What a Medical Savings Account Is

A Medical Savings Account (MSA) is a tax-advantaged savings account paired with a high-deductible health insurance plan. You put pre-tax money into the account, use it to pay medical bills, and the money you don't spend rolls over year to year. Unlike a flexible spending account (FSA), which forces you to spend the money or lose it, an MSA lets you keep whatever you don't use and grow it like an investment account.

There are two types of MSAs: Archer MSAs, which are older and rarely offered anymore, and Health Savings Accounts (HSAs), which are the modern version most people encounter. Both work the same basic way—you contribute money before taxes, pay medical expenses from the account, and keep what's left. The main difference is that HSAs are more widely available and have higher contribution limits.

To open an MSA or HSA, you must be covered by a high-deductible health plan (HDHP). That means your plan's deductible is at least $1,600 for individual coverage or $3,200 for family coverage in 2024—these numbers change yearly. You cannot be covered by any other health insurance at the same time, and you cannot be claimed as a dependent on someone else's tax return.

Key Takeaways

  • Medical Savings Accounts let you set aside pre-tax money to pay for medical expenses, and unused money stays in the account instead of disappearing at year-end.
  • You must be enrolled in a high-deductible health plan to open an MSA, and you cannot have other health coverage at the same time.
  • You can use MSA money for deductibles, copays, prescriptions, dental work, vision care, and many other medical costs, but not for insurance premiums or over-the-counter items without a prescription.
  • Money in an MSA grows tax-free if you invest it, and you pay no taxes when you withdraw it for medical expenses.
  • If you withdraw money for non-medical reasons before age 65, you owe income tax plus a 20 percent penalty on that amount.

What You Can and Cannot Pay For

MSA money covers most medical, dental, and vision expenses. You can use it for deductibles, copays, coinsurance, prescription drugs, dental cleanings and fillings, eyeglasses and contact lenses, hearing aids, mental health counseling, and physical therapy. You can also pay for medical equipment like crutches, wheelchairs, or blood pressure monitors.

You cannot use MSA money for health insurance premiums, except in specific cases: if you are receiving unemployment benefits, you can pay for COBRA or other continuation coverage. If you are 65 or older and on Medicare, you can pay Medicare premiums and Medicare supplemental insurance. Over-the-counter items like pain relievers, cold medicine, or antacids are not covered unless you have a prescription from a doctor.

The IRS publishes a full list of covered expenses, and the rules can be technical. If you are unsure whether a specific cost qualifies, ask your MSA provider or check IRS Publication 969 before you withdraw the money. Using MSA funds for ineligible expenses triggers taxes and penalties.

How Much You Can Contribute

Contribution limits change every year and depend on your coverage type. 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 are set by the IRS and typically increase slightly each year to keep pace with inflation.

You can contribute money through your employer's payroll if they offer an MSA plan, which means the money comes out before taxes are calculated. If you don't have an employer plan, you can open an individual MSA and contribute on your own, then deduct the contribution on your tax return. You have until the tax filing deadline (usually April 15) to make contributions for the previous year.

Your employer can also contribute to your MSA, and that money does not count against your personal contribution limit. If both you and your employer contribute, the combined total cannot exceed the annual limit.

How the Money Grows and When You Can Use It

Money sitting in an MSA earns interest or investment returns depending on how you invest it. Some MSAs function like savings accounts and earn a small interest rate. Others let you invest the balance in mutual funds or other securities, similar to a retirement account. Any growth is tax-free, and you never pay taxes on the earnings as long as you use the money for medical expenses.

You can withdraw money from your MSA anytime to pay for may be able to access medical expenses. There is no waiting period and no limit on how many times you withdraw. You do not have to submit receipts to the MSA provider to make a withdrawal, but you should keep receipts and records in case the IRS audits you and asks you to prove the expenses were medical.

If you withdraw money for a non-medical reason 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, but you still owe income tax on non-medical withdrawals. At age 65, an MSA functions more like a traditional retirement account.

MSAs and Job Changes

Your MSA belongs to you, not your employer. If you leave your job, the account stays open and the money remains yours. You can continue to use it to pay medical expenses and can keep contributing to it as long as you stay enrolled in an HDHP, even if your new employer does not offer an MSA plan.

If you switch to a job with a different health plan that is not a high-deductible plan, you can no longer contribute new money to the MSA. However, you can still withdraw money from the account to pay for medical expenses. Once you are no longer covered by an HDHP, you cannot make new contributions, but the existing balance stays in the account indefinitely.

Tax Reporting and Record-Keeping

Your MSA provider sends you a Form 1099-SA each year showing how much you withdrew. You report this on your tax return using Form 8889. If you withdrew money only for medical expenses, you do not owe additional tax on those withdrawals. If you withdrew money for non-medical reasons, you report that on Form 8889 and pay income tax plus the 20 percent penalty.

Keep receipts and records for every medical expense you pay with MSA money. The IRS does not require you to submit receipts when you withdraw, but if you are audited, you need to show that the expenses were legitimate medical costs. A good system is to keep a spreadsheet or folder with dates, provider names, and amounts for each expense.

If your employer contributes to your MSA, that contribution appears on your W-2 form and is not taxed as income. Your own contributions reduce your taxable income if you deduct them on your tax return, or they come out pre-tax if your employer runs them through payroll.

Comparing MSAs to Other Savings Options

An MSA differs from a Flexible Spending Account (FSA) in one major way: FSA money disappears if you don't spend it by the end of the year, while MSA money rolls over indefinitely. FSAs also have lower contribution limits (usually $3,300 per year) and do not let you invest the balance. However, FSAs do not require a high-deductible health plan, so they are available to more people.

Health Reimbursement Arrangements (HRAs) are employer-funded accounts that work similarly to MSAs but are owned by the employer, not the employee. You lose access to HRA money if you leave the job. MSAs are portable—they go with you when you change jobs.

If you have a high-deductible plan and expect significant medical expenses, an MSA can reduce your overall healthcare costs because the money is tax-free and rolls over. If you rarely use medical services and want to build long-term savings, an MSA can grow into a substantial reserve. If you prefer lower deductibles and do not want to manage a savings account, a traditional health plan with an FSA might suit you better.

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 health plan. You can use MSA money to pay for may be able to access medical expenses for yourself, your spouse, and any dependents on your plan. The expenses must be for people you can claim as dependents on your tax return.

What happens to my MSA if I turn 65 and enroll in Medicare?

Your MSA stays open and the money remains yours. You can use it to pay Medicare premiums, copays, and other may be able to access medical expenses. You can no longer contribute new money once you are on Medicare, but existing funds never expire. After 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as income.

Can I have both an MSA and an FSA at the same time?

No. If you have an MSA, you cannot also have an FSA or Health Reimbursement Arrangement. You must choose one or the other. Some employers offer both options and let employees pick which one to use.

Do I have to use my MSA money before the end of the year?

No. Unlike an FSA, MSA money does not expire. Whatever you don't spend stays in the account and can be used in future years. This makes an MSA useful for building a long-term medical savings cushion.

What if I withdraw money from my MSA and later find out the expense wasn't covered?

You owe income tax plus a 20 percent penalty on that withdrawal. The best way to avoid this is to check the IRS rules or ask your MSA provider before you withdraw money for an expense you are unsure about. Keep documentation showing you tried to verify the expense before withdrawing.