HSA Withdrawal Rules, the 20% Penalty, and How Rollovers Actually Work
The real penalty rate, what actually counts as a qualified expense, and the three ways to move HSA money without triggering a tax bill.
Can you withdraw money from an HSA?
Yes — you can withdraw HSA money at any time, for any reason. Withdrawals for qualified medical expenses are always tax-free. Withdrawals for anything else, before age 65, are taxed as ordinary income plus a 20% additional tax. After 65, the 20% penalty disappears and non-medical withdrawals are simply taxed as ordinary income, like a traditional IRA.
- The additional tax on non-medical withdrawals before 65 is 20%, not 10% — a figure widely repeated incorrectly, including by some HSA calculators.
- The 20% penalty is waived if you're 65+, disabled, or deceased — ordinary income tax still applies in those cases, just not the penalty.
- Health insurance premiums generally do NOT count as qualified medical expenses, with a short list of exceptions.
- HSA money never expires and rolls over indefinitely — the only limits are on how you move it between accounts.
The 20% additional tax, explained
Non-qualified distributions are reported on Form 8889 and taxed as ordinary income, with an additional 20% tax on top — set by IRC §223(f)(4)(A). On a $2,000 non-medical withdrawal at a 22% marginal rate, that's $440 in income tax plus $400 in penalty, for a total cost of $840 — 42% of the withdrawal gone before you've spent a dollar.
When the 20% penalty disappears
The additional tax does not apply to distributions made after the account holder:
- Turns 65 — ordinary income tax still applies to non-medical withdrawals, but the penalty is gone.
- Becomes disabled — as defined by inability to engage in substantial gainful activity due to an impairment expected to result in death or continue indefinitely.
- Dies — the beneficiary's tax treatment depends on who's named (see the investing guide, linked below, for the beneficiary rules in full).
What actually counts as a qualified medical expense
Broadly, unreimbursed costs for medical care as defined in IRC §213(d) — doctor visits, prescriptions, dental, vision, mental health care, and many over-the-counter medicines without a prescription (a CARES Act change that stuck). Health insurance premiums generally do not qualify, which surprises people who assume any health-related cost is fair game. IRS Publication 969 carves out a short exception list:
- COBRA continuation coverage premiums
- Premiums for coverage while receiving unemployment compensation
- Qualified long-term care insurance, subject to age-based dollar limits
- Medicare Part B, Part D, and Medicare Advantage premiums, once you're 65 or older
Transfers vs. rollovers vs. IRA-to-HSA
| Movement type | Frequency limit | Counts toward annual contribution limit? | Key rule |
|---|---|---|---|
| Trustee-to-trustee transfer | Unlimited | No | Funds move directly between custodians; you never take possession. The safest and simplest option. |
| 60-day (indirect) rollover | 1 per 12 months, across all your HSAs | No | You receive the funds and must redeposit into an HSA within 60 days, or it becomes a taxable, penalized distribution. |
| IRA-to-HSA qualified funding distribution | Once per lifetime | Yes | One-time transfer from a traditional or Roth IRA into your HSA, must go trustee-to-trustee, requires passing a 12-month testing period. |
Do HSA accounts roll over? Yes — moving them is the tricky part
Yes, HSA balances roll over indefinitely with no year-end deadline — that rule applies to FSAs, not HSAs. Moving money between accounts, though, follows one of three distinct paths, each with different rules:
Work out your exact contribution room, tax savings, or long-term growth before deciding how to move funds.
Open the HSA CalculatorTrustee-to-trustee transfer — use this whenever it's an option
Your old custodian sends funds directly to your new one. You never touch the money, so there's no 60-day clock and no annual limit — you can do this as many times as you like. This is almost always the right choice when consolidating HSAs after a job change or moving to a custodian with better investment options or lower fees.
Can you transfer an HSA to an IRA? No — but the reverse works, once
There is no mechanism to move HSA funds into an IRA or 401(k) — HSA money has to stay in an HSA to keep its tax benefits. The traffic only runs one direction: a qualified HSA funding distribution lets you move money from a traditional or Roth IRA into an HSA, tax-free, exactly once in your lifetime. The catch is that the transferred amount counts against your annual HSA contribution limit for that year, and it must go trustee-to-trustee to qualify. It also requires passing the same 12-month eligibility testing period as the last-month rule — losing HSA eligibility during that window makes the transfer taxable.
Only cash rolls over, not investments
If part of your balance is invested, you generally need to liquidate those holdings back to cash before a transfer or rollover — HSA custodians typically don't support moving securities in-kind the way an IRA-to-IRA transfer sometimes can.
Common questions
What if I miss the 60-day rollover deadline?
The distribution becomes a non-qualified withdrawal: the full amount is taxed as ordinary income, plus the 20% additional tax if you're under 65 and not disabled. There's no grace period built into the rule, so a trustee-to-trustee transfer — which has no deadline at all — is almost always the safer choice if it's available.
Can I merge my HSA with my spouse's HSA while we're both alive?
No. HSAs are individually owned accounts and can't be combined while both spouses are living, even if you're married and file jointly. Each spouse's HSA stays separate; only after death can a surviving spouse inherit and effectively take over the deceased spouse's account.
Do I have to report a trustee-to-trustee transfer on my taxes?
Generally no special reporting is needed for a same-year trustee-to-trustee transfer, since it isn't treated as a distribution at all. A 60-day rollover and an IRA-to-HSA qualified funding distribution do need to be reported on Form 8889 with your tax return, even though they aren't taxable when done correctly.
A research-first finance team. No lead selling, no lender rankings, no affiliate-pulled recommendations. Every guide pairs primary sources (IRS, CFPB, Federal Reserve, CRA) with the free calculators you can run yourself.
Run the numbers yourself
Every tool is free, private, and works offline — no sign-up required.
Frequently asked questions
Keep reading
2026 Tax Strategy Playbook: Lower Your Bill by April 15
Every legal move a U.S. taxpayer can still make before April 15 — 2026 brackets, Roth vs traditional, HSA, capital gains, self-employment, and the real dollar impact.
Take-Home Pay on a $50,000 Salary: Federal Tax, FICA, and What's Left (2026)
A single filer earning $50,000 in 2026 pays $3,820 federal income tax and $3,825 FICA, keeping $42,355 before state tax — about $3,530/month. Full breakdown by salary and state.
Self-Employment Tax Guide 2026: How Much 1099 & Freelance Income Owes the IRS
How self-employment tax is calculated, what's actually deductible, how it combines with federal income tax, and how to size your quarterly payments — with calculators.
S-Corp Tax Strategy: How to Save Thousands on Self-Employment Tax
A complete guide to S-Corp tax elections — how the savings work, when to elect, how to set a reasonable salary, and what compliance actually costs. Verified 2026 figures.