A Health Care Savings Account Lets You Set Aside Pre-Tax Money for Medical Costs
A Health Care Savings Account (also called an HSA) is a bank account where you deposit money before taxes are taken out of your paycheck, then use that money to pay for medical expenses. The money you put in reduces your taxable income for the year, and any interest or growth in the account is not taxed either. You own the account — the money stays yours even if you change jobs or retire.
HSAs are only available to people enrolled in a high-deductible health plan (HDHP) through an employer, the individual market, or Medicare. The IRS sets the minimum deductible each year; for 2024, that floor is $1,600 for individual coverage and $3,200 for family coverage. If your health plan's deductible is at least that high, you can open an HSA at a bank, credit union, or through your employer's benefits administrator.
The appeal is threefold: you reduce your taxable income, you avoid paying income tax on the money you withdraw for medical costs, and any balance you do not spend rolls forward to the next year. Unlike a Flexible Spending Account (FSA), which forces you to spend the money or lose it, an HSA is yours to keep indefinitely.
Key Takeaways
- You can only open an HSA if you are enrolled in a high-deductible health plan; your employer, the health insurance marketplace, or Medicare can tell you whether your plan qualifies.
- Money you deposit is deducted from your paycheck before income tax is calculated, lowering your tax bill for the year.
- You can withdraw HSA money tax-free to pay for may have access to medical expenses including deductibles, copays, prescriptions, dental work, and vision care.
- Any money you do not spend stays in the account and earns interest or can be invested; you can carry the balance forward indefinitely.
- After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.
How Much You Can Contribute Each Year
The IRS sets annual contribution limits, and they change each year. 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 catch-up contribution. These limits apply to the total amount you and your employer contribute combined — if your employer puts in $2,000, you can only add $2,150 more.
You contribute through payroll deduction (the most common route), a direct deposit to the HSA bank account, or a check mailed to the account holder. Contributions made by April 15 of the following year can be counted toward the previous year's limit, so there is a small window to catch up if you miss the December deadline.
If you lose your high-deductible health plan coverage mid-year — because you switched jobs or enrolled in Medicare — you can still contribute for the months you were covered, prorated. The IRS calls this the "last-month rule," and it lets you contribute a full year's worth if you were covered on December 1.
What Counts as a may have access to Medical Expense
You can withdraw HSA money tax-free to pay for any medical, dental, or vision expense that would be deductible on your federal tax return. That includes your health plan's deductible, copays, coinsurance, and out-of-pocket costs. Prescription medications and insulin are covered. So are dental cleanings, fillings, root canals, and orthodontia. Vision exams, glasses, contacts, and laser eye surgery all count.
Less obvious expenses that may have access to include hearing aids, crutches, wheelchairs, and other durable medical equipment; mental health counseling and therapy; physical therapy and chiropractic care; and over-the-counter medications like pain relievers and allergy medicine (though you need a prescription or doctor's note for some). Insulin and other diabetes supplies do not require a prescription to count.
Expenses that do not count include cosmetic surgery, gym memberships, vitamins (unless prescribed for a specific condition), and most over-the-counter items like toothpaste or sunscreen. If you are unsure whether a specific cost qualifies, the IRS publishes a full list on its website, and your HSA bank or administrator can also answer questions about particular expenses.
How to Withdraw Money and Keep Records
Most HSAs come with a debit card that works like any other bank card — you swipe it at the pharmacy, doctor's office, or hospital, and the money comes out of your HSA. Some accounts also offer online bill pay or checks. You can also pay out of pocket and then reimburse yourself from the HSA later, even years later, as long as you keep the receipt and can prove the expense was may have access to.
The IRS does not require you to submit receipts when you withdraw, but you must keep them for your records in case of an audit. If you withdraw money for a non-may have access to expense, that amount is taxed as income and you owe a 20% penalty on top of the tax — so a $1,000 withdrawal for something that does not count costs you roughly $320 in taxes and penalties.
Your HSA provider sends you a statement each year showing deposits, withdrawals, and the balance. Keep these statements along with your receipts. If you change jobs or health plans, you can roll your HSA to a new bank or provider without losing the money or paying taxes or penalties.
