HSA Withdrawal Rules


Calley Means

Published Date:

January 31, 2024


An HSA puts you in complete control of your health and wellness spending. You’re at the helm with the ability to budget for your needs and the needs of your dependent family members. Your tax-free contributions to your HSA make meeting your needs more affordable, and the ability to withdraw money from your HSA allows you to reimburse yourself for eligible purchases. 

It’s important to follow HSA rules down to the letter. If you don’t use your HSA correctly, you may be hit with tax purposes that defeat the purpose of using your HSA in the first place. Here’s what you need to know about HSA withdrawal rules and how to stay compliant. 

How Does an HSA Work?

An HSA allows people with a high deductible insurance policy to deposit pre-tax money into a special Health Savings Account. You don’t need to pay taxes on any of the money you deposited as long as you use it for an HSA eligible purchase. Your HSA is a tool that allows you to make your health and wellness needs more affordable by allowing you to legally avoid taxes. 

An HSA is significantly more advantageous than paying for your healthcare needs out of pocket simply because you’ll have more money to spend. You also have the opportunity to earn interest on the money you invest into your HSA, which essentially equates to extra free money over time. 

What Are the Main HSA Withdrawal Rules for Tax Purposes?

The money you place into your HSA is deposited under the assumption that it will only be used for HSA-eligible purchases, which is where your tax break comes from. You don’t ever have to pay taxes on the income you deposited into your HSA as long as you use it to make a qualified purpose. 

It’s very important to keep your receipt and copies of the Letters of Medical Necessity you used to make HSA purposes. These act as an official record that you followed the rules and will justify that you should never have to pay taxes on your HSA funds.

HSA Withdrawal Rules Without Proof of Purchase

You need to be able to prove your HSA money was spent appropriately if you withdrew it for an eligible purchase. It’s important to keep your receipts and invoices for every HSA-eligible purchase you make. 

If you don’t have proof of purchase, you’ll have to pay a 20% tax penalty on every withdrawal you can’t account for. If you have partial proof of purchase for a withdrawal, you only need to pay a 20% tax penalty on the portion of your withdrawal you don’t have proof of purchase for.

HSA Withdrawal Rules for Personal Use

You’re allowed to withdraw your HSA funds for personal use in the event of an emergency, but withdrawal comes with consequences. If you withdraw your HSA funds and close your account, you may need to pay a 20% tax penalty on the money you withdraw. It’s best to contend with the penalty up front and intend to keep only 80% of the money. Planning ahead can help you prevent serious financial consequences when your tax bill comes due.

What Are the HSA Withdrawal Rules for Reimbursements?

You’re allowed to make as many HSA withdrawals as you’d like if the withdrawals are for reimbursement purposes. Many retailers and service providers don’t accept direct HSA/FSA debit card payments, which means you’ll need to pay for the goods or services out of your own pocket and reimburse yourself with your HSA funds.

The process can be somewhat complicated, but you shouldn’t encounter any penalties if you’re an excellent recordkeeper. 

Accurate Record Keeping Is Vital

The total amount of your HSA withdrawals has to match (or be lower than) the total amount of eligible HSA purchases you made. Receipts and invoices can be used to confirm exact dollar amounts. When in doubt, round down. There will never be a penalty for withdrawing slightly too little from your HSA, but there will always be a penalty for withdrawing a little too much. 

It’s best to make your withdrawal after a purchase has already been completed, even if you know exactly how much of your HSA money you intend to spend. If you come in under budget, you’ll need to spend the surplus of money you withdrew on an eligible item. 

There Is No Time Limit for Reimbursements

It’s a headache to write yourself a check for $3.50 every time you just need to grab a bottle of hand sanitizer. Good news — you don’t have to reimburse yourself immediately. You technically have an infinite amount of time to reimburse yourself from your HSA account.

As long as your HSA account remains in good standing, you can reimburse yourself for any eligible purchase you made after you established your account. You can wait until you reach a specific dollar amount to start the reimbursement process to make it worth the time and effort. 

You can technically reimburse yourself a decade later as long as you still have the receipts for your eligible purchases. Some people prefer to wait a long time for reimbursements to allow their HSA to accumulate interest. Do whatever works best for you in your current financial situation. 

How Do HSA Withdrawal Rules Change When You’re Over 65?

HSA withdrawal rules and penalties completely go out of effect when you turn 65 years old. At that point, your HSA becomes just like another savings account. You can withdraw, invest, or spend the money in your HSA however you’d like without encountering any tax penalties.

You can use this information to plan ahead. Your HSA can act as a secondary tax-free retirement account. If you make small deposits every month and allow your HSA to accumulate interest, you could wind up with a substantial amount of money set aside for your retirement.

You’ll also want to consider that the majority of medical expenses in the average American’s life occur at or around the age of retirement. You’ll need health care funding more than ever as you become an older adult. Allowing your HSA to remain exclusively for healthcare and wellness related purchases may give you peace of mind knowing that you’ve planned ahead for your later health needs. 

How To Comply With HSA Withdrawal Rules

When you see the phrase “tax penalty,” it may be enough to make your hair stand on end. No one wants to get hit with a giant surprise tax bill, especially if they thought they were doing everything they needed to do to avoid tax consequences. Here’s how to double check that you’re doing what you’re supposed to do and how to reduce the risk that you’ll run into a compliance error.

Get a Letter of Medical Necessity When You Need One

One of the biggest mistakes people make with their HSA is believing that they’re using or withdrawing their funds correctly only to discover that their purchase wasn’t eligible. Some things, like vitamins and supplements, aren’t actually covered by HSA funds without a doctor’s note. 

Read the eligibility guidelines carefully. If you want to purchase something that isn’t specifically listed as covered by HSA funds, ask your doctor. Your doctor may be able to provide you with a Letter of Medical Necessity that will allow you to make a purchase that wouldn’t ordinarily be HSA eligible.

Avoid Making Withdrawals

The easiest way to comply with HSA withdrawal rules is to never make withdrawals from your HSA. This won’t always be possible, but an increasing number of retailers and service providers in the health and wellness space are changing the way they accept payment for HSA-eligible goods and services. 

Some financial institutions that offer HSA accounts will give account holders a debit card tethered to their HSA account. This debit card allows you to make direct HSA purchases, which completely eliminates the need for reimbursement. As long as you’re only using this debit card for eligible purchases, you’ll never encounter any issues with withdrawals. 

Truemed works with merchants to integrate HSA/FSA payment into their websites. If you shop with a merchant that uses Truemed, you can choose “Pay With Truemed,” enter your payment details, and answer a few questions. We’ll match you with a provider to determine your eligibility, and if you qualify, you’ll get a Letter of Medical Necessity to complete your purchase.

Set Yourself Up for Success

Keeping track of your purchases, storing your receipts, and getting a Letter of Medical Necessity when you have to can keep you from running into issues when you make withdrawals from your HSA account. 

Better still, try shopping exclusively with retailers that allow HSA/FSA as a form of payment at checkout. A growing list of retailers and gyms offer Truemed integrated HSA/FSA payment at checkout to help you avoid withdrawal hangups. 


How HSA-eligible plans work |

Health Savings Accounts and Other Tax-Favored Health Plans | IRS

Changes to your HSA When You Reach 65 | Wellesley College

Eligible HSA Expenses | American Library Association