What a Medical Savings Account Is
A Medical Savings Account (MSA) is a tax-advantaged savings account that lets you set aside pre-tax money specifically for medical expenses. You contribute money to the account, those contributions reduce your taxable income, and the money grows tax-free. When you need to pay for a doctor visit, prescription, or other may have access to medical cost, you withdraw from the account to cover it.
The most common type is the Health Savings Account (HSA), which is paired with a high-deductible health insurance plan. There is also the Archer MSA, an older account type that is rarely offered now. Both work on the same principle: money in, money out for medical costs, no tax on the growth or withdrawal.
The catch is that you can only open an MSA if you have a may have access to high-deductible health plan. You cannot have an MSA and a traditional low-deductible insurance plan at the same time. The account is yours to keep even if you change jobs or retire, as long as you follow the rules about what you spend it on.
Key Takeaways
- Money you put into an MSA reduces your taxable income for the year, and withdrawals for may have access to medical expenses are not taxed.
- You must be enrolled in a high-deductible health plan to open an HSA, the most common type of MSA.
- may have access to expenses include doctor visits, prescriptions, dental work, vision care, and medical equipment, but not insurance premiums or cosmetic procedures.
- Money left in the account at the end of the year rolls over and stays yours indefinitely, unlike a flexible spending account.
- If you withdraw money for non-medical expenses before age 65, you pay income tax plus a 20 percent penalty; after 65, you pay only income tax.
How Contributions and Tax Deductions Work
You contribute money to your MSA through payroll deduction if your employer offers one, or you can contribute on your own if you have individual coverage. The contribution limits change each year. For 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage, though these numbers vary by year and plan type.
When you contribute through payroll, the money comes out before taxes are calculated, so you never pay federal income tax, Social Security tax, or Medicare tax on that money. If you contribute on your own, you deduct the contribution on your tax return. Either way, the money reduces your taxable income dollar for dollar.
You can contribute to an MSA only during the months you are enrolled in a may have access to high-deductible plan. If you drop the plan mid-year, you can only contribute a prorated amount for the months you were covered. If you turn 65 or lose coverage, you can no longer make new contributions, though money already in the account stays there.
What Counts as a may have access to Medical Expense
may have access to expenses are medical, dental, vision, and mental health costs that treat or prevent illness or injury. This includes doctor visits, hospital stays, surgery, prescription drugs, dental fillings and cleanings, eyeglasses and contact lenses, hearing aids, and medical equipment like blood pressure monitors or crutches. You can also use MSA funds for certain over-the-counter medications and supplies if you have a prescription or doctor's order.
Expenses that do not count include health insurance premiums (with a few exceptions), cosmetic procedures, gym memberships, vitamins without a medical condition, and most wellness products. Long-term care insurance premiums do not count either, though there are limits on how much you can spend on long-term care insurance and still use MSA funds.
Keep receipts and documentation for every withdrawal. The IRS can audit your MSA and ask you to prove that money was spent on may have access to expenses. If you cannot show proof, the withdrawal is treated as a non-medical expense and you owe income tax plus a 20 percent penalty.
How Money Grows and Rolls Over Year to Year
Unlike a flexible spending account (FSA), which has a "use it or lose it" rule, money in an MSA rolls over automatically at the end of the year. If you contribute $3,000 and spend only $1,500 on medical costs, the remaining $1,500 stays in the account and is yours to use whenever you need it.
The money in your account can be invested in mutual funds, stocks, or bonds, depending on what your account provider offers. Any earnings on those investments are also tax-free as long as you use the money for may have access to medical expenses. Some people use MSAs as long-term retirement savings vehicles because the money can grow for decades if they do not need to withdraw it.
You can withdraw money from your MSA anytime without penalty, as long as it is for a may have access to expense. There is no deadline to spend the money, and there is no minimum withdrawal requirement. The account is portable: if you change jobs, retire, or switch insurance plans, the money stays with you.
