A Health Savings Account is a tax-advantaged savings account tied to a high-deductible health plan

A Health Savings Account (HSA) is a savings account you own that holds money specifically for medical expenses. The account is paired with a high-deductible health insurance plan — meaning your plan has a higher deductible than standard plans, but lower monthly premiums. The money you put into an HSA is not taxed when you contribute it, and withdrawals for may have access to medical expenses are not taxed either. This makes it different from a regular savings account, where you pay taxes on the interest you earn.

You control the account yourself. Your employer may contribute to it, you may contribute to it, or both of you may. The money stays in the account from year to year — it does not disappear at the end of the year like some other health benefits. You can use it to pay for deductibles, copays, prescriptions, dental work, vision care, and many other medical costs. If you do not spend the money in a given year, it rolls forward and you can use it later.

Key Takeaways

  • An HSA requires you to be enrolled in a high-deductible health plan, and you must not be covered by other health insurance or claimed as a dependent on someone else's taxes.
  • Contributions are made with pre-tax dollars, meaning the money reduces your taxable income for the year.
  • You can withdraw money tax-free only for may have access to medical expenses, which include deductibles, copays, prescriptions, dental, vision, and mental health care.
  • Money left in the account at the end of the year stays there and earns interest or investment returns, unlike flexible spending accounts that have a use-it-or-lose-it rule.
  • 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 requirements are

You can open an HSA only if you are enrolled in a high-deductible health plan. The IRS sets the minimum deductible each year — for 2024, that is $1,600 for individual coverage and $3,200 for family coverage. Your plan must also have an out-of-pocket maximum (the most you pay in a year before insurance covers everything) that does not exceed $4,050 for individual coverage or $8,050 for family coverage.

You also cannot be covered by any other health insurance at the same time, with limited exceptions for specific plans like dental-only or vision-only coverage. You cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare. If you meet these conditions, you can open an HSA through your employer's plan, through a bank, or through a financial institution that offers HSAs.

How much you can contribute each year

The IRS sets annual contribution limits that 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 contribute an additional $1,000 per year as a catch-up contribution. These limits explore to the total of all contributions from you and your employer combined — if your employer contributes $1,000, you can only contribute $3,150 more to stay within the limit.

You can contribute to an HSA through payroll deductions (which means the money comes out before taxes are calculated), or you can contribute directly to the account yourself and deduct the contribution on your tax return. Contributions must be made by the tax filing important date for that year, usually April 15 of the following year.

What medical expenses you can pay for with HSA money

The IRS maintains a list of may have access to medical expenses, and the list is longer than many people realize. You can use HSA money for deductibles, copays, and coinsurance on your health plan. You can pay for prescriptions, insulin, and other medications. Dental work including cleanings, fillings, and orthodontics is covered. Vision care including eye exams, glasses, and contact lenses is covered. Mental health and substance abuse treatment is covered.

You can also use HSA money for medical equipment like crutches, wheelchairs, and hearing aids; for therapy and rehabilitation; for certain over-the-counter items like pain relievers and allergy medicine (though rules changed in 2020 and you now need a prescription for some items); and for long-term care insurance premiums up to a certain amount. You cannot use HSA money for cosmetic procedures, gym memberships, or general wellness products that are not medically necessary.

If you withdraw money from your HSA for something that is not a may have access to medical expense, you pay income tax on that withdrawal plus a 20 percent penalty — unless you are 65 or older, in which case the penalty goes away but the income tax remains.

How the money grows and what happens to unused funds

Unlike a flexible spending account (FSA), which requires you to spend the money or lose it each year, an HSA is yours to keep. Money left in the account at the end of the year rolls forward to the next year. Many HSAs allow you to invest the balance in mutual funds or other investments, which means the money can earn returns over time. Some HSAs keep the balance in a cash account that earns interest, though the interest rate is typically low.

This makes an HSA function partly as a retirement savings tool. If you do not need to withdraw the money for medical expenses now, you can let it grow. After age 65, you can withdraw money from your HSA for any reason without the 20 percent penalty — you will pay income tax on non-medical withdrawals, but not the penalty. This means an HSA can become a general retirement account once you reach 65, similar to a traditional IRA.

How to use your HSA when you need medical care

When you have a medical expense, you have choices about how to pay for it. You can pay out of pocket with your own money and then reimburse yourself from your HSA later — there is no time limit on reimbursement, so you can wait months or years. You can use an HSA debit card if your account provider issues one, which lets you pay directly at the point of care. You can submit a receipt to your HSA provider and request a reimbursement check or transfer.

Keep receipts and records of all medical expenses you reimburse yourself for, in case the IRS asks questions. The IRS can audit HSA withdrawals up to three years after the year in which you made the withdrawal. If you cannot prove that a withdrawal was for a may have access to medical expense, you will owe income tax and the 20 percent penalty on that amount.

HSAs versus other health savings options

An HSA is different from a flexible spending account (FSA), which is also offered by many employers. An FSA also holds pre-tax dollars for medical expenses, but you must spend the money within the plan year or lose it — there is no rollover. An FSA has a lower annual limit (usually $3,200 for 2024) and you do not own the account; your employer does. An HSA is owned by you, has higher contribution limits, and the money rolls over.

A dependent care FSA is separate and covers childcare or adult care expenses, not medical expenses. A health reimbursement arrangement (HRA) is funded entirely by your employer and reimburses you for medical expenses, but you do not own it and the rules vary by employer. If your employer offers both an HSA and an FSA, you typically cannot use both in the same year — you must choose one.

Frequently Asked Questions

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

Yes, if your spouse is not covered by their own health insurance and you are not claiming them as a dependent for tax purposes. If your spouse has their own health plan, they should use their own HSA or FSA. If you have family coverage under your high-deductible plan, both you and your spouse are covered by the same plan and can share the HSA.

What happens to my HSA if I change jobs or retire?

Your HSA stays with you — it is your account, not your employer's. You can keep the account open even if you leave your job, change to a different health plan, or retire. You can continue to use the money for may have access to medical expenses. If you retire before age 65 and no longer have a high-deductible plan, you cannot make new contributions, but you can still withdraw money for medical expenses without penalty.

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

You cannot use HSA money to pay for your regular health insurance premiums. You can use it to pay for COBRA coverage (continuation coverage if you lose your job), Medicare premiums after age 65, and long-term care insurance premiums up to a limit set by the IRS. You cannot use it for supplemental insurance like accident or disability coverage.

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

You will owe income tax on that withdrawal plus a 20 percent penalty. You cannot undo the withdrawal, but you can file an amended tax return if you discover the error within the statute of limitations. Keep documentation of what you spent the money on so you can explain the situation if the IRS asks.

Do I have to use my HSA before I turn 65?

No. You can let the money sit in the account and grow for decades. After age 65, you can withdraw money for any reason without the 20 percent penalty, though you will pay income tax on non-medical withdrawals. Many people use their HSA as a retirement savings tool and do not touch it unless they have significant medical expenses.