What a Health Savings Account Actually Is

A Health Savings Account (HSA) is a tax-advantaged savings account tied to a high-deductible health insurance plan. Money you put in reduces your taxable income, the money grows tax-free, and you can withdraw it tax-free to pay medical expenses. You own the account and the money stays yours — it does not disappear at the end of the year like a Flexible Spending Account (FSA) does.

The account is held by a bank, credit union, or investment firm you choose. You control how much goes in (within annual limits set by the IRS), where it is invested, and when you withdraw it. If you leave your job, the account goes with you. If you switch insurance plans, the account stays open as long as you remain enrolled in a high-deductible plan.

The tradeoff is that your health insurance plan must have a high deductible — meaning you pay more out of pocket before insurance kicks in. For 2024, that means at least $1,600 for individual coverage or $3,200 for family coverage, though these amounts change yearly. You cannot have an HSA if you are covered by a non-high-deductible plan, Medicare, or another person's FSA.

Key Takeaways

  • Money you contribute to an HSA reduces your taxable income, grows tax-free, and can be withdrawn tax-free for medical expenses — a triple tax advantage no other account offers.
  • You must be enrolled in a high-deductible health plan to open or contribute to an HSA, and you cannot have an HSA if you are on Medicare or covered by a spouse's FSA.
  • The IRS sets annual contribution limits (for 2024, $4,150 for individual coverage and $8,300 for family coverage), and unused money rolls over year to year with no expiration.
  • You can pay for a wide range of medical expenses including deductibles, copays, prescriptions, dental work, vision care, and mental health treatment, but not insurance premiums or over-the-counter items without a prescription.
  • 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 and When

The IRS sets a yearly limit on how much you can put into an HSA. For 2024, the limit is $4,150 if you have individual coverage or $8,300 if you have family coverage. These limits increase slightly most years to account for inflation. If you are 55 or older, you can contribute an extra $1,000 per year as a catch-up contribution.

You can contribute money at any time during the year, but contributions for a tax year must be made by the tax filing deadline (usually April 15 of the following year). If you enroll in a high-deductible plan mid-year, you can still contribute a full year's worth of money, but only if you remain enrolled through December 31 and the following March 31 — this is called the testing period. If you drop the plan before that date, you owe taxes and a 20 percent penalty on the contributions.

Money you do not use in a given year stays in the account forever. There is no "use it or lose it" rule like there is with FSAs. This means you can let the account grow over decades and use it in retirement.

What Medical Expenses You Can Pay From Your HSA

The IRS maintains a long list of may have access to medical expenses you can pay from your HSA tax-free. These include your insurance deductible, copays, coinsurance, and any out-of-pocket costs your insurance does not cover. Prescription medications, dental work, vision care, mental health treatment, and physical therapy all count. You can also pay for medical equipment like crutches, wheelchairs, or blood pressure monitors.

Over-the-counter medications and supplies are trickier. Aspirin, cold medicine, allergy pills, and bandages do not count unless your doctor writes a prescription for them. Sunscreen, toothpaste, and vitamins do not count at all. If you are unsure whether something qualifies, the IRS publishes a searchable database of approved expenses on its website.

Insurance premiums themselves do not count, with three exceptions: you can pay premiums for COBRA coverage (continuation coverage after job loss), long-term care insurance, or health insurance while you are receiving unemployment benefits. You cannot use HSA money to pay your regular monthly health insurance premium.

How to Open an HSA and Move Money In and Out

You open an HSA through a bank, credit union, brokerage firm, or insurance company. Your employer may offer one through payroll, which is often the easiest route because contributions come straight from your paycheck before taxes are calculated. If your employer does not offer an HSA, you can open one on your own at any financial institution that offers them.

Once the account is open, you can contribute money in several ways. If your employer offers it, you can have money deducted from each paycheck. If you are self-employed or contributing on your own, you can transfer money from your bank account or make a deposit by check. You can also roll over money from another HSA if you switch providers.

