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 unused funds indefinitely.
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 way: you contribute money before taxes are taken out, the account grows tax-free, and withdrawals for may have access to medical expenses are not taxed.
The trade-off is that you must be enrolled in a high-deductible health plan (HDHP)—a plan with a higher yearly deductible than standard insurance. In 2024, that means a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. In exchange, your monthly premiums are usually lower.
Key Takeaways
- An MSA or HSA lets you set aside pre-tax money to pay medical bills, and unused money stays in the account year after year.
- You can only open an MSA if you are enrolled in a high-deductible health plan, which has a higher deductible but lower monthly premiums.
- Money in the account can be used for doctor visits, prescriptions, dental work, vision care, and many other medical expenses, but not for insurance premiums or cosmetic procedures.
- Once you turn 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.
Who Can Open an MSA or HSA
To open an MSA, you must meet three requirements: you must be enrolled in a high-deductible health plan, you cannot be covered by any other health insurance (with limited exceptions for accident, disability, or dental-only plans), and you cannot be claimed as a dependent on someone else's tax return.
If you are self-employed or work for a small employer, you can open an HSA through a bank, credit union, or insurance company. If your employer offers an HSA, they may set one up for you automatically or let you choose whether to participate. Some employers contribute money to your HSA as part of your benefits package; others leave it entirely up to you.
You cannot have an MSA if you are enrolled in Medicare, even if you also have a high-deductible plan. Once you turn 65 and become may be able to access for Medicare, your MSA stops accepting new contributions, though you can continue to use the money already in it.
What You Can and Cannot Pay For
may have access to medical expenses include doctor visits, hospital stays, prescription medications, dental work, vision care, hearing aids, and medical equipment like crutches or wheelchairs. You can also use the money for mental health treatment, physical therapy, and lab tests. The IRS publishes a full list, but the basic rule is: if it treats, prevents, or diagnoses a medical condition, it usually counts.
You cannot use MSA money for insurance premiums (with one exception: you can pay for long-term care insurance premiums after age 60). Cosmetic procedures, gym memberships, vitamins, and over-the-counter medications (unless prescribed by a doctor) do not count. If you use the money for a non-may have access to expense before age 65, you owe income tax on that amount plus a 20 percent penalty.
Keep receipts for everything you buy with MSA money. The IRS does not require you to submit them when you withdraw funds, but you must be able to prove the expense was medical if you are ever audited.
How Much You Can Contribute Each Year
The amount you can contribute changes each year and depends on your insurance coverage. For 2024, the limit is $4,150 for individual coverage or $8,300 for family coverage. These limits are set by the IRS and usually increase slightly each year to account for inflation.
If your employer offers an HSA, they may contribute part of the limit themselves. Your contribution plus your employer's contribution cannot exceed the annual limit. If you are self-employed, you can contribute up to the full limit on your own.
You can contribute to an MSA only during the months you are enrolled in a 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 enroll in a high-deductible plan partway through the year, the same rule applies.
How the Money Grows and When You Can Withdraw It
Money in an MSA earns interest or investment returns, depending on how you hold it. Some accounts function like savings accounts and earn a small interest rate. Others let you invest the money in mutual funds or stocks, similar to a retirement account. The growth is tax-free, meaning you do not owe taxes on the interest or investment gains.
You can withdraw money from your MSA at any time to pay for may have access to medical expenses. There is no waiting period and no limit on how much you can withdraw in a year. You can pay the expense out of pocket and then reimburse yourself from the account later, or you can pay directly from the account.
Once you turn 65, the rules change. You can withdraw money for any reason without the 20 percent penalty. Non-medical withdrawals are taxed as ordinary income, but medical withdrawals remain tax-free. This makes an MSA function like a retirement account after 65, similar to a traditional IRA.
What Happens When You Leave Your Job or Change Insurance
If you leave your job, your MSA stays with you. The money in the account is yours to keep, and you can continue using it to pay medical bills. You do not lose the account or forfeit the balance, unlike an FSA.
If you switch to 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 may have access to medical expenses. Once you enroll in another high-deductible plan, you can resume contributions.
If you move to a different state, your MSA moves with you. There are no state-specific restrictions on MSAs, and the account works the same way regardless of where you live.
MSAs Compared to Other Savings Options
An MSA differs from an FSA in one major way: an FSA has a "use it or lose it" rule, meaning money left over at the end of the year is forfeited. An MSA lets you keep unused money indefinitely. This makes an MSA better for people who want to save for future medical expenses, while an FSA works better for people who know they will spend the money each year.
An MSA also differs from a Health Reimbursement Arrangement (HRA), which is funded entirely by your employer. You do not contribute to an HRA yourself, and the rules for what you can spend it on are set by your employer. An MSA is funded by you, and you control how the money is used.
Compared to paying medical bills out of pocket with after-tax money, an MSA saves you money because contributions are not subject to income tax or payroll tax. If you are in the 22 percent tax bracket and contribute $3,000 to an MSA, you save $660 in taxes.
Frequently Asked Questions
Can I use my MSA to pay my health insurance premium?
No, with one exception. You cannot use MSA money to pay your monthly health insurance premiums or your deductible. However, if you are over 60, you can use it to pay premiums for long-term care insurance, which covers nursing home or in-home care costs.
What happens to my MSA if I die?
The money in your MSA becomes part of your estate and passes to your beneficiary or heirs according to your will. If your spouse inherits the account, they can treat it as their own MSA and continue using it. If anyone else inherits it, the full balance is taxed as income in the year of your death.
Can I withdraw money from my MSA to pay for my spouse's medical bills?
Yes. The money in your MSA can be used to pay may have access to medical expenses for you, your spouse, and any dependent children, even if they are not covered by your health plan. Keep receipts showing the expense was medical.
Do I have to use my MSA money before my deductible is met?
No. You can use MSA money to pay medical bills at any time, whether or not you have met your deductible. Many people use it to pay their deductible, then let insurance cover costs above that. Others save the money and use it only for expenses insurance does not cover.
What if I withdraw money from my MSA for a non-medical expense?
You owe income tax on the amount withdrawn 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 taxes plus $100 in penalty, for a total of $210. After age 65, the penalty goes away, but you still owe income tax.