Early withdrawal penalty on $77,000 in an HSA

HSAs are not only a great investment vehicle due to their being triple tax advantaged, but they're also the best way to pay out of pocket for qualified medical expenses. However, if you take money out of your HSA before the age of 65 for reasons other than paying for qualified medical expenses, you'll have to pay taxes on that amount as well as incur a 20% penalty. It's not recommended except as a last resort for extreme financial hardship.

Let's take a look at how much of a penalty you'll pay if you take $77,000 out of your HSA for non-qualified expenses before the age of 65.

The total penalty on an early withdrawal of $77,000 from your HSA is $29,260. This is based on the current withdrawal penalty of 20% and an average tax rate of 18%.

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HSA withdrawals after age 65

Before the age of 65, all withdrawals from an HSA must be used for qualified medical expenses. If you take an early distribution for non-medical expenses, you will incur taxes and a penalty (as seen above). However, you can take money out of your HSA for any reason without penalty after the age of 65! This may not seem like a big deal, but because HSAs are famously triple tax advantaged, if you invest the money in your HSA, it goes in tax free, grows tax free, and can be withdrawn tax free—either before the age of 65 for qualified medical expenses or after the age of 65 for any reason you want. For this reason, it's the best investment vehicle available to Americans.

If you're curious about how investing in an HSA compares to a 401(k) or Roth IRA, check out our HSA investment calculator.

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Sources

• Instructions for Form 8889 (2022) - IRS