To withdraw money, you typically write a check from the HSA, use a debit card linked to the account, or transfer money to your regular bank account. Keep receipts for any medical expenses you pay from the HSA — the IRS does not require you to submit them when you file taxes, but you must be able to prove the money went to may have access to expenses if you are audited.

How Your HSA Grows Over Time

Money sitting in an HSA earns interest or investment returns depending on how you set it up. Some HSAs are basic savings accounts that earn a small amount of interest. Others let you invest the money in mutual funds, stocks, or bonds, similar to a retirement account. The more aggressive your investments, the higher the potential growth — but also the higher the risk.

All growth is tax-free as long as you use the money for may have access to medical expenses. This is a major advantage over a regular savings account, where you pay taxes on interest earned. Over decades, this tax-free growth can add up significantly, especially if you invest the money rather than leaving it in cash.

Some people use an HSA as a retirement savings tool. They pay medical expenses out of pocket and let the HSA grow untouched. After age 65, they can withdraw money for any reason — medical or not — without the 20 percent penalty that applies to non-medical withdrawals before 65. Non-medical withdrawals are taxed as regular income, but the tax-free growth up to that point is still a benefit.

What Happens to Your HSA When You Change Jobs or Insurance

Your HSA is yours to keep regardless of what happens with your job or insurance. If you leave your employer, the account does not close and the money does not go anywhere. You keep the account and can continue to use it for medical expenses as long as you remain enrolled in a high-deductible plan.

If you switch to a different high-deductible plan — whether through a new employer or by buying your own insurance — you can keep contributing to the same HSA or open a new one. If you switch to a non-high-deductible plan (like a traditional PPO or HMO), you can no longer make new contributions, but you can still withdraw money from the account for medical expenses.

If you lose your high-deductible coverage and do not enroll in another one within a certain period, you can no longer contribute to the HSA. However, the money already in the account remains yours and you can still use it for medical expenses. The account essentially becomes inactive for contributions but active for withdrawals.

Penalties and Taxes for Misusing Your HSA

If you withdraw money from your HSA for something other than a may have access to medical expense, you owe income tax on that amount plus a 20 percent penalty — but only if you are under 65. This is a significant cost. For example, if you withdraw $1,000 for a non-medical expense and you are in the 22 percent tax bracket, you owe $220 in taxes plus $200 in penalty, for a total of $420.

After age 65, the 20 percent penalty goes away. You can withdraw money for any reason, and you only owe income tax on non-medical withdrawals. This is why some people view an HSA as a retirement account — after 65, it functions like a traditional IRA with no restrictions on how you use the money.

If you contribute more than the annual limit, you owe a 6 percent excise tax on the excess amount each year until you withdraw it. This is why it is important to track your contributions carefully, especially if you have multiple HSAs or if your employer makes contributions on your behalf.

Frequently Asked Questions

Can I have an HSA if I am married and my spouse has a different insurance plan?

It depends on your spouse's plan. If your spouse has a non-high-deductible plan or is on Medicare, you cannot have an HSA. If your spouse also has a high-deductible plan, you can each have your own HSA, or you can have one family HSA that covers both of you — but not both at the same time.

What happens to my HSA if I go on Medicare?

Once you enroll in Medicare, you can no longer make contributions to an HSA. However, you can continue to withdraw money from the account for may have access to medical expenses, including Medicare premiums, copays, and deductibles. The money you have already saved remains yours.

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

Yes, as long as they are claimed as dependents on your tax return. You can pay for their deductibles, copays, prescriptions, dental work, and other may have access to medical expenses using your HSA, even if they are not on your insurance plan.

What if I do not spend all my HSA money in a year?

The money rolls over to the next year with no limit on how much you can accumulate. Unlike an FSA, there is no deadline to use the money or lose it. You can let it grow for decades and use it whenever you have medical expenses.

Can I invest my HSA money in stocks or mutual funds?

Many HSA providers offer investment options, but not all do. Some only offer savings accounts. Check with your provider to see what options are available. If you want to invest, you may need to open your HSA with a brokerage firm or a bank that offers investment choices.