What an HSA is and who can open one

A Health Savings Account (HSA) is a tax-advantaged savings account tied to a high-deductible health plan (HDHP). You put pre-tax money into it, use that money to pay for may have access to medical expenses, and the money you don't spend rolls over year to year. Unlike a Flexible Spending Account (FSA), which forces you to spend the balance or lose it, an HSA is yours to keep and invest for the long term.

To open an HSA, you must be enrolled in an HDHP — a health insurance plan with a higher deductible than standard plans but lower premiums. In 2024, an HDHP deductible must be at least $1,600 for individual coverage or $3,200 for family coverage. You cannot have other health coverage (with narrow exceptions for dental, vision, and accident plans), and you cannot be claimed as a dependent on someone else's tax return.

You open an HSA through a bank, credit union, or financial services company — not through your employer, though your employer may offer one as a payroll option. Once open, you control the account entirely. Your employer can contribute to it, you can contribute to it, and you decide how much to save and when to spend it.

Key Takeaways

  • An HSA is a savings account for medical expenses that lets you use pre-tax money and keep unused balances indefinitely, unlike an FSA which expires annually.
  • You must be enrolled in a high-deductible health plan to open an HSA, and you cannot have other major health coverage at the same time.
  • Money in an HSA can be invested in stocks, bonds, and mutual funds, and grows tax-free if used for may have access to medical expenses.
  • may have access to expenses include deductibles, copays, coinsurance, prescriptions, dental work, vision care, and many over-the-counter items, but not insurance premiums or cosmetic procedures.
  • Withdrawals for non-medical expenses before age 65 are taxed as income plus a 20 percent penalty; after 65, they are taxed as income only.

How money flows in and out of an HSA

You fund an HSA with pre-tax dollars, which means the money you contribute reduces your taxable income for the year. If your employer offers payroll deduction, the money comes out before taxes are calculated. If you contribute on your own, you deduct the contribution on your tax return (Form 1040, Schedule 1). Either way, you avoid federal income tax, Social Security tax, and Medicare tax on that money.

The annual contribution limit is set by the IRS and varies by coverage type. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. If you are 55 or older, you can contribute an additional $1,000 per year (called a catch-up contribution). Your employer's contributions count toward this limit, so if your employer puts in $2,000, you can only add $2,150 more as an individual.

Money you don't spend stays in the account and earns interest or investment returns. Many HSA providers let you invest the balance in mutual funds or other securities once it reaches a certain threshold (often $1,000 to $2,500). This is where an HSA becomes a retirement savings tool — the money can grow for decades if you don't need it for medical expenses right away.

What you can and cannot pay for with HSA funds

may have access to medical expenses are broad and include most things you would expect: deductibles, copays, coinsurance, prescription drugs, dental work, vision care (including glasses and contacts), hearing aids, and mental health treatment. You can also use HSA funds for over-the-counter medications like pain relievers and allergy medicine, as well as medical equipment like blood pressure monitors, thermometers, and crutches.

Some expenses are less obvious but still covered: acupuncture, chiropractic care, physical therapy, fertility treatments, and certain cosmetic procedures if they treat a medical condition (like surgery to correct a deviated septum). You can even use HSA funds to pay for long-term care insurance premiums, up to an annual limit set by the IRS.

What is not covered: health insurance premiums (with the exception of COBRA, long-term care insurance, and premiums while you are receiving unemployment benefits), cosmetic procedures that do not treat a medical condition, gym memberships, vitamins and supplements (unless prescribed by a doctor for a specific condition), and over-the-counter items like sunscreen or toothpaste. If you are unsure whether an expense qualifies, the IRS publishes a detailed list on its website, and your HSA provider can usually answer quickly.

How to use your HSA when you need medical care

When you incur a may have access to medical expense, you can pay for it directly from your HSA using a debit card (if your provider issues one), a check, or a transfer. Some providers let you submit a claim and get reimbursed. Keep your receipts and documentation — the IRS does not require you to submit them with your tax return, but you must be able to prove that expenses were may have access to if audited.

You do not have to spend your HSA money in the same year you earn it. This is a major difference from an FSA. If you have $5,000 in your HSA at the end of the year, that money is still yours next year and the year after that. You can let it accumulate and use it whenever you need it, or save it specifically for retirement medical expenses.

