HSA withdrawal rules

Notice what is missing. No five-year rule, no required minimum distributions during your lifetime, and no restriction on withdrawing while still employed. The account is unusually unencumbered.

Wider than most people assume. Deductibles, copays and coinsurance. Prescriptions. Dental work including orthodontics. Vision, glasses and contacts. Mental health care and therapy. Physical therapy and chiropractic care. Most over-the-counter medicines and menstrual products. Fertility treatment. Hearing aids. Some transport costs to receive care.

Insurance premiums usually do not qualify, with four exceptions: COBRA continuation coverage, health coverage while receiving unemployment, long-term care premiums up to an age-based limit, and, once you are 65 and enrolled, most Medicare premiums other than Medigap.

Cosmetic procedures, general wellness spending and gym memberships without a specific medical diagnosis do not qualify. IRS Publication 502 is the authoritative list and is worth reading once.

You can spend HSA money on qualified expenses for your spouse and your tax dependents, even when they are not covered by your high-deductible plan. Eligibility to contribute depends on your own coverage; eligibility to spend follows your tax family.

This catches people out in a useful direction: a parent with an HSA can generally cover a dependent child's medical costs from it regardless of whose insurance the child is on.

There is no time limit on reimbursement. An expense incurred in 2026, paid out of pocket and never claimed, can be reimbursed from the HSA in 2046 completely tax free, provided the account existed when the expense was incurred.

So the money stays invested and compounding for twenty years, and then comes out untaxed. That is the closest thing to a free lunch the tax code offers, and the entire cost is administrative: you must keep the receipts and know they exist decades later.

Two conditions are easy to break. The expense must post-date the account's establishment, and it must not have been reimbursed by insurance or deducted on a tax return already.

The 20% penalty ends. Non-medical withdrawals become ordinary income, exactly like a traditional IRA, and medical withdrawals remain tax free.

Practically, that turns the HSA into the most flexible account you hold: a retirement account with a permanent tax-free option attached for the one category of spending that reliably rises with age.

Note also that once you enroll in Medicare you cannot contribute further, though you can keep spending, and Medicare premiums themselves become a qualified expense.

Providers do not check what you buy. You report contributions and distributions on Form 8889 with your return and certify that withdrawals went to qualified expenses.

The record-keeping burden is genuinely on you. A scanned folder of receipts, with dates and amounts, is enough and takes minutes a year. Without it, deferred reimbursement is unprovable and the strategy collapses.

Withdrawal rules, the 20% penalty and Form 8889 requirements are in IRS Publication 969. The list of qualified expenses is in Publication 502. Walnut is informational and is not an investment adviser. This guide is educational and not personalized tax or investment advice; anything with a tax consequence is worth confirming with a tax professional.