Tax-Free HSA Withdrawals for 2021


If you have a health savings account (HSA), you know that in addition to helping you build a financial resource for paying medical expenses, it’s providing significant tax benefits, too.

  • Regardless of your income level, the money you put into your HSA reduces your taxable income.
  • The growth on your HSA investments is tax deferred.
  • So long as you have qualified medical expenses for yourself, your spouse, or your dependents, your withdrawals from your HSA are tax free.

When are HSA withdrawals tax free?

The most important thing you can do to make certain your contributions and investment growth remain tax free is to understand the rules for taking tax free HSA withdrawals.

  • Medical expenses may be incurred by you, your spouse, or your dependents. Your spouse or dependents do not need to be covered by a high deductible health plan or be HSA-eligible.
  • You can pay or reimburse yourself for medical expenses incurred in any prior year, so long as the expenses were incurred after your HSA was established.
  • The medical expenses cannot also be reimbursed through insurance or another arrangement if you claim them for your HSA distributions.
  • You can continue to take tax-free HSA distributions for qualified medical expenses after you are no longer eligible to contribute to an HSA.
  • The medical expenses paid for or reimbursed from your HSA must be “qualified” expenses under the tax laws.

What medical expenses are “qualified”?

Expenses that meet the “qualified medical expense” definition for HSAs are expenses that would generally be eligible for the medical and dental expense deduction under Schedule A for IRS Form 1040. In general, these are expenses incurred to alleviate or prevent a physical or mental disability or illness, including the cost of equipment and supplies. You can find a detailed list of qualified medical expenses in IRS Publication 502, Medical and Dental Expenses.

Here are some common medical expenses that qualify for tax-free HSA withdrawals:

  • Home testing and personal protective equipment (masks, hand sanitizer) for COVID-19
  • Over-the-counter medicine
  • Menstrual care products
  • Pregnancy test kits
  • Breast pumps
  • Alcohol and drug addiction treatment
  • Ambulance services
  • Birth control
  • Fertility enhancement
  • Chiropractor
  • Eye exam, eyeglasses, and contact lenses
  • Dental treatment
  • Prescription drugs
  • Stop smoking programs
  • Mental health care
  • Acupuncture
  • Hearing aids
  • Hospital expenses
  • Nursing home and long-term care
  • Transportation expenses to get medical treatment
  • Special education services recommended by a doctor
  • Modifications made to a home to accommodate a disabled condition

Health insurance premiums are generally not counted as qualified medical expenses for HSA purposes, though there are some exceptions including:

  • Long-term care insurance,
  • Healthcare continuation coverage (such as coverage under COBRA),
  • Healthcare coverage while receiving unemployment compensation, and
  • Medicare and other healthcare coverage for those ages 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

What if I didn’t have any qualified expenses?

HSA withdrawals that are not used to pay for qualified medical expenses must be included in your taxable income for the year of withdrawal. These withdrawals are also subject to an additional 20% excise tax. 

The additional 20% tax does not apply to withdrawals made after you attain age 65, become disabled, or die. This means you may build up your HSA balance as a tax-free resource for paying medical expenses in retirement. If you want to use your HSA money for other things after age 65, your withdrawals will be subject to income tax, but you won’t owe the additional 20% tax. 

How do I report my HSA withdrawals on my tax return? 

Your HSA custodian will report your HSA withdrawals on IRS Form 1099-SA. You should have received this form around January 31 each year. Your custodian must also file this form with the IRS. To claim your tax deduction or tax-free withdrawals, you need to file IRS Form 8889, Health Savings Accounts, with your federal income tax return.

Find more information on the rules for HSA contributions and distributions in IRS Publication 969, Health Savings Accounts and Other Tax Favoured Health Plans. Be sure to consult a tax professional if you have questions about your tax liability or tax strategies for your HSA.