A health savings account is a bank account you own that holds money specifically for medical costs, with tax advantages most regular savings accounts don't have

A health savings account (HSA) is a savings account attached to a high-deductible health insurance plan. You put pre-tax money into it, use it to pay for medical expenses, and the money you don't spend stays in the account and grows year to year. The main advantage is that money going in and money coming out for may have access to medical costs are both tax-free — which means you're not paying federal income tax on that money at any stage.

Think of it as a dedicated medical savings fund that your employer or you can contribute to, similar to how a 401(k) works for retirement. But instead of waiting until you're 59½ to withdraw without penalty, you can use HSA money anytime for medical bills. The catch is that you must be enrolled in a high-deductible health plan (HDHP) to open and use one. If you switch to a regular health plan, you can keep the account and the money in it, but you can't add new contributions.

Key Takeaways

  • An HSA is a savings account you control that holds money for medical expenses, and contributions reduce your taxable income for the year.
  • You must be enrolled in a high-deductible health plan to open an HSA, but you can keep the account and its money if you switch plans later.
  • Money in an HSA that you don't spend rolls over year to year and can be invested to grow, unlike flexible spending accounts that expire annually.
  • You can use HSA funds for a wide range of medical costs including deductibles, copays, prescriptions, dental work, and vision care.
  • Withdrawals for non-medical expenses before age 65 are taxed as income plus a 20 percent penalty, but after 65 the penalty goes away.

Who can open an HSA and what the requirements are

To open an HSA, you must be covered by a high-deductible health plan. The IRS sets the minimum deductible each year — for 2024, that's $1,600 for individual coverage and $3,200 for family coverage. Your plan also has a maximum out-of-pocket limit set by the IRS. If your plan meets these thresholds, you're may be able to access to open an HSA.

You cannot have an HSA if you're covered by any other health insurance at the same time, with a few exceptions: you can have a separate accident plan, a disability plan, or coverage for specific diseases. You also cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare. If any of these explore to you, you're not may be able to access to open a new HSA, though you can keep one you already have.

Most people open an HSA through their employer, who may contribute money to it as part of their benefits package. If your employer doesn't offer one, you can open an individual HSA through a bank, credit union, or investment company. You'll need to show proof that you're enrolled in an HDHP — usually a copy of your insurance card or plan documents.

How money flows in and out of an HSA

Money enters an HSA in three ways: through employer contributions, your own contributions, or investment earnings if you invest the balance. If your employer contributes, that money goes in automatically and is not counted as taxable income to you. If you contribute on your own, you can deduct those contributions from your taxable income when you file taxes, which lowers the amount of income tax you owe.

The IRS sets annual contribution limits. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you're 55 or older, you can add an extra $1,000 per year. These limits are the combined total from you and your employer — if your employer puts in $2,000, you can only add $2,150 more to hit the $4,150 limit.

Money comes out when you pay for may have access to medical expenses. You can use a debit card linked to the account, write a check, or request a reimbursement after you've paid out of pocket. may have access to expenses include deductibles, copays, coinsurance, prescription drugs, dental work, vision care, mental health treatment, and many other medical costs. The IRS publishes a full list, but the basic rule is: if it's a medical service or product your doctor would prescribe or recommend, it usually qualifies.

The tax advantages and how they work

An HSA has three tax benefits that stack together. First, money you contribute is not subject to federal income tax — if you earn $50,000 and contribute $3,000 to an HSA, you only pay income tax on $47,000. Second, any interest or investment gains inside the account are not taxed. Third, withdrawals for may have access to medical expenses are not taxed. This triple tax advantage is why an HSA is sometimes called a "triple tax-free" account.

To get these benefits, you must keep records showing that your withdrawal was for a may have access to medical expense. You don't have to submit receipts to the HSA provider, but you should keep them in case the IRS asks. If you withdraw money for a non-medical expense before age 65, you owe income tax on that amount plus a 20 percent penalty. After age 65, you can withdraw money for any reason without the penalty — you'll just owe income tax on non-medical withdrawals, like a regular savings account.

How an HSA differs from a flexible spending account

A flexible spending account (FSA) is similar to an HSA in that you contribute pre-tax money for medical expenses, but the rules are stricter. With an FSA, money you don't spend by the end of the year is forfeited — there's a "use it or lose it" rule. An HSA has no such rule; money rolls over year to year and can accumulate indefinitely.

An FSA also doesn't let you invest the balance to make it grow, while an HSA does. If you have money sitting in your HSA, you can move it into stocks, bonds, or mutual funds through the provider, and any gains are tax-free. This makes an HSA a long-term savings tool, not just a way to pay this year's medical bills.

Some employers offer both an FSA and an HDHP with an HSA. In that case, you can contribute to both, but the FSA is usually limited to dependent care or transit costs, not medical expenses. If your employer offers an FSA for medical expenses, you cannot have an HSA at the same time.

What happens to your HSA if you change jobs or retire

Your HSA belongs to you, not your employer. If you leave your job, the account stays open and the money stays in it. You can keep using it to pay for medical expenses, and you can keep investing the balance. You don't have to do anything — the account straightforward continues.

If your new employer offers an HSA, you can keep your old one or open a new one. Some people consolidate old HSAs into one account to make it easier to manage. If your new employer doesn't offer an HSA, you can still keep your old account and contribute to it on your own, as long as you remain enrolled in an HDHP.

At age 65, you become may be able to access for Medicare, which disqualifies you from making new HSA contributions. However, you can still withdraw money from an existing HSA for any reason without the 20 percent penalty — you'll just owe income tax on non-medical withdrawals. Many people use their HSA as a supplemental retirement account, letting the balance grow and using it for medical expenses in retirement.

How to choose between an HSA and a regular health plan

The decision depends on your expected medical costs and how much you can afford to save. An HDHP with an HSA usually has a lower monthly premium than a regular plan, but a higher deductible. If you're young and healthy with few medical expenses, the lower premium might outweigh the higher deductible, and the HSA becomes a bonus savings tool. If you have chronic conditions or expect significant medical costs, a regular plan with a lower deductible might cost less overall, even though the premium is higher.

Run the numbers for your situation: add up the monthly premium difference, the deductible, and your expected out-of-pocket costs under each plan. Then factor in the tax savings from the HSA contribution. If the HDHP comes out ahead, the HSA is a bonus. If the regular plan comes out ahead, stick with it — the HSA advantage doesn't make up the difference.

Frequently Asked Questions

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

You cannot use HSA money to pay your regular health insurance premium. However, you can use it to pay premiums for COBRA coverage (temporary insurance if you lose your job), long-term care insurance, or health insurance while you're receiving unemployment benefits. You can also use it for Medicare premiums after age 65.

What happens if I withdraw money from my HSA for something that's not medical?

Before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. After age 65, the penalty goes away, but you still owe income tax. Keep receipts for all medical expenses so you can prove withdrawals were may have access to if the IRS asks.

Can my spouse and I share one HSA?

No. Each person must have their own HSA. If you're both enrolled in a family HDHP, you each open separate accounts. You can each contribute up to the family limit, but the combined total from both of you cannot exceed the annual family limit set by the IRS.

What if I have leftover money in my HSA at the end of the year?

Unlike a flexible spending account, HSA money does not expire. It rolls over year to year and can accumulate indefinitely. You can let it grow and use it for future medical expenses, or invest it to earn returns.

Can I use my HSA debit card at any pharmacy or doctor's office?

Most pharmacies and medical providers accept HSA debit cards, but not all. If a provider doesn't accept it, you can pay out of pocket and request reimbursement from your HSA later. Keep the receipt to document that it was a may have access to expense.