What an HSA is and how the money moves

A Health Savings Account (HSA) is a bank account you own that holds money set aside for medical expenses. You put pre-tax dollars into it (money taken from your paycheck before taxes are calculated), the money sits there earning a small amount of interest, and you withdraw it to pay for doctor visits, prescriptions, dental work, and other may have access to medical costs. The key difference from a regular savings account is that the money going in is not taxed, the money growing inside is not taxed, and the money coming out for medical expenses is not taxed — but only if you follow the rules about what counts as a medical expense.

You can only open an HSA if you are enrolled in a high-deductible health plan (HDHP) — a type of health insurance where you pay a larger amount out of pocket before your insurance kicks in. The insurance company does not run the HSA itself. You choose a bank or financial institution to hold the account, just as you would choose a bank for a checking account. Some employers offer HSAs through a payroll administrator, but the money is still yours in your own account.

Key Takeaways

  • You can only open an HSA if you have a high-deductible health plan, and you must be the one enrolled in that plan — family members cannot share one account.
  • Money goes in pre-tax (reducing your taxable income), grows tax-free, and comes out tax-free for may have access to medical expenses like deductibles, copays, prescriptions, and dental work.
  • You decide how much to contribute each year up to a limit set by the IRS, which changes annually and is higher if you have family coverage.
  • Unlike a flexible spending account (FSA), HSA money rolls over year to year and never expires, so you can save it long-term.
  • You can withdraw money for non-medical reasons, but you will owe income tax plus a 20 percent penalty unless you are over 65 or disabled.

Who can open an HSA and when

You must be enrolled in an HDHP to open an HSA. The IRS sets the minimum deductible amount each year — for 2024, that is $1,600 for individual coverage and $3,200 for family coverage, though these numbers change annually. If your plan has a lower deductible than the IRS minimum, you cannot open an HSA, even if your employer offers one.

You also cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare. If you turn 65 and enroll in Medicare, your HSA stays open and you can still use it for medical expenses, but you cannot add new money to it.

You can open an HSA at any time during the year, but contribution limits are based on when you enroll. If you enroll mid-year, you can contribute a smaller amount. If you enroll on the first day of the year, you can contribute the full annual limit.

How much you can contribute and where the money comes from

The IRS sets an annual contribution limit. For 2024, you can contribute up to $4,150 if you have individual coverage, or $8,300 if you have family coverage. These limits increase slightly most years. You can contribute the money in three ways: through payroll deduction (your employer takes it from your paycheck before taxes), as a direct deposit from your bank account, or as a lump sum payment when you file your taxes.

If your employer offers an HSA, they may contribute money on your behalf — this counts toward your annual limit but does not reduce the amount you can add yourself. For example, if your employer contributes $1,000 and the individual limit is $4,150, you can still contribute $3,150 more that year.

You do not have to contribute the maximum. You can put in $500, $1,000, or any amount up to the limit. The less you contribute, the smaller your tax savings, but you still get the tax break on whatever you do contribute.

What you can spend HSA money on

The IRS maintains a list of may have access to medical expenses — costs that you can pay from your HSA without owing taxes on the withdrawal. These include deductibles, copays, coinsurance (the percentage of a bill you pay after insurance), prescription medications, dental work, vision care, mental health treatment, and medical equipment like crutches or blood pressure monitors. You can also use HSA money to pay for health insurance premiums in specific situations: if you are unemployed and receiving unemployment benefits, if you are retired and over 65, or if you are paying for long-term care insurance.

Expenses that do not count include cosmetic surgery (unless it is reconstructive after an injury), over-the-counter medications without a prescription, gym memberships, and vitamins. If you are unsure whether a specific expense qualifies, the IRS publishes a detailed list on its website, and your HSA provider can usually answer questions about specific items.

You do not have to spend the money in the year you contribute it. Unlike an FSA, which has a "use it or lose it" rule, HSA money rolls over indefinitely. You can save it for years and spend it whenever you need to.

How to withdraw money and keep records

Most HSAs come with a debit card that you can use at pharmacies, doctor offices, and hospitals. Some accounts also let you write checks or transfer money to your bank account. When you use the debit card at a medical provider, the transaction is usually flagged as medical, and you do not need to do anything else.

If you pay out of pocket and then reimburse yourself from your HSA, or if you withdraw cash and use it for medical expenses, you should keep receipts. The IRS does not require you to submit receipts with your tax return, but you must keep them in case of an audit. A receipt shows the date, the provider, the service or item, and the cost.

If you withdraw money for a non-may have access to expense, you owe income tax on that amount plus a 20 percent penalty. For example, if you withdraw $500 for something that does not count as a medical expense and you are in the 22 percent tax bracket, you would owe $110 in taxes plus $100 in penalties — a total of $210 on the $500 withdrawal. After age 65, the penalty goes away (you still owe income tax), and if you are disabled, you may be able to avoid the penalty with documentation.

How an HSA differs from an FSA

Both HSAs and FSAs let you set aside pre-tax money for medical expenses, but they work differently. An FSA has a "use it or lose it" rule — money you do not spend by the end of the year is forfeited, though some plans allow a small carryover or a grace period. An HSA has no expiration date. Money rolls over year to year, so you can save it long-term.

An HSA is also portable. If you change jobs, the account goes with you. An FSA is tied to your employer, so if you leave, the account closes and you can only access money you have already spent. An HSA also earns interest or investment returns (depending on how you invest it), while an FSA typically does not.

You can have an FSA and an HSA at the same time, but there are rules. If you have an FSA, you cannot use it to pay for medical expenses that you also pay for with your HSA in the same year — that would be double-dipping. Many people use an FSA for predictable costs like copays and an HSA for long-term savings.

Investment options and long-term growth

Some HSA providers let you invest the money in mutual funds, stocks, or bonds, similar to a retirement account. Others keep the money in a savings account earning a low interest rate. If you have a large balance and do not plan to spend it soon, investing can help the money grow faster than it would in savings.

Investing HSA money carries risk — the value can go down as well as up — but it also means your money can work harder over time. If you are young and healthy and do not expect major medical expenses, investing part of your HSA balance can turn it into a long-term medical savings fund. Some people use their HSA as a retirement account, paying medical expenses out of pocket and letting the HSA grow untouched until they are older.

Check with your HSA provider about what investment options are available and what fees they charge. Some providers offer low-cost index funds; others charge higher fees that eat into your returns.

Frequently Asked Questions

Can my spouse or children use my HSA?

No. An HSA is an individual account in your name only. If your spouse or children have medical expenses, they need their own HSAs (if they are enrolled in HDHPs) or you need to pay their expenses out of pocket. You cannot transfer HSA money to a family member's account.

What happens to my HSA if I change jobs?

Your HSA stays with you. The account is yours, not your employer's. You can keep it at the same financial institution, move it to a different bank, or roll it into your new employer's HSA plan if they offer one. The money is always accessible to you.

Can I use my HSA to pay for my health insurance premium?

Only in specific situations: if you are unemployed and receiving unemployment benefits, if you are retired and over 65, or if you are paying for long-term care insurance. You cannot use it to pay for regular health insurance premiums while you are employed, even if you have an HDHP.

What if I withdraw money and later find out it was not a may have access to expense?

You will owe income tax on the withdrawal plus a 20 percent penalty. If you discover this after filing your taxes, you can file an amended return to correct it. Keep good records so you can prove which expenses were may have access to and which were not.

Can I open an HSA if my employer does not offer one?

Yes. You can open an HSA on your own at most banks and financial institutions, as long as you are enrolled in an HDHP. You will contribute money yourself rather than through payroll deduction, but the tax benefits are the same.