An HSA is a savings account you control, paired with a high-deductible health plan

A Health Savings Account (HSA) is a bank account that holds money specifically for medical expenses. You open it only if you're enrolled in a high-deductible health plan (HDHP) — a type of insurance with lower monthly premiums but higher out-of-pocket costs before insurance kicks in. The HSA lets you set aside pre-tax dollars to pay those out-of-pocket costs yourself, and any money you don't spend stays in the account and grows year to year.

The account belongs to you, not your employer or insurance company. You decide how much to contribute each year (up to a limit set by the IRS), and you decide when to withdraw money and what to spend it on. If you leave your job, the account goes with you. The money is yours to keep.

HSAs are offered through banks, credit unions, and financial services companies. Your employer may offer one as part of their benefits package, or you can open one on your own if you have an HDHP. The account typically comes with a debit card so you can pay medical providers directly from the HSA balance.

Key Takeaways

  • You can only open an HSA if you're enrolled in a high-deductible health plan; you cannot have other health coverage at the same time.
  • Money goes into the account as pre-tax contributions from your paycheck or as tax-deductible deposits if you open one independently.
  • You can spend HSA money on may have access to medical expenses — copays, deductibles, prescriptions, dental, vision, and many other costs — without paying income tax on the withdrawal.
  • Any balance you don't spend rolls over to the next year and earns interest or investment returns; there is no "use it or lose it" deadline.
  • After age 65, you can withdraw money for any reason, though non-medical withdrawals are taxed as income.

How money gets into your HSA

If your employer offers an HSA, you contribute through payroll deduction. The money comes out of your paycheck before taxes are calculated, which lowers your taxable income for the year. For 2024, the IRS limit is $4,150 for individual coverage and $8,300 for family coverage; these limits change annually. You decide how much to contribute when you enroll, and the money is deducted from each paycheck in equal amounts.

If you don't have an employer plan or want to contribute more, you can open an HSA independently and deposit money yourself. Those deposits are tax-deductible when you file your tax return — you report them on Form 8889 and reduce your taxable income by the amount you contributed. You can make deposits at any time during the year, up to the annual limit.

Some employers contribute to their employees' HSAs as part of compensation. That employer money counts toward the annual limit but doesn't reduce your take-home pay. If both you and your employer contribute, the combined total cannot exceed the IRS limit for that year.

What you can spend HSA money on

HSA funds can pay for may have access to medical expenses — costs related to diagnosing, treating, or preventing illness or injury. This includes copays and coinsurance, deductibles, prescription medications, dental work, vision care, mental health treatment, and medical equipment like crutches or blood pressure monitors. You can also use HSA money for over-the-counter medications if you have a prescription or a doctor's note saying they're medically necessary.

The IRS publishes a detailed list of what counts. Some expenses that surprise people: you can pay for acupuncture, chiropractic care, hearing aids, and certain fertility treatments. You cannot use HSA money for cosmetic procedures, gym memberships, or general wellness products unless they treat a specific medical condition.

When you use the debit card at a pharmacy or doctor's office, the transaction is usually approved automatically if the merchant is coded as a medical provider. For other purchases — like buying a blood pressure monitor at a drugstore — you may need to keep a receipt to prove it was a may have access to expense, in case the IRS audits your account.

How the money grows and what happens to unused balances

Unlike a Flexible Spending Account (FSA), which has a "use it or lose it" rule, an HSA has no deadline. Money you don't spend in one year rolls over to the next year, and the year after that. The balance accumulates indefinitely. Some HSAs earn interest on the balance, and many allow you to invest the money in mutual funds or other securities, similar to a 401(k). Any interest or investment gains are tax-free as long as you use the money for may have access to medical expenses.

This makes an HSA function as a long-term savings tool. Many people use it to cover immediate medical costs but let the balance grow for retirement, when medical expenses typically increase. At retirement, you can withdraw money tax-free for Medicare premiums, long-term care insurance, and other may have access to expenses. After age 65, you can withdraw money for any reason — it's taxed as ordinary income if it's not for a may have access to expense, but there's no penalty.

