Are HSA Funds Taxable After Age 65? | Smart Uses Later

Yes, HSA money after 65 stays tax free for qualified care, but non-medical withdrawals are taxed as ordinary income with no extra penalty.

If you have a growing Health Savings Account and retirement on the horizon, the question “Are HSA Funds Taxable After Age 65?” stays close to mind. You want to know how much of that balance you actually keep, how the IRS views your withdrawals, and what changes once you blow out those 65th-birthday candles.

This guide walks through the tax rules in clear language, using current IRS guidance. It explains when HSA withdrawals stay tax free, when they trigger income tax, and which choices can keep more money in your pocket during retirement. It is general education only; for personal decisions, talk with a qualified tax or financial professional.

Are HSA Funds Taxable After Age 65? Quick Overview

The short version looks like this:

• Withdrawals for qualified medical expenses stay federal tax free at any age.
• Before 65, non-medical withdrawals trigger income tax plus a 20% penalty.
• After 65, non-medical withdrawals trigger income tax only; the 20% penalty disappears.
• You keep the triple benefit on qualified medical spending: pre-tax contributions, tax-deferred growth, and tax-free distributions.

These points come straight from IRS rules for HSAs, summarized in IRS Publication 969 on Health Savings Accounts. The same framework shows up in many HSA explainers from banks and benefits providers that rely on those IRS rules.

How HSA Tax Benefits Work At Any Age

Before sorting through age 65 changes, it helps to see the basic HSA structure. An HSA is a special account tied to a high-deductible health plan. You, your employer, or both can put money in. Deposits go in on a pre-tax basis, and growth inside the account is not taxed while it stays there.

HealthCare.gov’s HSA glossary entry sums it up simply: you set aside pretax dollars to pay for qualified medical expenses such as deductibles, copayments, and coinsurance. If you follow the rules, those withdrawals never show up in taxable income.

Tax Treatment While You Are Still Working

During your working years, the HSA behaves like a mix of a checking account and a retirement account:

• Contributions made through payroll reduce taxable wages for federal income tax.
• Investment earnings inside the account are sheltered from current tax.
• Money you pull out for qualified medical expenses stays out of income.

If you take money out for something unrelated to medical care before age 65, that distribution goes into taxable income and you owe a 20% penalty on top. That penalty is meant to discourage using the HSA like a regular savings account too early.

What Changes Once Medicare Starts

Once you enroll in Medicare, you can no longer add new money to your own HSA. That rule appears in IRS HSA guidance and is echoed in Medicare and benefits explainers. At the same time, every dollar already inside the HSA stays available for qualified medical expenses on a tax-free basis.

You can use HSA funds for many Medicare costs. IRS guidance in Publication 969 (full PDF) explains that you may pay premiums for Medicare Part B, Part D, and Medicare Advantage plans with HSA money, along with deductibles and copays for that coverage. Medigap premiums sit in a different bucket and do not qualify.

Taxes On HSA Funds After 65: When Do You Owe Anything?

After age 65, the HSA rules line up with a simple set of questions. What are you spending the money on, and did you keep proof of medical costs? The answers drive whether a withdrawal stays tax free or shows up in income.

Withdrawals For Qualified Medical Expenses

For qualified medical expenses, the tax treatment does not change at 65. Distributions related to those expenses are still tax free, as long as they meet IRS rules.

That includes costs for doctor visits, hospital care, surgery, lab work, prescriptions, and many other items listed in IRS guidance. IRS Topic No. 502 on medical and dental expenses gives a long list of what counts as medical care for tax purposes, and Publication 969 links those same rules to HSA distributions.

To claim tax-free treatment, you need records: receipts, insurance statements, and any notes that tie the withdrawal to an eligible expense. You do not send those documents with your return, but you should store them in case the IRS asks later.

Withdrawals For Non-Medical Expenses

Here is the key shift after 65. The 20% penalty on non-medical withdrawals disappears once you reach that age. You still owe ordinary income tax, but no extra surcharge.

Before 65, a non-medical withdrawal is one of the more painful moves you can make with an HSA, since it brings tax plus a 20% penalty. After 65, that same withdrawal acts more like a taxable distribution from a traditional IRA or 401(k). It still raises your adjusted gross income, but no extra HSA penalty applies.