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 percent penalty. After age 65, you can withdraw money for any reason without the penalty — you will owe income tax on non-medical withdrawals, but not the extra 20 percent. This makes an HSA function like a traditional IRA after you turn 65, except that withdrawals for medical expenses remain tax-free for life.

Tax advantages and long-term growth potential

An HSA has three tax advantages that make it powerful for long-term savings. First, contributions are tax-deductible (or made pre-tax through payroll). Second, the money grows tax-free inside the account. Third, withdrawals for may have access to medical expenses are never taxed. This triple tax benefit is unique — even a traditional IRA does not offer it.

Because of these advantages, many people use an HSA as a retirement savings vehicle rather than spending it immediately. If you can afford to pay medical expenses out of pocket, you can let your HSA balance grow and invest it. At retirement, you have a pool of money that can cover medical expenses tax-free, or be withdrawn for any reason (with income tax only, no penalty) after age 65.

The investment options vary by provider. Some HSAs offer only savings accounts with minimal interest. Others let you invest in a range of mutual funds, index funds, and stocks. If you plan to keep your HSA long-term, look for a provider that offers low-cost investment options and low fees, because those costs compound over decades.

What happens to your HSA if you change jobs or insurance

Your HSA is yours to keep, regardless of employment changes. If you leave your job, the account stays open and the money remains yours. You can continue to use it for may have access to medical expenses, and you can continue to invest it. Your new employer cannot take it from you, and you do not have to roll it over or close it.

If you change to a non-HDHP plan (such as a standard PPO or HMO), you can no longer contribute to your HSA, but you can still withdraw money from it for may have access to medical expenses. The account sits dormant until you re-enroll in an HDHP, at which point you can resume contributions.

If you move your HSA to a different provider, you can do a trustee-to-trustee transfer, which moves the money without tax consequences. Some people do this to find better investment options or lower fees. You can also do one rollover per year where you withdraw the money yourself and deposit it into a new HSA within 60 days, though this is riskier because you are responsible for meeting the deadline.

Common mistakes and how to avoid them

One frequent mistake is spending HSA money on non-may have access to expenses without realizing it. Over-the-counter items like pain relievers are covered, but sunscreen and toothpaste are not. If you are unsure, check the IRS list or ask your provider before you spend. Keeping receipts and a record of what you spent on helps you stay organized and protects you if you are audited.

Another mistake is not investing your HSA balance if you have a long time horizon. If you have $5,000 in your HSA and you are 35 years old, leaving it in a savings account earning 0.5 percent interest means you miss decades of potential growth. Even a modest investment strategy can significantly increase your balance by retirement.

A third mistake is forgetting that you cannot have an HSA and an FSA at the same time (with a narrow exception for a limited-purpose FSA that covers only dental and vision). If your employer offers both, you must choose one. An HSA is usually better if you can afford to save the money, because it rolls over indefinitely. An FSA is better if you have predictable medical expenses each year and want to use all the money.

Frequently Asked Questions

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

Yes, if your spouse is covered under your family HDHP or is not covered by any other health plan. You can also use HSA funds to pay for medical expenses of your spouse or dependents even if they are not on your insurance plan, as long as you could claim them as dependents on your tax return.

What happens to my HSA if I die?

The account passes to your beneficiary, usually your spouse or estate. If your spouse inherits it, they can treat it as their own HSA and continue using it tax-free for medical expenses. If a non-spouse beneficiary inherits it, they owe income tax on the full balance, though not the 20 percent penalty.

Can I withdraw money from my HSA to pay my health insurance deductible?

Yes. Your deductible is a may have access to medical expense, so you can use HSA funds to pay it. This is one of the main reasons to have an HSA — it helps you cover the out-of-pocket costs that come with a high-deductible plan.

Is there a deadline to spend my HSA money each year?

No. Unlike an FSA, which has a use-it-or-lose-it rule, an HSA has no deadline. Money rolls over indefinitely, and you can spend it whenever you need it. This is why an HSA is better for long-term savings than an FSA.

Can I contribute to an HSA if my employer offers one but I open my own?

Yes, but the total contributions from all sources cannot exceed the annual limit. If your employer contributes $2,000, you can contribute up to $2,150 more (for individual coverage in 2024). Track all contributions to stay within the limit and avoid penalties.