrawal is added to your gross income and hit with an additional 20% tax. The 20% penalty goes away at age 65, but ordinary income tax on non-medical withdrawals does not. So the answer to whether you pay taxes on HSA distributions depends on what you spent the money on and how old you were when you took it out.

What Counts as a Qualified Medical Expense

The tax code defines qualified medical expenses broadly: costs tied to diagnosing, treating, or preventing disease, and care that affects any structure or function of the body.¹ In practice that covers doctor visits, hospital bills, prescriptions, insulin, dental work, vision care including exams and contacts, and mental health services. Withdrawals that pay for these are excluded from your gross income entirely.²

Over-the-counter medications and menstrual care products also qualify. The CARES Act added them for purchases made after December 31, 2019, and no prescription is needed.³

The tax-free treatment extends to expenses for a spouse and any tax dependents, so paying for a child’s orthodontia or a spouse’s emergency room bill from your HSA still comes out untaxed.⁴ The IRS does not verify at the time of withdrawal that a purchase qualifies. Keep your receipts. If your return is audited, documentation is what stands between you and a reclassified distribution.

Insurance Premiums: What You Can and Cannot Pay

Premiums are the area where people most often get this wrong. As a rule, you cannot use HSA money tax-free to pay health insurance premiums. The IRS lists narrow exceptions:⁴

COBRA continuation coverage premiums qualify.
Health coverage premiums qualify while you are receiving federal or state unemployment compensation.
Long-term care insurance premiums qualify, subject to age-based dollar limits.
At 65 or older, premiums for Medicare Part A, Part B, Part D, and Medicare Advantage qualify. Medigap (Medicare supplement) premiums do not.

Paying any other type of premium from your HSA is treated the same as any other non-qualified withdrawal.

What You Owe on a Non-Qualified Withdrawal

Take money out for anything that is not a qualified medical expense and the entire amount is added to your gross income for that year.² On top of ordinary income tax, you owe a 20% additional tax on the non-qualified portion.⁴ A $5,000 non-qualified withdrawal produces $1,000 in penalty before your regular tax bracket touches it.

Intent does not matter here. Swiping an HSA debit card at a store by mistake produces the same tax result as a deliberate non-medical withdrawal. Combined federal income tax and the 20% penalty can consume 40% or more of the amount you pulled out, depending on your bracket.

State Income Tax

Most states follow the federal treatment and exclude qualified HSA distributions from state income tax. California and New Jersey do not recognize the federal HSA tax benefits. If you live in either state, contributions may be taxed at the state level, investment earnings inside the account may be taxed each year, and even distributions used for medical expenses may be subject to state income tax. Check your state’s rules if you are unsure.

What Changes at Age 65

At 65, the 20% additional tax on non-qualified distributions no longer applies.² The same exception applies at any age if you become permanently disabled.⁵ Ordinary income tax still applies to non-medical withdrawals; the account behaves like a traditional IRA in that respect.

Qualified medical distributions stay completely tax-free after 65. Medicare Part A, Part B, Part D, and Medicare Advantage premiums are qualified; Medigap premiums are not.⁴ Long-term care costs and prescription drugs also remain tax-free uses.

Fixing an Accidental Non-Qualified Withdrawal

If you use HSA funds for a non-qualified expense by mistake, you may be able to return the money and avoid the tax hit. The IRS treats this as a mistaken distribution when the error results from reasonable cause. You must repay the funds by the tax filing deadline for the first year you knew or should have known about the mistake, not counting extensions.⁶

A timely repayment keeps the distribution out of your gross income, avoids the 20% additional tax, and is not treated as an excess contribution. Your HSA trustee or custodian is not required to accept the returned funds, so call your provider before assuming the fix is available.

Reimbursing Yourself Later

There is no deadline for pulling money out to reimburse yourself for a qualified medical expense. You can pay a bill out of pocket today, let the HSA balance grow, and take a tax-free reimbursement years later, as long as you have documentation of the original expense.

One firm limit applies: the expense must have been incurred after your HSA was established.⁴ Bills from before the account existed never qualify, no matter when you attempt the distribution. State law controls the exact date an HSA is considered established, so if the account and the expense fall in the same month, confirm the order.

Reporting Distributions on Your Tax Return

Each January, your HSA custodian sends Form 1099-SA showing total distributions for the prior year in Box 1.⁶ The form does not separate qualified from non-qualified withdrawals. That split is your responsibility.

You report it on Form 8889, Part II. Start with the total distribution figure, subtract what you spent on qualified medical expenses, and the remainder is your taxable distribution. It flows to Schedule 1 of Form 1040 as other income.⁷ If the 20% additional tax applies, Form 8889 is also where you calculate it.⁵

File Form 8889 in any year you received a distribution, even if every dollar went to qualified expenses. Failing to file it or misreporting the numbers can lead the IRS to treat all distributions as taxable. Because reimbursement has no time limit, keep medical receipts as long as the account is open, not just for the usual three-year audit window.

Tax Treatment of an Inherited HSA

What happens to the account after your death depends on who inherits it.

A surviving spouse named as beneficiary simply takes the account over as their own HSA. Tax-free qualified medical distributions continue, and contributions can continue if the spouse has eligible high-deductible health plan coverage.⁵

A non-spouse beneficiary (a child, sibling, or anyone else) faces a different result. The account stops being an HSA on the date of death, and the fair market value on that date is included in the beneficiary’s gross income for the year of death.⁵ Earnings that accrue afterward are also taxable. The 20% additional tax does not apply. The beneficiary can reduce the taxable amount by qualified medical expenses of the deceased that are paid within one year after death. If the estate is the beneficiary, the value goes on the deceased’s final income tax return instead.

1
Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses
2
Office of the Law Revision Counsel. 26 U.S.C. 223 – Health Savings Accounts
3
Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act
4
Internal Revenue Service. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
5
Internal Revenue Service. Instructions for Form 8889
6
Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA
7
Internal Revenue Service. Form 8889