To cash out an HSA, you log into your HSA administrator’s portal or app, request a distribution, and choose how you want the money delivered. That part takes minutes. The cost of the withdrawal is where it gets interesting: if you spend the money on qualified medical expenses, it comes out completely tax-free at any age. If you spend it on anything else before age 65, you owe ordinary income tax on the amount plus an additional 20% tax. After 65, the 20% disappears and the HSA behaves much like a traditional IRA.
How to Request the Distribution
Most administrators handle withdrawals through a secure online portal or mobile app. You’ll need your account number and the dollar amount. If you’re paying a provider directly, have their billing address ready.
Three delivery methods are standard:
- Electronic transfer to a linked personal bank account, usually three to five business days.
- HSA debit card, swiped at the provider or pharmacy for an immediate payment.
- Paper check, mailed by the administrator, typically seven to ten business days. Some custodians charge a small fee.
No one at your HSA administrator reviews whether the withdrawal is for a medical expense. The IRS puts that responsibility on you at tax time, which is why your receipts matter more than any approval from the custodian.
What a Non-Medical Withdrawal Actually Costs
If you pull HSA funds and don’t spend them on qualified medical expenses, two taxes hit. First, the withdrawn amount is added to your gross income for the year, just like extra wages, and taxed at your ordinary federal rate, which runs from 10% to 37% for 2026 depending on your total taxable income.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Second, a flat 20% additional tax applies to the non-qualified amount, layered on top of the income tax.2Office of the Law Revision Counsel. 26 USC 223 – Section: (f) Tax Treatment of Distributions
Run the numbers on a $10,000 non-medical withdrawal in the 22% bracket: $2,200 in income tax plus $2,000 in additional tax, for a $4,200 hit. That math is why financial planners almost universally discourage non-medical HSA withdrawals before 65.
The 20% additional tax does not apply if you’re 65 or older, disabled under the strict standard in 26 U.S.C. ยง 72(m)(7), or deceased.3Office of the Law Revision Counsel. 26 USC 223 You’ll report every HSA distribution on Form 8889 with your annual return, even the ones that were fully qualified.4Internal Revenue Service. About Form 8889, Health Savings Accounts (HSAs) Your administrator will send you a Form 1099-SA reporting the total, so the IRS already knows what came out.5Internal Revenue Service. Form 1099-SA
What Counts as a Qualified Medical Expense
The tax-free path runs through IRS Publication 502. The list is broader than most people expect: doctor and hospital visits, prescription drugs, dental work including fillings and braces, eye exams, glasses, contact lenses, laser eye surgery, mental health treatment, and equipment like hearing aids and wheelchairs.
Some common surprises on the ineligible side: gym memberships, cosmetic procedures like face lifts, teeth whitening, and hair transplants, nutritional supplements unless prescribed for a specific diagnosed condition, and over-the-counter medicines other than insulin. Insurance premiums are generally not qualified expenses either, with important exceptions once you reach 65.
What Changes at Age 65
Turning 65 rewrites the rules. The 20% additional tax goes away, so you can withdraw for any reason and owe only ordinary income tax on non-medical amounts.6Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans Qualified medical withdrawals stay completely tax-free.
Several insurance premiums also become qualified expenses at this point: Medicare Part A, Part B, Part D, and Medicare Advantage. Long-term care insurance premiums qualify too, subject to age-based annual limits. Medigap (Medicare supplemental) premiums are the notable exclusion.6Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
One wrinkle for people still working: once you enroll in Medicare, you can’t make new HSA contributions, though you can spend and withdraw everything already in the account.6Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans If you delay Medicare, the 2026 contribution limits are $4,400 for self-only coverage or $8,750 for family coverage, plus a $1,000 catch-up if you’re 55 or older.7Internal Revenue Service. IRS Notice: 2026 HSA Contribution Limits
Reimbursing Yourself for Old Medical Bills
There’s no deadline to reimburse yourself for a qualified expense. If you paid a medical bill out of pocket three years ago and kept the receipt, you can withdraw from the HSA today and the distribution is tax-free. The only requirement is that the expense was incurred after you established the HSA.8Internal Revenue Service. Distributions for Qualified Medical Expenses
People who can afford to pay medical bills from checking use this deliberately. Let the HSA grow (especially if it’s invested), then reimburse yourself later. Some accumulate years of unreimbursed receipts as a reserve they can tap tax-free whenever they need cash. The whole strategy hinges on documentation.
Fixing a Mistaken Withdrawal
If you took a non-qualified distribution by accident, you can return the money and avoid the tax hit. The deadline is April 15 following the first year you knew or should have known the distribution was a mistake.9Internal Revenue Service. Distributions for Qualified Medical Expenses (Continued) Get the funds back into the HSA by that date and the distribution is excluded from your gross income, with no 20% additional tax.
Call your custodian to start the return. Most require a written form identifying the amount as a mistaken distribution, along with a check. This is a narrow exception. It covers genuine mistakes of fact, like a pharmacy charge that turned out to be covered by insurance. It doesn’t give you a do-over for deliberate non-medical withdrawals you later regret.
Records You Need to Keep
Your custodian won’t ask for receipts. The IRS will, if it comes to that. You have to be able to show that each distribution paid a qualified medical expense, that the expense wasn’t reimbursed by insurance or another source, and that you didn’t also claim it as an itemized deduction.6Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
For each expense, hold onto the itemized receipt or invoice showing date of service, provider name, and what the charge was for. Explanations of Benefits from your insurer are useful backup. Digital scans and photos are acceptable, so a folder on a cloud drive works. Keep records for at least three years after the filing deadline of the return that reports the distribution, longer if you’re using the delayed-reimbursement approach. Reimburse yourself five years after the fact and the clock restarts from the return where you report that withdrawal.
State Tax Wrinkles in California and New Jersey
Federal HSA tax treatment is uniform, but California and New Jersey do not recognize the federal HSA deduction at the state level. If you live in either state, your contributions are included in state taxable income and the earnings inside the account are subject to state income tax. Medical distributions are still federally tax-free, but those two states treat the HSA more like an ordinary investment account for state purposes. Residents of other states generally get the same benefits at the state level as they do federally.
Fees That Eat Into the Cash-Out
Check the custodian’s fee schedule before you request the distribution. Common charges:
- Account closure or transfer fee, typically $20 to $30 if you’re moving to another custodian or closing the account entirely.
- Paper check fee of a few dollars per check, though some custodians waive it.
- Expedited wire transfer, usually in the $20 to $25 range if you need funds faster than a standard electronic transfer.
Electronic transfers to a linked bank account are free at most major custodians. If you’re closing the account with the withdrawal, ask about the closure fee first so it doesn’t come out of your final distribution as a surprise.