A Medical Savings Account (MSA) is a tax-advantaged savings account paired with a high-deductible health insurance plan

An MSA lets you set aside pre-tax money specifically for medical expenses. The money you contribute reduces your taxable income for the year, and any funds you don't spend roll over to the next year—you never lose the balance. You pair an MSA with a high-deductible health plan (HDHP), which means your insurance premium is lower but you pay more out of pocket before coverage kicks in.

The trade-off is deliberate: you save on premiums, put that savings into the MSA, and use the account to cover the higher deductible and other may have access to medical costs. If you're healthy and don't expect major medical bills, an MSA can mean real money stays in your account year after year instead of disappearing into insurance premiums.

There are two types of MSAs: Archer MSAs (older, rarely offered now) and Health Savings Accounts (HSAs) (the modern version that most people use). This guide focuses on HSAs because they're what's actually available to most workers and self-employed people today.

Key Takeaways

  • An MSA requires enrollment in a high-deductible health plan, which means lower premiums but higher out-of-pocket costs before insurance covers care.
  • Money you contribute to an MSA is not taxed, and unused balances carry forward indefinitely—there is no "use it or lose it" rule.
  • You can withdraw MSA funds tax-free only for may have access to medical expenses like deductibles, copays, prescriptions, and dental or vision care.
  • Withdrawals for non-medical expenses are taxed as income and carry a 20 percent penalty if you're under 65, making the account unsuitable for general savings.
  • Contribution limits change each year and depend on whether you have individual or family coverage under your HDHP.

How contributions work and what you can deduct

You contribute money to your MSA through payroll deduction (if your employer offers one) or by depositing funds yourself if you're self-employed or your employer doesn't sponsor a plan. The money comes out before taxes are calculated, so a $3,000 contribution reduces your taxable income by $3,000. If you're in the 22 percent tax bracket, that's roughly $660 in federal tax savings on that contribution alone.

Contribution limits reset each year and vary by coverage type. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage under an HDHP—but these numbers change annually, so check the IRS website or your plan documents for the current year. If you're 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution.

Your employer may also contribute to your MSA on your behalf. That money counts toward your annual limit but doesn't reduce your own contribution room dollar-for-dollar—it's added to what you can put in yourself.

What counts as a may have access to medical expense

You can withdraw money tax-free from an MSA only for may have access to medical expenses. The IRS defines these narrowly, and the list includes deductibles, copays, coinsurance, and prescription drugs. It also covers dental work (fillings, crowns, root canals, orthodontia), vision care (glasses, contacts, exams, LASIK), hearing aids, and mental health treatment. Physical therapy, chiropractic care, and acupuncture count if a doctor prescribes them.

Over-the-counter medications are may have access to only if you have a prescription from a doctor—buying ibuprofen or cold medicine off the shelf without a prescription does not count. Medical equipment like crutches, wheelchairs, blood pressure monitors, and glucose meters all may have access to. Long-term care insurance premiums (with limits) and certain long-term care services also count.

What does not count: cosmetic surgery, gym memberships, vitamins (unless prescribed for a specific condition), general wellness products, and insurance premiums themselves (with narrow exceptions for COBRA continuation coverage and long-term care). If you're unsure whether a specific expense qualifies, ask your MSA provider or check IRS Publication 969 before you withdraw.

How the account grows and what happens to unused money

Unlike a flexible spending account (FSA), an MSA has no deadline to spend the money. Any balance you don't use in a given year stays in the account and earns interest or investment returns, depending on how your provider invests the funds. Some MSA providers offer only a savings account with minimal interest; others let you invest in mutual funds or stocks, similar to a retirement account.

This makes an MSA a genuine long-term savings tool. If you contribute $4,150 a year and spend only $2,000 on medical care, the remaining $2,150 stays put and grows. Over 20 years, that accumulation can become substantial—especially if you invest the balance rather than leaving it in a low-interest savings account.

The catch is that you must remain enrolled in an HDHP to contribute new money to the MSA. If you switch to a traditional health plan, you can no longer add funds, but you keep the balance and can still withdraw it for may have access to medical expenses.

