A Health Savings Account lets you set aside pre-tax money to pay for medical costs now or later

A Health Savings Account (HSA) is a bank account attached to a high-deductible health insurance plan. Money you put into it is not taxed as income, and you can withdraw it tax-free to pay for medical expenses. The account stays open year to year — unlike a flexible spending account, which resets annually — so unused money rolls forward and grows.

The mechanics are straightforward: you contribute money from your paycheck (if your employer offers it) or from your own funds, the money sits in an account earning interest, and you withdraw it when you have a medical bill. Because the contributions are pre-tax and the withdrawals for medical costs are tax-free, an HSA reduces the total amount you pay in taxes and out of pocket for healthcare.

The trade-off is that you must be enrolled in a high-deductible health plan (HDHP) to open or contribute to an HSA. You cannot have an HSA if you are covered by a traditional health plan, Medicare, or certain other insurance types. Once you leave the HDHP, you can keep the account and spend what is in it, but you cannot add new money.

Key Takeaways

  • An HSA requires enrollment in a high-deductible health plan; you cannot open one with a standard insurance plan.
  • Contributions reduce your taxable income, and withdrawals for medical costs are not taxed, creating a double tax advantage.
  • Unlike flexible spending accounts, HSA money does not expire at the end of the year and can be invested to grow over time.
  • You can withdraw funds for may have access to medical expenses including deductibles, copays, prescriptions, dental work, and vision care.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

Who can open an HSA and what the enrollment rules are

You are may be able to access to open an HSA if you are enrolled in a high-deductible health plan and have no other health coverage. The IRS sets the minimum deductible each year — for 2024, that is $1,600 for individual coverage and $3,200 for family coverage. Your employer may offer an HSA through payroll, or you can open one independently at a bank or financial institution that administers HSAs.

You cannot contribute to an HSA if you are claimed as a dependent on someone else's tax return, enrolled in Medicare, or covered by a non-HDHP plan (including a spouse's traditional plan). You also cannot have both an HSA and a flexible spending account (FSA) in the same year, though you can switch between them in different years.

If your employer offers an HSA, they typically handle the setup and deduct contributions directly from your paycheck before taxes. If you open one on your own, you contribute after-tax dollars but then deduct the contribution on your tax return. Either way, the tax benefit is the same.

How much you can contribute and what happens to unused money

The IRS sets annual contribution limits, which change each year. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year as a catch-up contribution. These limits explore to all your HSA accounts combined — if you have two HSAs, the total across both cannot exceed the limit.

Unlike a flexible spending account, money in an HSA does not expire. Whatever you do not spend in a given year stays in the account and rolls forward indefinitely. This means an HSA can function as a long-term savings vehicle: you can contribute the maximum each year, spend only what you need for current medical costs, and let the rest accumulate and grow through interest or investment.

Many HSA providers offer investment options — similar to a 401(k) — so you can invest your balance in mutual funds or other securities. This is optional; you can also keep your balance in a cash account earning interest. The growth is tax-free as long as you use the money for medical costs.

What counts as a may have access to medical expense you can pay for

may have access to medical expenses include most costs related to diagnosis, treatment, or prevention of disease. The main categories are deductibles, copays, and coinsurance for your health plan; prescription medications; dental work (cleanings, fillings, root canals, orthodontics); vision care (eye exams, glasses, contact lenses); hearing aids and related care; and mental health treatment. You can also use HSA funds for over-the-counter medications if you have a prescription from your doctor.

Some expenses that seem medical but do not count include cosmetic procedures (unless medically necessary), gym memberships, vitamins and supplements (unless prescribed), and long-term care insurance premiums. The IRS publishes a full list, and your HSA provider can tell you whether a specific expense qualifies.

You do not have to spend the money in the year you contribute it. You can pay a medical bill out of pocket and then reimburse yourself from your HSA months or years later, as long as you have receipts. This flexibility is one reason an HSA can serve as a retirement savings tool: you can cover current medical costs with other money and let your HSA grow untouched.

