A Medical Savings Account Lets You Set Aside Pre-Tax Money for Health Costs

A Medical Savings Account (MSA) is a tax-advantaged savings account paired with a high-deductible health insurance plan. Money you put into it comes out of your paycheck before taxes are taken, which lowers your taxable income for the year. You can then withdraw that money tax-free to pay for may have access to medical expenses — doctor visits, prescriptions, dental work, vision care, and many other health-related costs.

The account belongs to you, not your employer or insurance company. Any money you don't spend in a given year stays in the account and rolls over to the next year. This is different from a Flexible Spending Account (FSA), where unspent money is typically forfeited at the end of the year.

MSAs come in two main types: Health Savings Accounts (HSAs), which are the most common and have higher contribution limits, and Archer MSAs, which are older and rarely offered by employers anymore. This guide focuses on HSAs, since that is what most people encounter.

Key Takeaways

  • Money you contribute to an MSA comes out before taxes, reducing what you owe to the IRS that year.
  • You can withdraw money tax-free only for may have access to medical expenses like doctor visits, prescriptions, dental, and vision care.
  • Unused money stays in your account and grows year to year — you do not lose it at the end of the year.
  • You must be enrolled in a high-deductible health plan to open or contribute to an MSA.
  • Withdrawals for non-medical expenses are taxed as income and subject to a penalty if you are under 65.

Who Can Open a Medical Savings Account

To open an MSA, you must be covered by a high-deductible health plan (HDHP). In 2024, that means your individual deductible is at least $1,600 and your family deductible is at least $3,200. Your plan's out-of-pocket maximum cannot exceed $8,050 for individual coverage or $16,100 for family coverage. These numbers change each year, so check with your insurance company or the IRS website to confirm the current year's limits.

You cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare. You also cannot have other health coverage that is not an HDHP — for example, you cannot have both an HDHP and a traditional PPO plan at the same time.

Most people open an MSA through their employer, since employers often set up the account and may contribute money to it. If your employer does not offer an HDHP, you can open an MSA on your own through a bank, credit union, or insurance company, as long as you are enrolled in an HDHP purchased on the individual market or through a spouse's employer.

How Much You Can Contribute Each Year

The IRS sets annual contribution limits, and they vary based on whether you have individual or family coverage. For 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage. These limits change yearly and are announced by the IRS in the fall for the following year.

Your employer may contribute to your account, and that money counts toward your limit. For example, if your employer puts $1,000 into your MSA and you contribute $2,000 yourself, you have used $3,000 of your $4,150 limit. You can contribute only up to the limit for the months you are enrolled in an HDHP — if you drop the plan in June, you can only contribute a prorated amount for those six months.

You can contribute to your MSA through payroll deductions (the most common method), by sending a check to the account holder, or by transferring money from another account. Contributions are due by the tax filing deadline of the following year — typically April 15 — if you want to deduct them on that year's tax return.

What Medical Expenses You Can Pay From Your Account

The IRS maintains a list of may have access to medical expenses you can pay from your MSA tax-free. These include doctor visits, hospital stays, surgery, prescription medications, and mental health treatment. Dental work, vision care (including glasses and contact lenses), and hearing aids also may have access to. Over-the-counter medications like pain relievers and cold medicine may have access to only if you have a prescription for them.

Some expenses that surprise people: physical therapy, chiropractic care, acupuncture, and certain medical equipment like crutches or blood pressure monitors all may have access to. Insulin and other diabetes supplies are covered. Long-term care insurance premiums (with limits) and certain health insurance premiums you pay yourself also count.

Expenses that do not may have access to include cosmetic surgery (unless it is reconstructive after an injury), gym memberships, vitamins and supplements (unless prescribed), and most over-the-counter items without a prescription. Dental work that is purely cosmetic does not may have access to, but root canals and fillings do. If you are unsure whether a specific expense qualifies, the IRS publishes a full list on its website, or you can ask your account provider.

How to Withdraw Money and Track Your Spending

When you have a may have access to medical expense, you can withdraw money from your MSA in several ways. Most account providers issue a debit card linked to the account, which you can use at the point of sale — at a pharmacy, doctor's office, or hospital. Some providers allow you to request a check or electronic transfer to your bank account. A few require you to pay out of pocket and then submit a receipt for reimbursement.

Keep all receipts and documentation for medical expenses you pay from your MSA. The IRS does not require you to submit receipts when you withdraw money, but you must be able to prove the expense was may have access to if you are audited. Many account providers also send you an annual statement showing your balance and transactions, which helps you track what you have spent.

You do not have to spend your MSA money in the same year you contribute it. If you have $5,000 in your account at the end of the year, that full amount stays there and you can use it in future years. This makes an MSA different from an FSA, where you typically lose unspent money.

What Happens to Your Account If You Change Jobs or Leave Your HDHP

Your MSA stays with you if you change jobs. The account is yours, not your employer's, so you keep the money and can continue to use it for may have access to medical expenses. If your new employer offers an MSA, you can roll your old account into the new one, or you can keep both accounts open and manage them separately.

If you drop your HDHP coverage, you can no longer make new contributions to your MSA. However, you can still withdraw money from the account to pay for may have access to medical expenses, even after you are no longer enrolled in an HDHP. This is one of the main advantages of an MSA over an FSA — the money does not disappear when your coverage ends.

If you withdraw money for a non-may have access to 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, though you still owe income tax on non-medical withdrawals. This makes an MSA function somewhat like a retirement account once you reach 65.

Tax Reporting and What You Need to Know at Tax Time

Contributions you make to your MSA through payroll deductions are automatically excluded from your taxable income — your employer handles this. If you contribute money directly to your account (not through payroll), you deduct those contributions on your tax return using Form 8853.

Withdrawals for may have access to medical expenses are not reported as income and do not affect your taxes. If you withdraw money for a non-may have access to expense, you report that on Form 8853 as well, and you owe both income tax and the 20 percent penalty (unless you are 65 or older).

Your MSA provider will send you a Form 1099-SA each January showing all withdrawals you made the previous year. You use this form to complete your tax return. Keep your receipts for at least three years in case the IRS asks questions about whether your withdrawals were for may have access to expenses.

Frequently Asked Questions

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

Yes, if your spouse is covered under your family HDHP plan. You can also use MSA funds to pay for medical expenses of your spouse or dependents even if they are not on your insurance plan, as long as you claim them as dependents on your tax return.

What if I withdraw money from my MSA and later find out the expense does not may have access to?

You owe income tax on that withdrawal plus a 20 percent penalty if you are under 65. You should deposit the money back into your account as soon as you realize the mistake. Keep documentation showing you corrected the error, in case the IRS questions it later.

Can I invest the money in my MSA, or does it just sit in a savings account?

Most MSA providers allow you to invest your balance in stocks, bonds, or mutual funds, similar to a retirement account. Some require you to keep a minimum amount (like $1,000 or $2,000) in cash, with the rest invested. Check with your provider about investment options and any fees.

Do I have to use my MSA money before I turn 65?

No. You can let the money grow in your account for decades. After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as income. Many people use their MSA as a supplemental retirement savings account for this reason.

What is the difference between an MSA and an FSA?

An MSA requires enrollment in a high-deductible health plan and has higher contribution limits. Unused money rolls over year to year. An FSA has lower limits, does not require an HDHP, and typically forfeits unspent money at year-end. MSAs are designed for long-term savings; FSAs are for predictable near-term expenses.