What a Health Savings Account Is

A Health Savings Account (HSA) is a tax-advantaged savings account you can open if you have a high-deductible health plan (HDHP). Money you put into it reduces your taxable income, grows tax-free, and can be withdrawn tax-free to pay medical expenses. Unlike a flexible spending account (FSA), the money rolls over year to year—you do not lose what you do not spend.

The account is yours to keep even if you change jobs or health plans. You control how much to contribute each year (within IRS limits), what to invest it in, and when to withdraw it. No employer involvement is required, though many employers offer HSAs as part of their benefits package.

Key Takeaways

  • An HSA requires enrollment in a high-deductible health plan (HDHP) and lets you set aside pre-tax money specifically for medical costs.
  • Contributions reduce your taxable income, the account grows tax-free, and withdrawals for may have access to medical expenses are tax-free.
  • Unlike an FSA, HSA money does not expire at the end of the year and can accumulate indefinitely.
  • You can invest HSA funds in stocks, bonds, or mutual funds once your balance reaches a certain threshold, typically $1,000 to $2,500 depending on the provider.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as ordinary income.

Who Can Open an HSA and When

You must be covered by an HDHP to open an HSA. For 2024, an HDHP means a health plan with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. Your plan must also have an out-of-pocket maximum (the most you pay before insurance covers everything) of no more than $4,000 for individual or $8,000 for family coverage. These numbers change annually.

You cannot have other health coverage at the same time—no spouse's plan, no parent's plan, no Medicare, no Medicaid, no VA benefits, and no coverage through a spouse's employer if that plan is not an HDHP. You also cannot claim yourself as a dependent on someone else's tax return.

You can open an HSA through your employer if they offer one, through a bank or financial institution directly, or through a health insurance broker. The account must be opened by December 31 of the tax year you want to contribute for, though some providers allow a grace period into the following year.

How Much You Can Contribute Each Year

The IRS sets annual contribution limits. For 2024, you can contribute up to $4,150 if you have individual HDHP coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). These limits reset January 1 each year.

You can contribute in a lump sum or spread contributions throughout the year. If you enroll in an HDHP partway through the year, you can still contribute the full annual amount if you remain covered by an HDHP through December 31. If you drop HDHP coverage before year-end, your contribution limit is reduced proportionally.

Contributions can come from you (as an individual), your employer, or both. If your employer contributes, that amount counts toward your limit. You cannot exceed the annual maximum no matter how many HSAs you have or how many employers contribute.

What You Can Use HSA Money For

may have access to medical expenses include deductibles, copayments, coinsurance, and prescription drugs. They also cover dental work (fillings, root canals, orthodontics), vision care (glasses, contacts, eye exams, LASIK), hearing aids, mental health treatment, physical therapy, and many over-the-counter items like pain relievers, allergy medicine, and first-aid supplies.

The IRS maintains a detailed list of what counts. Some things people assume are covered are not: cosmetic procedures (unless medically necessary), gym memberships, vitamins (unless prescribed by a doctor for a specific condition), and most wellness programs. If you are unsure, the IRS Publication 502 lists hundreds of specific items.

You can withdraw money to pay for your spouse's or dependent's medical expenses even if they are not on your health plan. You do not have to use the money in the same year you contribute it—you can let it accumulate and use it years later, or even in retirement.

How the Tax Benefits Work

Money you contribute to an HSA reduces your taxable income dollar-for-dollar. If you earn $60,000 and contribute $4,150 to an HSA, you report only $55,850 as taxable income. This lowers your federal income tax, and in most states, your state income tax as well.

The money inside the account grows tax-free. If you invest your HSA balance in mutual funds and earn $2,000 in gains, you pay no tax on that growth. When you withdraw money for a may have access to medical expense, you pay no tax on the withdrawal either—not on the contribution, not on the growth, nothing.

If you withdraw money for a non-medical reason before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. After age 65, you can withdraw money for any reason without the penalty, though you still owe income tax on non-medical withdrawals. This makes an HSA function like a retirement account after 65.

How to Use Your HSA When You Need Medical Care

When you have a medical expense, you can pay out of pocket and then reimburse yourself from your HSA later. You do not have to submit receipts to the HSA provider unless they ask, but you must keep them for your records in case the IRS audits you. The receipt should show the date, the provider, the service or item, and the cost.

Some HSA providers issue debit cards that work like a regular card at pharmacies and medical offices. When you use the card, the provider may automatically match the charge to a medical expense category. If the charge does not match a may have access to expense, the provider typically flags it and asks you to reimburse the account.

You can also request a check or bank transfer from your HSA to pay a medical bill directly. There is no limit on how often you withdraw or how much you withdraw in a year, as long as the money goes to may have access to expenses.

How HSAs Compare to FSAs and Other Accounts

An FSA is an employer-sponsored account with a "use it or lose it" rule: money you do not spend by the end of the year is forfeited (though employers can allow a grace period or carryover of up to $610 for 2024). An HSA has no expiration—your balance carries forward indefinitely. This makes an HSA better for long-term saving if you do not have large annual medical expenses.

An FSA does not require a high-deductible plan, so it is available to people with traditional health insurance. An HSA requires an HDHP, which usually has lower premiums but higher deductibles. An FSA is typically capped at $3,200 per year; an HSA allows higher contributions and investment growth.

A Dependent Care FSA (for childcare expenses) and a Limited-Purpose HSA (for dental and vision only) are separate accounts with their own rules. You can have an HSA and an FSA at the same time only if the FSA is limited-purpose or covers only dental and vision.

What Happens to Your HSA When You Change Jobs or Insurance

Your HSA stays with you. The account is portable—it does not belong to your employer, and you keep it even if you leave the job. You can roll the balance to a new HSA at a different provider, or keep the old account open and continue using it. Some people maintain multiple HSAs from previous employers.

If you lose HDHP coverage, you can no longer contribute to the HSA, but you can still withdraw money for may have access to medical expenses. If you regain HDHP coverage later, you can resume contributions. There is no penalty for the gap in coverage.

If you switch to a non-HDHP plan (like a traditional PPO or HMO), you lose HSA may be able to access when ready. You cannot contribute for the rest of that year, but existing money in the account remains yours and can be used for medical expenses indefinitely.

Frequently Asked Questions

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

No, not for regular premiums. You can use HSA funds to pay premiums only if you are receiving unemployment benefits (COBRA does not count) or if you are retired and over 65 and paying for Medicare premiums. Otherwise, premiums are not a may have access to expense.

What happens if I withdraw money for something that is not a medical expense?

Before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. After age 65, you owe only income tax, no penalty. Keep receipts for all withdrawals in case the IRS asks you to prove the expense was medical.

Can I invest my HSA money in stocks?

Most HSA providers let you invest once your balance reaches a threshold, usually $1,000 to $2,500. You can then choose from mutual funds, stocks, or bonds offered by the provider. Some accounts keep a portion in cash and let you invest the rest. Check with your specific provider for their investment options.

What if I do not use all my HSA money by the end of the year?

Unlike an FSA, the money rolls over. You can let it accumulate year after year and use it whenever you have medical expenses. Many people use HSAs as retirement savings vehicles, building a large balance over decades and withdrawing it tax-free in retirement.

Can I give my HSA to someone else or leave it to my heirs?

You cannot transfer an HSA to another person while you are alive. If you die, your beneficiary inherits the account. If your spouse is the beneficiary, they can treat it as their own HSA. If anyone else inherits it, they owe income tax on the full balance, though medical expenses paid within a year of your death may be tax-free.