Money that is deposited into the HSA is fully tax-deductible each year. In addition, there is no tax paid when funds are withdrawn to pay for qualified medical expenses. Any interest earned in your HSA is also not taxed. Once you reach age 65, the money can be withdrawn as an IRA and used to supplement your retirement income, but you’ll be taxed at your individual rate.

If you take money out for non-medical expenses before you turn age 65, the amount withdrawn will incur a 10 percent penalty and be taxed as gross income. It works just like an IRA.

Contributions are deductible whether or not the eligible individual itemizes deductions. However, individuals cannot also deduct the contributions as medical expense deductions under section 213.