What a Health Savings Account Is

A Health Savings Account, or HSA, is a bank account where you set aside money specifically to pay for medical expenses. The money you put in is not taxed by the federal government, and you do not pay taxes on the money when you withdraw it to pay for doctor visits, prescriptions, or other may have access to medical costs. This is different from a regular savings account, where you pay taxes on any interest the bank pays you.

An HSA is tied to a specific type of health insurance called a High Deductible Health Plan, or HDHP. You can only open an HSA if you are enrolled in an HDHP. The account belongs to you — if you change jobs or change insurance, the money stays in your account and you keep control of it.

Think of it as a way to save money on taxes while building up funds for medical bills you know are coming, or for unexpected health costs later in life.

Key Takeaways

  • You can only open an HSA if your health insurance is a High Deductible Health Plan, which your employer or insurance company will tell you by name.
  • Money you contribute to an HSA is not taxed, and withdrawals for medical expenses are not taxed, which saves you money compared to paying with after-tax dollars.
  • You own the account and the money in it — it does not disappear if you change jobs or insurance plans.
  • You can use HSA money for doctor visits, prescription drugs, dental work, vision care, and many other medical costs, but not for insurance premiums or over-the-counter items without a prescription.
  • If you withdraw money for non-medical reasons before age 65, you pay taxes on it plus a 20 percent penalty, but after 65 you can withdraw for any reason and only pay taxes.

Who Can Open an HSA

To open an HSA, you must be enrolled in a High Deductible Health Plan. Your employer, your insurance company, or the health insurance marketplace will tell you if your plan qualifies. The plan will have a higher deductible — the amount you pay out of pocket before insurance starts to help — than a standard plan, but the monthly premium you pay is usually lower.

You cannot have other health insurance at the same time, with a few exceptions. You can have dental insurance, vision insurance, or accident insurance alongside your HDHP. You also cannot be enrolled in Medicare, and you cannot be claimed as a dependent on someone else's tax return.

If you meet these conditions, you can open an HSA through your employer's benefits program, through your bank, or through a financial services company that offers HSAs. Many banks and investment firms offer them.

How Much You Can Contribute Each Year

The IRS sets a limit on how much you can put into an HSA each year. The limit changes slightly from year to year. For 2024, the limit is $4,150 if you have individual coverage and $8,300 if you have family coverage. Your employer may contribute money on your behalf, and that counts toward your limit.

You do not have to contribute the maximum. You can put in any amount up to the limit, and you can change how much you contribute each year. If you contribute more than the limit, you will owe taxes and a penalty on the overage.

If you turn 55 during the year, you can contribute an extra $1,000 that year and every year after, as long as you stay enrolled in an HDHP. This is called a catch-up contribution and is meant to help people save more for medical costs in retirement.

What You Can and Cannot Pay For

You can use HSA money to pay for a wide range of medical costs: doctor visits, hospital stays, prescription medications, dental work, vision care, hearing aids, mental health treatment, and physical therapy. You can also use it for medical equipment like crutches, wheelchairs, or blood pressure monitors. The IRS publishes a full list of may have access to medical expenses on its website.

You cannot use HSA money to pay for health insurance premiums while you are working, though there are exceptions for COBRA coverage (continuation coverage if you lose your job), Medicare premiums after you turn 65, or long-term care insurance. You also cannot use it for over-the-counter medicines like cold medicine or pain relievers unless you have a prescription from a doctor.

If you use HSA money for something that does not count as a medical expense, you will owe income tax on that amount plus a 20 percent penalty. Keep your receipts so you can prove what you spent the money on if the IRS asks.

How the Money Grows and What Happens to It

Money in an HSA earns interest, just like a regular savings account. Some HSAs also let you invest the money in stocks or mutual funds, similar to a retirement account, so it can grow faster. You choose whether to keep the money in a savings account or invest it based on how much risk you are comfortable with.

Unlike a Flexible Spending Account, or FSA (another type of account tied to health insurance), HSA money does not disappear at the end of the year. Whatever you do not spend rolls over to the next year, and the year after that. The money is yours to keep as long as you own the account.

If you leave your job or change insurance, you keep the HSA and the money in it. You can continue to use it to pay for medical expenses even if you no longer have an HDHP, though you cannot make new contributions once you switch to a different type of insurance.

Opening an HSA and Making Contributions

If your employer offers an HDHP, you usually set up an HSA during your company's open enrollment period, which is typically once a year. Your employer will tell you which HSA provider or providers you can choose from. You fill out a form, choose how much to contribute, and the money is taken from your paycheck before taxes are calculated — this is called a pre-tax deduction.

If you buy your own health insurance through the marketplace or directly from an insurance company, you can open an HSA at a bank or financial services company. You will need to show proof that you are enrolled in an HDHP. You can contribute money directly from your bank account, and you will claim the deduction on your tax return.

Once the account is open, you receive a debit card or checkbook to pay for medical expenses directly from the account. You can also withdraw money and pay out of pocket, then keep the receipt. Some people use their HSA as an investment account and pay medical bills with their regular money, letting the HSA grow for future use.

Withdrawals After Age 65 and in Retirement

Once you turn 65, the rules change. You can withdraw money from your HSA for any reason without penalty. If you withdraw for non-medical expenses, you will still owe income tax on that money, but you will not owe the 20 percent penalty. This makes an HSA a useful retirement savings tool — you can use it like a regular retirement account once you reach 65.

If you are on Medicare, you can no longer make contributions to an HSA, but you can still withdraw money from it to pay for medical expenses. Medicare premiums, copayments, and deductibles all count as may have access to medical expenses, so you can use your HSA to help pay for them.

If you die, the money in your HSA goes to your beneficiary — the person you named when you opened the account. If you did not name a beneficiary, the money becomes part of your estate.

Frequently Asked Questions

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

Yes, as long as you are married and file taxes jointly. You can use your HSA to pay for medical expenses for your spouse and your children, even if they are not covered by your HDHP. Keep receipts to prove the expenses are medical.

What happens to my HSA if I lose my job?

The account and the money in it are yours to keep. You can continue to use it to pay for medical expenses. You cannot make new contributions unless you enroll in another HDHP. If you have COBRA coverage (continuation health insurance after job loss), you can continue to contribute to your HSA while you have COBRA.

Can I have both an HSA and a Flexible Spending Account?

No, you cannot have both at the same time. However, you can have an HSA and a Limited FSA, which only covers dental and vision expenses. Ask your employer if they offer a Limited FSA if you want to use both accounts.

Do I have to use my HSA money every year?

No. Unlike an FSA, HSA money rolls over every year. You can let it build up and use it whenever you need it, or save it for retirement. There is no important date to spend it.

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

You will owe income tax on that amount plus a 20 percent penalty. If you made a mistake, you can try to correct it by putting the money back into the account, but this must be done quickly. Keep all receipts and records so you can prove what the money was used for.