Short answer: Yes. HSA funds are taxed if they are used for non-qualified expenses, and if you are under age 65, an additional 20% penalty generally applies.
Health Savings Accounts offer powerful tax advantages, but those benefits apply only when the money is used for qualified medical expenses. If HSA funds are used for non-medical purposes, the tax treatment changes.
When you withdraw HSA funds for a non-qualified expense, the amount is included in your taxable income. If you are under age 65, the IRS also imposes a 20% additional penalty on that distribution.
After you reach age 65, HSA funds may be withdrawn for any purpose without the 20% penalty. However, non-medical withdrawals are still taxable as ordinary income, similar to distributions from a traditional IRA.
As long as HSA funds are used for qualified medical expenses, distributions remain completely tax-free at any age.
Sources
- IRS, Publication 969 – Health Savings Accounts: https://www.irs.gov/forms-pubs/about-publication-969
- IRS, FAQs on Health Savings Accounts – Distributions: https://www.irs.gov/faqs/health-savings-accounts-hsas
Content history
Originally published: March 27, 2025
Last reviewed: January 26, 2026