HSAs After Age 65 or If You Lose Your High-Deductible Plan
Once you turn 65, you can withdraw money from your HSA for any reason without the 20% penalty. Non-medical withdrawals are taxed as regular income, but the penalty goes away. This makes an HSA function like a traditional retirement account after 65 — you can use it to pay for medical expenses tax-free, or withdraw it for living expenses and pay income tax only.
If you stop being covered by a high-deductible plan — because you switched to a standard plan, enrolled in Medicare, or lost coverage — you can no longer contribute new money to the HSA. The money already in the account stays yours and can still be used for may have access to medical expenses tax-free. You just cannot add to it unless you return to a high-deductible plan later.
If you enroll in Medicare, you become ineligible to contribute to an HSA starting the month you are covered. However, you can continue to withdraw from an existing HSA for may have access to medical expenses, including Medicare premiums (with some limits), deductibles, and copays.
HSA vs. FSA: When to Choose Each
A Flexible Spending Account (FSA) is similar to an HSA but has key differences. With an FSA, you set aside pre-tax money for medical expenses, but you must spend it within the plan year or lose it — there is no rollover. FSAs do not require a high-deductible plan, so they are available to anyone with employer health coverage. The contribution limit is lower: $3,300 for 2024.
An HSA is better if you want to save money long-term, expect to have ongoing medical costs, or want the account to grow like a retirement fund. An FSA is better if you have predictable medical expenses each year and want to use up the money rather than accumulate it. Some employers offer both, and you can have an FSA and an HSA at the same time as long as the FSA is limited to dental and vision expenses only.
| HSA | FSA | |
|---|---|---|
| Requires high-deductible plan | Yes | No |
| Money rolls over year to year | Yes, indefinitely | No, use it or lose it |
| 2024 contribution limit | $4,150 (individual) / $8,300 (family) | $3,300 |
| You own the account | Yes, it moves with you | No, employer owns it |
| Can invest the balance | Yes, at most providers | Usually no |
Opening an HSA and Choosing a Provider
If your employer offers a high-deductible health plan, they usually offer an HSA through their benefits administrator or a partner bank. You enroll during open enrollment or when you first become may be able to access, and contributions are deducted from your paycheck automatically. Your employer may also contribute on your behalf — this is assistance programs and counts toward your annual limit.
If you buy health insurance on your own through the marketplace or a broker, you can open an HSA at any bank, credit union, or investment firm that offers them. Fidelity, Lively, HealthEquity, and Optum are common providers, but your own bank may also offer HSAs. Compare fees (some charge monthly maintenance fees, others do not), whether you can invest the balance in stocks or mutual funds, and the ease of using the debit card or withdrawing money.
Once you open an account, you receive a debit card, online access, and statements. You can set up automatic payroll deduction through your employer, or make manual deposits yourself. If you change jobs, you can roll the HSA to a new provider at no cost or tax consequence — just contact the new provider and they handle the transfer.
Frequently Asked Questions
Can I use my HSA to pay for my spouse's medical expenses?
Yes, if you are married and file taxes jointly, you can use your HSA to pay for your spouse's may have access to medical expenses even if they are not on your health plan. You can also use it for your children and any dependent you claim on your tax return.
What happens to my HSA if I die?
If your beneficiary is your spouse, they can treat the HSA as their own and continue using it. If the beneficiary is anyone else, the account is taxed as income to the estate, though may have access to medical expenses paid within one year of death are not taxed. Name a beneficiary when you open the account.
Can I invest the money in my HSA?
Many HSA providers let you invest the balance in stocks, bonds, or mutual funds once it reaches a certain amount (often $1,000 to $2,500). This is optional — you can also leave it in a savings account. Investment earnings are not taxed as long as you withdraw the money for may have access to medical expenses.
Do I have to use my HSA debit card, or can I pay out of pocket and reimburse myself later?
You can do either. Many people pay medical bills out of pocket and reimburse themselves from the HSA months or years later. Keep the receipt to prove the expense was may have access to. This strategy lets the HSA balance grow and be invested longer.
What if I withdraw money from my HSA for a non-medical expense by mistake?
You owe income tax on the amount plus a 20% penalty. If you catch the mistake quickly, some providers let you reverse the withdrawal. Otherwise, you report it on your tax return. To avoid this, double-check that an expense qualifies before you withdraw.