Penalties and Taxes for Non-may have access to Withdrawals
If you withdraw money from your MSA for something that is not a may have access to medical expense, you owe income tax on the withdrawal plus a 20 percent penalty. For example, if you withdraw $500 for a non-medical expense and you are in the 22 percent tax bracket, you owe $110 in income tax plus $100 in penalty, for a total of $210 out of the $500.
The 20 percent penalty applies only before age 65. Once you turn 65, you can withdraw money for any reason without the penalty, though you still owe income tax on non-medical withdrawals. At that point, an MSA functions more like a traditional IRA.
If you have a high-deductible plan and also enroll in Medicare, Medicaid, or TRICARE, you can no longer contribute to your MSA. If you do contribute after becoming ineligible, you owe income tax plus a 6 percent penalty on the excess contribution for each year it sits in the account.
MSA vs. FSA vs. HSA: What Is the Difference
A Flexible Spending Account (FSA) is similar to an MSA but has different rules. With an FSA, you contribute pre-tax money for medical or dependent care expenses, but money you do not spend by the end of the year is forfeited. You cannot carry it over. FSAs also have lower contribution limits and are tied to your employer—if you leave the job, the account closes.
An HSA is a type of MSA and is the most common one today. It requires a high-deductible health plan and offers the same tax advantages as other MSAs. HSAs have higher contribution limits than FSAs and the money rolls over indefinitely. Most people who have an MSA actually have an HSA.
An Archer MSA is an older account type that was largely replaced by HSAs. Very few employers offer them now. If you already have one, you can keep it, but new Archer MSAs are rarely opened.
| Feature | HSA (type of MSA) | FSA | Archer MSA |
|---|---|---|---|
| Requires high-deductible plan | Yes | No | Yes |
| Money rolls over year to year | Yes | No (use it or lose it) | Yes |
| Portable if you change jobs | Yes | No | Yes |
| Can invest the money | Yes | Usually no | Yes |
| Contribution limit (2024, individual) | $4,150 | $3,300 | $3,850 |
How to Open and Manage an MSA
If your employer offers a high-deductible health plan, they usually offer an HSA as well. You enroll during open enrollment or when you first become may be able to access. Your employer may contribute to the account on your behalf, or you may contribute entirely on your own. The employer handles the setup and payroll deduction.
If you have individual health coverage, you can open an HSA through a bank, credit union, or investment company. You will need proof that you are enrolled in a may have access to high-deductible plan. Once the account is open, you can contribute money and manage it online, by phone, or through the mail.
Keep track of your contributions, withdrawals, and expenses. Your account provider sends you a statement each year showing deposits and withdrawals. You do not file a separate tax form for an MSA, but you do report contributions and withdrawals on your tax return using Form 8889 if you have an HSA.
Frequently Asked Questions
Can I use my MSA to pay for my health insurance premium?
No, not for regular health insurance premiums. However, you can use MSA funds to pay premiums for COBRA coverage, long-term care insurance (up to certain limits), and health insurance while you are receiving unemployment benefits. You cannot use it for your monthly health plan premium.
What happens to my MSA if I leave my job?
The account stays with you. Your employer does not own it and cannot take the money back. You can continue to use it for medical expenses and can keep contributing if you enroll in an individual high-deductible plan. If you move to a new job with an MSA, you can roll the old account into the new one or keep both separate.
Can I withdraw money from my MSA to pay for my spouse's medical expenses?
Yes, if your spouse is on your health plan or if you file taxes jointly. The money can be used for any family member's may have access to medical expenses, not just your own. Keep receipts showing whose expense it was in case of an audit.
What if I do not spend all my MSA money before I turn 65?
The money stays in the account and is yours to use for medical expenses at any time. After 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are subject to income tax. Many people use MSAs as retirement savings for this reason.
Do I have to report my MSA on my tax return?
If you have an HSA, you report contributions and withdrawals on Form 8889 when you file your federal tax return. If you contribute through payroll, your employer reports it. If you contribute on your own, you deduct it on your return. Keep records of all contributions and may have access to expenses for at least three years in case of audit.