Several recent explainers and financial firm guides line up with this reading of Publication 969. They all state the same pattern: tax-free for qualified medical expenses at any age, taxable with penalty if non-medical before 65, and taxable without penalty if non-medical after 65.

What Counts As Qualified Medical Expenses

The IRS definition of qualified medical expenses refers back to section 213 of the tax code. Publication 969 and Publication 502 use that definition. It includes costs for diagnosis, cure, mitigation, treatment, or prevention of disease, as well as items that affect the structure or function of the body.

That means doctor bills, hospital stays, many prescription drugs, some over-the-counter items, and certain medical equipment can qualify. Dental and vision care often qualify too. Cosmetic work done purely for appearance does not. General wellness items, like gym dues, usually do not qualify either.

Because the list is long and changes over time, many HSA providers point account holders back to IRS Publication 502 and related IRS topics. Those references spell out many common items and give clues about grey areas.

HSA Withdrawals After 65: Tax And Penalty Rules At A Glance

The table below summarizes how HSA withdrawals are handled once you reach 65, compared with earlier years.

Use Of HSA Funds	Income Tax Owed?	20% Penalty?
Qualified medical expenses for yourself at any age	No	No
Qualified medical expenses for spouse or dependents	No	No
Medicare Part B, Part D, or Medicare Advantage premiums after 65	No	No
Long-term care insurance premiums within IRS limits	No	No
COBRA or other health premiums while on that coverage	No	No
Non-medical expenses before age 65	Yes	Yes
Non-medical expenses after age 65	Yes	No
Withdrawal by a spouse who inherits the HSA and keeps it as an HSA	Same rules as above	Same rules as above

The chart shows how powerful an HSA can be in retirement. If you use the account for medical costs, you keep the full balance free from federal income tax. If you need to tap some of it for living expenses after 65, you can do that as well, with the same tax hit as many traditional retirement accounts but no extra HSA penalty.

Using HSA Funds After 65 For Medicare And Insurance Costs

Healthcare spending often ramps up after 65. The IRS gives HSAs a special role here by allowing tax-free use of HSA money for several insurance costs that crop up in retirement.

Medicare Premiums You Can Pay With An HSA

IRS guidance in Publication 969 states that once you reach 65, HSA funds can cover several kinds of Medicare premiums on a tax-free basis:

• Medicare Part B premiums.
• Medicare Part D prescription drug premiums.
• Premiums for Medicare Advantage (Part C) plans.
• Employer coverage premiums in some retiree arrangements.

You can also use an HSA to pay certain long-term care insurance premiums within yearly dollar caps set by the IRS. Those caps rise with age and help keep the tax break aimed at older policyholders.

Costs You Still Need To Pay With Taxed Money

Some insurance costs do not qualify for tax-free HSA treatment, even after 65. The main example is Medigap (Medicare Supplement) premiums. Publication 969 explains that you cannot treat those premiums as qualified HSA expenses. If you cover them with HSA money anyway, that withdrawal counts as taxable income.

General non-medical insurance, such as life insurance or long-term disability coverage, also sits outside the HSA qualified list. Paying those bills from an HSA leads to income tax on the amount withdrawn and, if you are under 65, the 20% penalty as well.

Common Retirement Expenses And HSA Eligibility

Many retirees use HSAs to handle a wide mix of healthcare costs. This table lists common expenses and how they usually interact with HSA rules, based on IRS Publication 502 and related guidance.

Retirement Expense	HSA-Eligible?	Typical Treatment
Doctor and specialist visits	Yes	Copays, deductibles, and many out-of-pocket bills qualify.
Hospital stays and surgery	Yes	Most costs related to diagnosis and treatment qualify.
Prescription drugs	Yes	Prescription medications usually qualify; some over-the-counter items need a prescription.
Dental and vision care	Yes	Cleanings, fillings, glasses, and contact lenses often qualify.
Hearing aids and batteries	Yes	Devices and related supplies generally qualify as medical equipment.
Medicare Supplement (Medigap) premiums	No	Not treated as qualified HSA expenses; taxed if paid from the HSA.
Health club or gym dues	No	Viewed as general wellness spending, not medical care.
Home ramps or modifications for medical reasons	Often	May qualify when needed for a medical condition; details matter.
Transportation to medical appointments	Yes	Some travel costs count as medical expenses under IRS rules.