How withdrawals work and what happens if you spend on non-medical costs

To withdraw money from your HSA, you typically request a transfer to your bank account, write a check from the HSA account, or use a debit card linked to the account (if your provider offers one). You keep receipts for the medical expenses you paid for, in case the IRS asks. You do not have to submit receipts when you withdraw — the burden is on you to keep them and prove the expense was may have access to if audited.

If you withdraw money for a non-medical expense before age 65, you owe income tax on the amount plus a 20 percent penalty. For example, if you withdraw $1,000 for a non-may have access to expense and you are in the 22 percent tax bracket, you would owe $220 in taxes plus $200 in penalty, totaling $420. This makes HSA withdrawals for non-medical costs significantly more expensive than straightforward paying out of pocket.

After age 65, the penalty goes away. You can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as ordinary income. This is why an HSA becomes more like a traditional retirement account after 65 — the tax advantage remains for medical costs, but you have the flexibility to use the money for other purposes if needed.

What happens to your HSA if you change jobs or leave your HDHP

Your HSA belongs to you, not your employer. If you change jobs, the account stays open and the money remains yours. You can continue to spend from it for medical costs, and if your new employer offers an HSA and you are still enrolled in an HDHP, you can continue to contribute. If your new employer does not offer an HSA, you can open an individual HSA on your own.

If you leave your HDHP and switch to a traditional health plan, you can no longer make new contributions to your HSA. However, the money already in the account is still yours and you can continue to withdraw it for may have access to medical expenses. The account does not close — it straightforward stops accepting contributions until you re-enroll in an HDHP.

If you are married and both spouses have HSAs, each account is separate. If one spouse loses HDHP coverage, that person's account stops accepting contributions but remains open for withdrawals. The other spouse's account continues normally.

How an HSA compares to a flexible spending account and other savings options

An HSA and a flexible spending account (FSA) both offer tax advantages for medical costs, but they work differently. An FSA is "use it or lose it" — money not spent by the end of the year is forfeited (though some plans allow a small carryover or grace period). An HSA has no expiration, so unused money accumulates. An HSA also allows investment growth, while an FSA typically does not. On the other hand, an FSA does not require a high-deductible plan, so it is available to more people.

A dependent care FSA is separate from a medical FSA and covers childcare or adult care costs. You can have both a medical FSA and a dependent care FSA in the same year, but you cannot have a medical FSA and an HSA together.

If you have a choice between an HSA and an FSA, the HSA is usually better if you expect to have medical expenses and can afford to let money accumulate. The FSA is better if you have predictable annual medical costs and want to use all the money each year, or if you are not enrolled in an HDHP.

Frequently Asked Questions

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

Yes, as long as your spouse is a dependent on your tax return. You can use your HSA for medical costs of your spouse and any dependents, regardless of whether they are covered by your health plan. Keep receipts showing the expense was for a dependent.

What if I withdraw money from my HSA and later find out the expense did not count?

You owe income tax plus the 20 percent penalty on that withdrawal. You cannot undo the withdrawal, but you can avoid the penalty by recontributing the amount to your HSA within 60 days (if you are still may be able to access to contribute). Consult a tax professional if this happens, as the rules are complex.

Can I invest my HSA balance in stocks or mutual funds?

Many HSA providers offer investment options, but not all do. Check with your provider about what investment choices are available. Any growth is tax-free as long as you use the money for medical costs. If you withdraw invested funds for non-medical costs, you owe tax and penalty on the gains as well as the original amount.

Do I lose my HSA if I go on Medicare?

You cannot contribute to an HSA once you enroll in Medicare, but the money already in the account is yours to keep. You can continue to withdraw it for medical costs tax-free. After age 65, you can also withdraw for non-medical costs without the 20 percent penalty, though you will owe income tax.

What records do I need to keep for HSA withdrawals?

Keep receipts and invoices showing the date, amount, and nature of the medical expense. You do not submit these when you withdraw, but the IRS can request them during an audit. Receipts from your doctor, pharmacy, or hospital are sufficient — you do not need a separate form from your HSA provider.