What an HSA actually is

A Health Savings Account (HSA) is a bank account you own that holds money specifically for medical expenses. You put pre-tax dollars into it, the money grows tax-free, and you withdraw it tax-free when you pay for may have access to medical costs. Unlike a flexible spending account (FSA), which you lose at the end of the year if you don't spend it, an HSA rolls over year to year and stays yours even if you change jobs or retire.

The catch is that you can only open an HSA if you're enrolled in a high-deductible health plan (HDHP) — a type of health insurance with a lower monthly premium but a higher deductible. For 2024, the IRS defines an HDHP as a plan with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. If your plan doesn't meet that threshold, you cannot have an HSA, even if your employer offers one.

You control the account yourself. Your employer may contribute to it, you may contribute to it, or both of you may. The money is yours — if you leave the job, the account goes with you. You decide how much to contribute each year (up to an annual limit set by the IRS), and you decide when and how to spend it.

Key Takeaways

  • An HSA is a savings account for medical expenses that only works if you have a high-deductible health plan, and the money rolls over year to year instead of disappearing.
  • You contribute pre-tax dollars, meaning the money reduces your taxable income, and withdrawals for may have access to medical costs are also tax-free.
  • may have access to expenses include insurance premiums, deductibles, copays, prescriptions, dental work, vision care, and many other medical services — but not all health costs may have access to.
  • If you withdraw money for non-medical reasons before age 65, you pay income tax on it plus a 20 percent penalty; after 65, you pay only income tax.
  • The account belongs to you even after you leave your job, and you can invest the balance in stocks, bonds, or mutual funds instead of leaving it in cash.

How the tax advantage works

The tax benefit comes in three layers. First, money you put into the account reduces your taxable income for the year — if you earn $50,000 and contribute $3,000 to an HSA, the IRS treats your income as $47,000. Second, any interest or investment gains inside the account are not taxed. Third, when you withdraw money to pay for a may have access to medical expense, that withdrawal is not taxed either.

Compare this to paying medical expenses with after-tax dollars from your regular paycheck. If you earn $50,000 and pay $3,000 in medical costs out of pocket, you've already paid income tax on that $3,000. With an HSA, you avoid that tax entirely. The exact savings depends on your tax bracket — someone in the 22 percent federal bracket saves $660 on a $3,000 contribution, while someone in the 12 percent bracket saves $360.

Your employer may also contribute to your HSA. That money is not counted as taxable income to you, and it reduces what you can contribute yourself. For 2024, the total contribution limit (employer plus employee) is $4,150 for individual coverage or $8,300 for family coverage. If your employer puts in $1,000, you can contribute up to $3,150 yourself that year.

What counts as a may have access to medical expense

The IRS maintains a detailed list of what you can pay for with HSA money tax-free. The broad categories include insurance premiums (though not all of them), deductibles, copays, coinsurance, prescriptions, dental work, vision care including glasses and contacts, hearing aids, mental health treatment, and physical therapy. You can also use HSA funds to pay for over-the-counter medications like pain relievers and allergy medicine, but only if you have a prescription or a doctor's note saying you need them.

Some costs that sound medical don't count. Cosmetic surgery, teeth whitening, gym memberships, and vitamins (unless prescribed by a doctor) are not may have access to expenses. Long-term care insurance premiums have limits on how much you can deduct. If you're unsure whether a specific cost qualifies, the IRS website has a searchable database, or you can ask your HSA provider — they usually have a customer service line that can answer in minutes.

You don't have to spend the money in the year you contribute it. Unlike an FSA, which operates on a "use it or lose it" rule, HSA money carries forward indefinitely. You could contribute for five years and spend it all in year six. This makes an HSA useful as a long-term savings tool for future medical costs, not just a way to pay this year's bills.

What happens if you spend HSA money on non-medical costs

If you withdraw money from your HSA for something that's not a may have access to medical expense, you owe income tax on that amount plus a 20 percent penalty. The penalty applies only to the non-may have access to withdrawal, not to your entire account balance. So if you withdraw $500 for a non-medical reason and your tax bracket is 22 percent, you'd owe $110 in income tax plus $100 in penalty — a total of $210 on that $500.

The one exception is after age 65. Once you turn 65, you can withdraw HSA money for any reason without the 20 percent penalty. You'll still owe income tax on non-medical withdrawals, but the penalty goes away. This is why some people treat an HSA as a retirement account — after 65, it functions like a traditional IRA, except the money is still yours and there are no required withdrawals.