Keeping records and proving expenses

You are responsible for tracking which expenses are may have access to and keeping receipts. The HSA provider does not verify whether your purchases are may be able to access — that's your job. If you're audited, the IRS will ask you to show that the money was spent on may have access to expenses. Receipts, invoices, and explanation of benefits (EOB) statements from your insurance company all count as proof.

Many HSA providers offer online portals where you can upload receipts and tag transactions as medical. This creates a record and makes it easier to find documentation later. Even if you don't upload receipts, keep them in a folder or file for at least three to seven years, depending on your tax situation.

If you withdraw money for a non-may have access to expense before age 65, you owe income tax on the withdrawal plus a 20% penalty. For example, if you withdraw $500 for something that isn't a may have access to medical expense, you pay income tax on that $500 plus $100 in penalties. After age 65, the penalty goes away — you only owe income tax.

What happens to your HSA if you change jobs or lose coverage

Your HSA stays with you when you leave your job. The account is portable — you own it, and the money is yours. You can keep the same HSA or transfer the balance to a new HSA at a different bank or provider. There's no tax consequence to moving the money, and you don't lose any balance.

If you lose HDHP coverage, you can no longer make new contributions to the HSA. However, you can still withdraw money from the existing balance for may have access to medical expenses, and any unused balance remains in the account. If you enroll in a different type of health plan (like a PPO or HMO), you become ineligible to contribute, but you keep the account and the money in it.

If you become may be able to access for Medicare, you can no longer contribute to an HSA starting the month you enroll. You can still withdraw money for may have access to expenses, and after age 65 you can withdraw for any reason without the 20% penalty.

HSA vs. FSA: the key differences

Both HSAs and FSAs let you set aside pre-tax money for medical expenses, but they work differently. An FSA is "use it or lose it" — you must spend the money within the plan year or you forfeit it (though some plans allow a small carryover). An HSA has no deadline; money rolls over forever. An FSA is tied to your employer and disappears if you leave the job. An HSA is yours to keep.

You can only have an HSA if you're enrolled in an HDHP. You can have an FSA with almost any health plan. Some employers offer both, but you can only contribute to one in a given year. If you have an FSA, you cannot have an HSA at the same time.

HSAs allow investment options and can grow over time. FSAs are typically held in a simple account with no investment option. For long-term savings, an HSA is more powerful. For immediate, predictable medical expenses, an FSA may be simpler because you don't have to track balances year to year.

Frequently Asked Questions

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

Yes. If you're 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're not on your health plan. You can also use it for your children and any dependent you claim on your tax return. The money doesn't have to be spent on the person whose name is on the account.

What happens if I withdraw money from my HSA for a non-medical expense?

Before age 65, you owe income tax on the withdrawal plus a 20% penalty. After age 65, you only owe income tax — the penalty is waived. For example, a $1,000 withdrawal for a non-may have access to expense before age 65 costs you income tax plus $200 in penalties. Keep receipts to prove expenses are may have access to and avoid this penalty.

Can I have an HSA if I'm on Medicare?

You cannot contribute to an HSA once you enroll in Medicare. However, if you already have an HSA, you can keep the account and withdraw money for may have access to medical expenses, including Medicare premiums. After age 65, you can withdraw for any reason without the 20% penalty, though non-medical withdrawals are taxed as income.

Do I have to use the HSA debit card, or can I pay out of pocket and reimburse myself later?

You can do either. Some people pay medical bills from their own bank account and then withdraw from the HSA later, or reimburse themselves from the HSA. This can be useful if you want to let the HSA balance grow and invest it. Just keep receipts to prove the expenses were may have access to and that you paid them.

What if my employer contributes to my HSA but I leave the job mid-year?

The money your employer contributed is yours to keep. You own the account and the balance, regardless of when you leave. You can no longer contribute through payroll once you're no longer employed, but any money already in the account stays there. You can continue to withdraw for may have access to expenses or transfer the balance to a new HSA at a different provider.