Penalties and taxes for non-medical withdrawals

If you withdraw money from an MSA for something that is not a may have access to medical expense, the withdrawal is taxed as ordinary income and you pay a 20 percent penalty on top. So if you withdraw $1,000 for a non-may have access to expense and you're in the 22 percent tax bracket, you owe $220 in income tax plus $200 in penalty—a total of $420 on a $1,000 withdrawal. This makes the account a poor choice for general savings or emergency funds.

The penalty drops to zero (but the income tax remains) once you turn 65. At that point, you can withdraw money for any reason, though non-medical withdrawals are still taxable income. This is one reason some people view an MSA as a supplemental retirement account—it functions like a traditional IRA after 65, except the tax-free withdrawal option for medical expenses never goes away.

If you die, your beneficiary inherits the MSA balance. The tax treatment depends on who the beneficiary is: a spouse can treat it as their own MSA, while other beneficiaries must pay income tax on the full balance (though the 20 percent penalty does not apply).

MSA versus HSA: which one you might encounter

Archer MSAs were created in 1996 and are now essentially obsolete. They were limited to self-employed people and small businesses, and new enrollments have been closed since 2007. If you have an old Archer MSA, you can keep it and continue to use it, but you cannot open a new one. Most people who think they have an MSA actually have an HSA.

Health Savings Accounts (HSAs) are the modern version and are available to anyone enrolled in an HDHP—employees, self-employed people, and retirees on Medicare Part A and B. HSAs have higher contribution limits than old Archer MSAs, no income limits, and more flexibility. If you're shopping for a medical savings account today, you're looking for an HSA, not an MSA.

The terms are sometimes used interchangeably in casual conversation, but the IRS treats them as separate products with different rules. When reading plan documents or IRS guidance, pay attention to which one is actually being discussed.

How to open an MSA or HSA and track your balance

If your employer offers an HDHP with an MSA or HSA, enrollment usually happens during open enrollment or when you first become may be able to access. Your employer will direct you to the plan administrator (often a bank or investment company) where you'll set up the account and choose how the money is invested.

If you're self-employed or your employer doesn't offer a plan, you can open an HSA on your own as long as you're enrolled in an HDHP. Many banks, credit unions, and investment firms offer HSAs. You'll need to provide proof of HDHP enrollment (usually a copy of your insurance card or plan documents) and make contributions yourself, either as a lump sum or through regular deposits.

Track your balance and withdrawals through your provider's website or app. Keep receipts for all medical expenses you pay from the account—the IRS doesn't require you to submit them with your tax return, but you need them if you're ever audited. Your provider will send you a Form 1099-SA each January showing all withdrawals from the previous year, which you'll report on your tax return.

Frequently Asked Questions

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

Yes. MSA funds can cover may have access to medical expenses for you, your spouse, and any dependent children, even if they're not covered by your HDHP. You don't have to be the one receiving the care—only the expense itself has to be may have access to.

What happens to my MSA if I leave my job?

The account stays yours. You keep the balance and can continue to withdraw it for may have access to medical expenses. You cannot contribute new money unless you enroll in an HDHP on your own (through the marketplace or a spouse's plan), but the existing funds remain available indefinitely.

Can I invest my MSA balance in stocks or mutual funds?

It depends on your provider. Some MSA providers offer only a savings account; others let you invest in mutual funds, stocks, or bonds once your balance reaches a certain threshold (often $1,000 or $2,000). Check with your provider about investment options before opening the account if this matters to you.

Do I have to use my MSA before my regular health insurance deductible is met?

No. You can use MSA funds and your HDHP coverage in any order. Some people use the MSA to cover the deductible, while others pay the deductible out of pocket and save the MSA balance for future years. The choice is yours.

What if I withdraw money and later find out it wasn't a may have access to expense?

You'll owe income tax and the 20 percent penalty on that withdrawal. If you discover the mistake before filing your tax return, you can redeposit the money into the account (if you're still may be able to access to contribute) to avoid the tax and penalty. After you file, correcting it requires amending your return.