Keep receipts for any HSA withdrawal you make for medical expenses. The IRS doesn't require you to submit them when you file taxes, but if you're ever audited, you'll need to prove that the money went to may have access to costs. Many HSA providers also let you upload receipts to your account for record-keeping.

HSA vs. FSA: the main differences

Both accounts let you set aside pre-tax money for medical expenses, but they work very differently. An FSA is "use it or lose it" — money you don't spend by the end of the year (or the grace period, which varies by employer) disappears. An HSA rolls over forever. An FSA doesn't require a high-deductible health plan; you can have an FSA with any type of health insurance. An HSA only works if you're on an HDHP.

An FSA is usually run by your employer, and you can't take it with you if you leave the job. An HSA is your own account, held at a bank or financial institution, and it follows you from job to job. An FSA typically has a lower annual contribution limit — usually $3,200 for individual coverage — while an HSA limit is higher. You can have both an FSA and an HSA in the same year, but there are strict rules about which expenses you can pay from each one.

For most people, an HSA is more flexible because you're not forced to spend the money or lose it. But if you know you'll have high medical costs this year and want to use pre-tax dollars without worrying about investing or managing an account, an FSA may be simpler.

How to open and manage an HSA

You open an HSA through a bank, credit union, or financial services company — not through your employer, though your employer may recommend one. Common HSA providers include Fidelity, HealthEquity, Lively, and Optum Bank. You'll need proof that you're enrolled in an HDHP, which your employer's benefits office or your insurance company can provide. The process usually takes 10 to 15 minutes online.

Once the account is open, you decide how to hold the money. You can keep it in a cash savings account earning minimal interest, or you can invest it in stocks, bonds, or mutual funds through the provider's investment platform. Many people keep a small amount in cash for when ready medical expenses and invest the rest for long-term growth. Your HSA provider will show you the investment options available and the fees associated with each.

You can contribute to your HSA through payroll deduction (if your employer offers it), by making deposits directly to the account, or both. Payroll deduction is simpler because the money comes out before taxes are calculated. If you contribute on your own, you claim the deduction on your tax return. Either way, you must contribute by the tax filing important date (usually April 15) to count the contribution toward that tax year.

When you can't have an HSA

You must be enrolled in an HDHP to have an HSA. If your employer offers only a standard health plan with a lower deductible, you cannot open an HSA. If you're covered by Medicare, you cannot contribute to an HSA, though you can continue to withdraw from an existing one for may have access to medical expenses. If you're claimed as a dependent on someone else's tax return, you cannot have an HSA.

Some people are disqualified because they have other health coverage that doesn't count as an HDHP. Tricare (military health coverage), the Veterans Health Administration, and certain employer plans with low deductibles all disqualify you from HSA may be able to access. If you're unsure whether your plan qualifies, your insurance company or employer's benefits office can confirm in one call.

Frequently Asked Questions

Can I use my HSA to pay for my spouse's medical expenses?

Yes, as long as your spouse is listed as a dependent on your tax return. You can pay for any family member's may have access to medical expenses from your HSA, even if they're not on your health insurance plan. Keep receipts showing the expense and the person it was for.

What happens to my HSA if I change jobs?

The account stays with you. You own it, not your employer. You can continue to use it to pay for medical expenses, and you can keep contributing to it as long as you remain enrolled in an HDHP with your new employer. If your new employer offers an HSA, you can keep your old account or open a new one — many people consolidate into one account for simplicity.

Can I invest my HSA balance in stocks?

Yes, most HSA providers offer investment options including stocks, bonds, and mutual funds. Some require a minimum balance (often $1,000 to $2,000) before you can invest. The growth is tax-free, and you can withdraw the money for medical expenses at any time without penalty, regardless of market performance.

Do I have to spend my HSA money by a certain age?

No. Unlike a 401(k), there are no required withdrawals from an HSA at any age. You can let the money sit and grow indefinitely. After age 65, you can withdraw it for any reason (though non-medical withdrawals are taxed as income). Many people use an HSA as a retirement savings tool for this reason.

Can I pay for dental and vision care with my HSA?

Yes. Dental work, cleanings, orthodontia, and vision care including eye exams, glasses, and contact lenses are all may have access to expenses. Cosmetic dental work like teeth whitening is not covered. Check with your HSA provider if you're unsure whether a specific procedure qualifies.