A Health Savings Account Lets You Set Aside Pre-Tax Money for Medical Costs
A Health Savings Account (HSA) is a savings account owned by you that holds money specifically for medical expenses. The money you put in is not taxed by the federal government, and the money you withdraw to pay for medical care is not taxed either. You control the account, decide how much to contribute each year (within legal limits), and decide when to spend it.
To open an HSA, you must be covered by a high-deductible health plan (HDHP) — a type of health insurance with a lower monthly premium but a higher deductible. The IRS sets the minimum deductible each year; for 2024, it is $1,600 for individual coverage and $3,200 for family coverage. You cannot have an HSA if you are on Medicare, covered by another health plan that is not an HDHP, or claimed as a dependent on someone else's tax return.
The money in your HSA rolls over year to year — you do not lose it if you do not spend it. You can invest the balance in stocks, bonds, or mutual funds through most HSA providers, which means the account can grow over time. Once you turn 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are still taxed as income.
Key Takeaways
- You must have a high-deductible health plan to open an HSA, and the IRS sets the minimum deductible each year.
- Money you contribute is not taxed, money you withdraw for medical expenses is not taxed, and unused money stays in the account year to year.
- You own the account and control how much goes in and when it comes out, unlike a flexible spending account run by your employer.
- The account can be invested to grow over time, and after age 65 you can withdraw for any reason without the early-withdrawal penalty.
How Much You Can Contribute Each Year
The IRS sets a yearly limit on how much you can put into an HSA. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. These limits change each year, and the IRS announces the new numbers in the fall for the following year. If you are 55 or older, you can contribute an extra $1,000 per year on top of the regular limit.
You can contribute the full year's amount at any time during the year, or spread it across paychecks if your employer offers payroll deduction. If you become covered by an HDHP partway through the year, you can still contribute a prorated amount for the months you were covered. Money you do not contribute in a given year is gone — you cannot carry over unused contribution room to the next year.
What Counts as a Medical Expense You Can Pay From Your HSA
The IRS maintains a detailed list of medical expenses you can pay from your HSA without owing taxes on the withdrawal. The list includes doctor visits, hospital stays, prescription drugs, dental work, vision care, mental health treatment, and physical therapy. It also covers medical equipment like wheelchairs, crutches, and hearing aids, as well as insulin and other diabetes supplies.
Some expenses that sound medical do not count. Over-the-counter pain relievers, cold medicine, and allergy medicine do not count unless you have a prescription. Cosmetic procedures do not count unless they treat an injury or illness. Gym memberships and general wellness programs do not count, though some preventive care does. If you are unsure whether an expense qualifies, the IRS publishes a full list on its website, and your HSA provider can also answer questions about specific costs.
You can withdraw money from your HSA to pay for a family member's medical expenses, even if they are not covered by your health plan. You do not have to use the money in the same year you contribute it — you can let it sit and build up, then withdraw it years later to cover old medical bills or current ones.
How an HSA Differs From a Flexible Spending Account
A Flexible Spending Account (FSA) is another tax-advantaged account for medical expenses, but it works differently. With an FSA, your employer runs the account, not you. Money you do not spend by the end of the year is forfeited — there is no rollover. An FSA has a lower yearly limit ($3,300 for 2024) and you cannot invest the balance.
An HSA is yours to keep even if you change jobs or leave your employer. An FSA ends when you leave your job. An HSA requires an HDHP; an FSA works with any health plan. An HSA can be invested and grow over decades; an FSA is just a spending account. If you have access to both, an HSA is usually the better choice because of the rollover feature and investment option, though some people use both at the same time.
How to Open and Use an HSA
To open an HSA, you first need to enroll in an HDHP through your employer, the health insurance marketplace, or a private insurer. Once your HDHP coverage is active, you can open an HSA through a bank, credit union, or investment firm. Many employers offer HSA accounts as part of their benefits package, which makes payroll deduction easy. If your employer does not offer one, you can open an HSA on your own through any provider that offers them.
When you open the account, you will provide your name, Social Security number, and coverage information. You will choose how much to contribute for the year. If you use payroll deduction, the money comes out before taxes are calculated, which lowers your taxable income. You will receive a debit card or checkbook to withdraw money, or you can request a check or transfer funds to your bank account.
Keep receipts for all medical expenses you pay from your HSA. The IRS does not require you to submit receipts when you withdraw money, but you must be able to prove the expense was medical if audited. Some HSA providers track expenses for you; others leave it to you to keep records.
What Happens to Your HSA if You Change Jobs or Lose Coverage
Your HSA stays with you when you change jobs. The money in the account is yours, and you can take it to a new HSA provider or leave it where it is. If your new employer offers an HSA, you can roll your old account into the new one, or keep both open. You do not have to close the account or forfeit the balance.
If you lose HDHP coverage, you can no longer contribute to your HSA, but you can still withdraw money from it for medical expenses without penalty. If you withdraw money for non-medical reasons while you still have HDHP coverage, you owe income tax on the withdrawal plus a 20 percent penalty. Once you turn 65 or lose HDHP coverage, the penalty goes away — you can withdraw for any reason, though non-medical withdrawals are still taxed as income.
Frequently Asked Questions
Can I use my HSA to pay for my spouse's medical bills?
Yes. You can withdraw from your HSA to pay for medical expenses of your spouse or any dependent, regardless of whether they are covered by your health plan. Keep receipts showing the expense and the person it was for.
What happens if I withdraw money from my HSA for something that is not medical?
If you withdraw for a non-medical reason while you have HDHP coverage, you owe income tax on the amount plus a 20 percent penalty. Once you turn 65 or lose HDHP coverage, you can withdraw for any reason without the penalty, though non-medical withdrawals are still taxed as regular income.
Can I invest the money in my HSA?
Most HSA providers let you invest the balance in mutual funds, stocks, or bonds once it reaches a certain amount (often $1,000 to $2,500). The growth is not taxed as long as you use the money for medical expenses. Check with your provider about investment options and fees.
Do I have to use my HSA money by a certain date?
No. Money in an HSA rolls over year to year with no expiration date. You can let it build up for decades and withdraw it whenever you need it for medical expenses. This is different from a flexible spending account, where unused money is forfeited at year-end.
What if I am covered by my spouse's health plan instead of my own?
You cannot have your own HSA if you are covered by any health plan other than an HDHP, even if it is your spouse's plan. Only the spouse who holds the HDHP can open an HSA. If both spouses have separate HDHPs, each can open their own HSA.