Here's What Happens if You Take an HSA Withdrawal for a Non-Medical Purpose

It's important to set aside money to cover the cost of medical care. And you can go about that a few different ways. You could put more money into a regular savings account as your bills come in. Or, you could fund a health savings account, or HSA.

Now, an HSA isn't automatically an option for everyone. There are criteria your health insurance plan must meet for you to qualify. 

For example, to qualify for an HSA this year, your health insurance plan must have a minimum deductible of $1,500 or more for self-only coverage, and $3,000 or more for family coverage. Your plan's out-of-pocket maximum also cannot exceed $7,500 if you have self-only coverage, or $15,000 for family coverage. (Do note that these requirements commonly change from year to year.)

But saving in an HSA for medical costs makes a lot of sense because you get a tax break on the money that goes in. If you put $2,000 into an HSA this year, that's $2,000 of income the IRS won't tax you on.

Plus, HSAs, unlike flexible spending accounts, allow you to invest money you don't need immediately for medical bills to grow your balance into a larger sum. Investment gains in your HSA are tax-free, as are withdrawals when taken to pay for medical expenses.

But if you raid your HSA for non-medical purposes, you should know that a huge penalty might apply. Whether you're penalized or not, however, will depend on your age.

When you're under 65

If you take an HSA withdrawal for non-medical reasons and you're not yet 65, you'll be taxed on the money you remove from your account. You'll also face a 20% penalty on the sum you remove. Ouch. That's double the penalty for taking an early IRA or 401(k) plan withdrawal.

So, let's say you remove $1,000 from your HSA at age 35 to cover a home repair rather than pay for a medical bill. You'll be taxed on that sum at whatever tax rate applies to you (that will hinge on your income), and you'll also lose $200 off the bat in the form of a penalty.

When you're 65 or older

Once you turn 65, HSAs become a lot more flexible. At that point, you can take an HSA withdrawal for any reason without being penalized. However, you will be taxed on non-medical HSA withdrawals. 

It's for this reason that some people will tell you that an HSA can technically double as a retirement savings plan. Once you turn 65, it basically works the same as a traditional IRA or 401(k).

Raid your HSA carefully

The whole purpose of funding an HSA is to have money available for medical bills as they arise. So it's not a good idea to take an HSA withdrawal for a non-medical reason.

If you want to make sure you have money to tap in a pinch, such as to cover a home or vehicle repair, build yourself a solid emergency fund and keep that money in the bank, where it won't be restricted. But do your best to avoid non-medical HSA withdrawals, so you don't get hit with costly penalties or taxed on that money needlessly.