If your company offers them, a Health Savings Account (HSA) is a great way to save money to pay for current or future out-of-pocket medical costs.
Your contributions are made on a pre-tax basis from your paycheck, and you’ll never pay taxes on earnings or withdrawals you use to pay for qualified medical expenses.
HSAs are only available if your company healthcare plan is a high-deductible health plan (HDHP). But any money you’ve contributed to your HSA is yours, even if your company switches to a non-HDHP at a later time.
And if and when you leave your company, you can take your HSA with you.
The strategy
Now, you can always withdraw money from your HSA for non-medical purposes.
But if you do so, you’ll pay ordinary taxes on the withdrawal, plus a 20% early withdrawal penalty if you’re under age 65.
But there is one way you can withdraw this money and not pay any taxes at all.
How? By paying for all medical expenses out-of-pocket and then “reimbursing” yourself from your HSA later, as long as the HSA was established when these expenses occurred.
Why would you do this? Maybe you have some extra money to spend from a bonus or an inheritance. Or perhaps the value of your HSA has fallen because of market downturns, and you’d rather give it some extra time to recover.
Here’s an example
In 2025, you accrue $5,000 in out-of-pocket medical expenses. You could pay these costs directly from funds in your HSA. Or you could pay for the costs yourself and then withdraw some or all of this amount from your HSA at a later time. You could use this money for any purpose you want.
These withdrawals wouldn’t be taxable because you would be using them to reimburse yourself. In fact, you wouldn’t even need to take the HSA withdrawal in the same year you paid these expenses. You could, for example, pay medical costs out of pocket over a period of several years and then withdraw the accumulated amount from your HSA to reimburse yourself later.
Doing it the right way to avoid IRS scrutiny
The key to using this strategy correctly is documentation. You’ll need to keep detailed records of the treatments you received, their costs, and receipts for the amounts you paid out of pocket. And even though you’re not paying taxes, you’ll still need to enter HSA withdrawals on IRS Form 8889 and file it with your tax returns.
Also, if you itemize out-of-pocket medical expenses on your tax return, you can’t reimburse yourself for these same expenses from your HSA later.
If you have any questions about this strategy, you should consult with a tax professional.
This article was authored by Martin Baker and Jeffrey Briskin. Martin is a financial advisor and Director of Financial Planning with Canby Financial Advisors, a SEC-registered investment adviser. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or training. Martin can be reached at 508.598.1082 or mbaker@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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