How is an HSA taxed when I use it for non-medical expenses?

An HSA loses its magic if you spend it on non-medical costs. Before age 65, a non-qualified withdrawal is taxed as ordinary income plus a 20% penalty, per the IRS, which is steeper than the 10% penalty on early retirement-account withdrawals. After age 65, the 20% penalty disappears, so non-medical withdrawals are simply taxed as ordinary income, making an HSA function much like a traditional IRA for anything but medical bills. Withdrawals for qualified medical expenses remain completely tax-free at any age. Because of this, the strategy is to always spend HSA dollars on medical costs (now or reimbursed later) and treat non-medical use as a last resort. Keep every medical receipt to justify tax-free withdrawals.