When you are unsure about a specific expense, starting with the IRS medical expense rules helps. From there, you can check your HSA provider’s lists or tools, which often draw directly from those IRS standards.

Planning Tips For HSA Funds In Retirement

Once you reach 65, your HSA becomes one more tool in your retirement toolbox. Used carefully, it can stretch your dollars and offer flexibility that other accounts do not match.

Use The HSA For Medical, Treat It Like An IRA For Non-Medical

Many savers think of the HSA as two accounts in one. For medical expenses, the HSA acts like a tax-free reimbursement account. For non-medical expenses after 65, it acts more like a traditional IRA, with taxable distributions but no extra HSA penalty.

This split view can help you decide which dollars to spend first. Some retirees pay current medical bills from cash flow and leave the HSA invested, then reimburse themselves later with a single large tax-free withdrawal backed by saved receipts. Others draw from the HSA regularly for Medicare premiums and copays, since those costs are reliably tax free.

Remember There Are No Required Minimum Distributions

Unlike traditional IRAs and many workplace plans, HSAs do not have required minimum distributions. You are never forced to pull money out at a set age. That gives you more control over when HSA withdrawals show up in taxable income.

Some retirees leave HSAs untouched as long as possible, letting the balance grow while they draw living expenses from other accounts that do have distribution rules. Others tap HSAs earlier to keep taxable income lower in years with large medical bills.

Coordinate HSA Withdrawals With Your Tax Bracket

Because non-medical withdrawals after 65 are taxed as ordinary income, timing matters. If you expect a year with lower income, you might choose that window for any non-medical HSA withdrawals you plan to make. That can soften the tax bite.

For medical costs, the aim is simpler: keep withdrawals tied to actual qualified expenses so they stay tax free. That means holding onto receipts and matching them to distributions, even if you reimburse yourself years after the service date.

Common Mistakes With HSAs After Age 65

HSAs come with several easy-to-miss traps near retirement age. A little attention can help you steer clear of them.

Contributing After You Enroll In Medicare

Once you enroll in any part of Medicare, you lose eligibility to make new contributions to a personal HSA. The problem is that Medicare coverage can start retroactively in some cases, which can create “excess contributions” if you keep funding the HSA too long.

Publication 969 outlines the correction process for extra HSA contributions. Usually that involves pulling out the extra amount and any earnings tied to it before you file your tax return, so you do not owe extra taxes and penalties.

Using HSA Money For Ineligible Insurance Premiums

Medigap premiums are the classic example here. They help close gaps in Medicare coverage, but the IRS does not treat them as qualified HSA expenses. Using HSA funds for those premiums leads to taxable withdrawals and, if you are under 65, the 20% penalty as well.

Other non-medical insurance premiums, such as life insurance, also fall outside the HSA qualified list. Check IRS guidance or your HSA provider’s materials before using HSA money for any new type of premium.

Poor Recordkeeping For Medical Expenses

To keep HSA withdrawals tax free, you need proof that each distribution lines up with a qualified medical expense. That means receipts, explanation-of-benefits statements, pharmacy printouts, and similar records.

Without those records, an IRS audit could reclassify tax-free withdrawals as taxable income. That risk grows if you reimburse yourself years after the expense, which is common among savers who treat the HSA as a long-term investment account.

Ignoring Beneficiary Designations

Like other accounts, HSAs need up-to-date beneficiary forms. If your spouse is named, they can usually take over the HSA as their own and keep the same tax treatment. If someone else inherits the HSA, the entire balance often becomes taxable to that person in the year they receive it.

Keeping beneficiary designations current helps avoid unpleasant surprises for family members. It also lines the HSA up with the rest of your estate plan.

When To Get Personal Advice On HSA Taxes After 65

HSA rules come from federal tax law, and those rules change over time. The references linked here, such as IRS Publication 969, Publication 502, and HSA explainers from government health sites, rest on current law at the time of writing. New tax legislation or updated IRS guidance can shift contribution limits, eligible expenses, or penalty rules.

Because every household has its own mix of income sources, healthcare needs, and state tax rules, it helps to sit down with a professional who works with HSAs regularly. Bring copies of your HSA statements, Medicare information, tax returns, and any employer retiree coverage documents. With that stack of paperwork, an advisor can help you build an HSA withdrawal plan that fits your situation while staying inside current IRS rules.