When we put together HSA vs FSA we left a gap: taking money out of an HSA for something other than medical care is known to carry a penalty, but we could not confirm the rate or the age condition from the source, so we left both out. IRS Publication 969 has them.
1. You pay income tax on it. The source says “you must pay tax on the distribution” — it lands on that year’s income.
2. And 20% is added on top. “An additional 20% tax.” It is separate from the income tax.
3. From 65 the 20% disappears. Disability and death do the same. The income tax stays.
One birthday changes it
Say you take $1,000 out for something other than medical care. With a 22% bracket as an example, it looks like this.
Before 65 the income tax of $220 carries the $200 additional tax on top, for $420 — 42% of what you withdrew. Past 65 only the additional tax goes, leaving $220, or 22% (our calculation).
This is where people slip. Turning 65 does not mean “spend it on anything, tax free”. What the source removes is the additional tax alone; “you must pay tax on the distribution” still stands. The income tax applies at any age.
So an HSA has two faces
Spent on medical care it is untaxed going in and coming out. Spent on anything else, from 65 it behaves like a traditional IRA — an account you pay income tax on when you draw from it.
Put another way, after 65 an HSA is “tax-free for medical care, taxed otherwise”. Either use is open to you, so nothing is lost — but “free from 65” it is not.
Both numbers differ from a retirement account
“An additional tax for taking it early” also exists on a 401(k) or IRA. But both figures are different.
| Account | Additional tax | Age it stops |
|---|---|---|
| HSA — non-medical withdrawal | 20% | 65 |
| IRA / 401(k) — early distribution | 10% | 59½ |
The HSA rate is exactly twice as high (our calculation), and its age threshold arrives 5 years 6 months later. Assume “it is a retirement account, so 59½ will do” and you pay 20% for those 5 years 6 months.
All you need to carry is that the two are out of step — the HSA rate is higher and its age is later.
One account, three different additional taxes
The 20% is not the only one. Three additional taxes attach to a single HSA, and each attaches to a different mistake.
The 10% is a contribution rule, not a withdrawal rule. The last-month rule lets you count as eligible for the whole year if you are eligible on 1 December, so you can pay in a full year’s worth. Fail to stay eligible through the following twelve months — the testing period — and the extra contributions go into income and carry a 10% additional tax. It is triggered by paying in, not by taking out.
And there is a hard boundary on when an expense counts. The Form 8889 instructions put it plainly: “Expenses incurred before you establish your HSA are not qualified medical expenses.” Anything spent before the account exists is out, however medical it was — which is where “open the account first” comes from.
Questions this leaves
Can I claim old receipts later?
The only boundary the source draws is the opening date. Publication 969 allows reimbursement for “qualified medical expenses you incur after you establish the HSA”, and the Form 8889 instructions rule out anything earlier. The expense also has to be one not compensated for by insurance or otherwise.
No deadline for claiming appears in either source. That is a finding of absence, not a ruling that none exists — keeping and substantiating the receipts is on you, and the practice is worth checking with a tax professional.
How much is it if a whole family limit is misspent?
Spend the whole 2026 family limit of $8,750 on something other than medical care and the additional tax alone is $1,750 (our calculation — 20% of $8,750). Income tax comes on top of that. The bigger the limit, the more a mistake costs.
How are disability and death determined?
The source says only “after the date you are disabled, reach age 65, or die”. Neither Publication 969 nor the Form 8889 instructions defines “disabled” — we read through both this time to check. The definition sits elsewhere and is out of scope here.
So should I treat an HSA as a retirement account?
This piece does not make that judgement. It sets out the rule: from 65 the additional tax goes and the income tax remains. Whether that suits you depends on your rate now against your rate later, and on what medical costs you expect. Limits and eligibility are in HSA vs FSA.
Sources and where to check
IRS Publication 969 — Health Savings Accounts and Other Tax-Favored Health Plans. “If you don’t use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution.” · “There is an additional 20% tax on the part of your distributions not used for qualified medical expenses.” · “There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.” (irs.gov)
IRS Topic no. 557 — “you’ll be assessed a 10% additional tax on early distributions from traditional and Roth IRAs, unless an exception applies. Generally, early distributions are those you receive from an IRA before reaching age 59½.” Source for the 10% and 59½ used in the comparison. (irs.gov)
Our own calculation — $420, $220, 42%, 22% and $1,750, along with “exactly twice the rate” and “5 years 6 months later”, are worked out from the figures above. The 22% bracket is an example.
IRS Form 8889 instructions — “HSA distributions included in income… are subject to an additional 20% tax unless one of the following exceptions applies”; the exceptions are “Dies, Becomes disabled or Turns age 65”; and “Expenses incurred before you establish your HSA are not qualified medical expenses.” (irs.gov)
IRS Publication 969, the last-month rule — eligible on 1 December and you count as eligible for the whole year, but fail the testing period and the extra contributions enter income and carry “a 10% additional tax” — a different rate from the 20% on distributions. (irs.gov)
Where “disabled” is defined — not in Publication 969 or the Form 8889 instructions, but in the statute: 26 U.S.C. §223(f)(4)(B) waives the 20% for distributions made after the beneficiary “becomes disabled within the meaning of section 72(m)(7),” and §72(m)(7) defines that as being “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration,” with proof furnished as the Secretary requires (checked 23 September 2026). State tax is separate from the federal rules.
As of August 2026, federal only. Not tax advice. Limits and HDHP eligibility are in HSA vs FSA; withdrawal rules for the other accounts are in the 401(k) guide and the IRA guide. The care-cost account is covered separately in the Dependent Care FSA guide.
