A health savings account holds money you set aside for medical expenses, and you control when and how you spend it

A Health Savings Account (HSA) is a bank account attached to a high-deductible health insurance plan. You put pre-tax money into it, use it to pay for medical bills, and any balance you don't spend stays in the account and grows year to year. The money is yours — you own it, you decide how to spend it, and you can take it with you if you change jobs or insurance plans.

The account works differently from a flexible spending account (FSA) because there is no "use it or lose it" rule. Money you don't spend in one year rolls forward to the next. After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals before 65 trigger a 20% penalty plus income tax on the earnings.

Key Takeaways

  • You contribute money before taxes are taken out, which lowers your taxable income for the year.
  • You can spend HSA money on may have access to medical expenses — copays, deductibles, prescriptions, dental work, vision care, and some medical equipment — without paying income tax on the withdrawal.
  • Money left in the account at the end of the year does not disappear; it carries forward and earns interest or investment returns if you invest it.
  • You withdraw money by debit card, check, or reimbursement request, and you keep receipts to prove the expense was medical if the IRS asks.
  • Only people enrolled in a high-deductible health plan can open an HSA, and contribution limits change each year based on whether you cover yourself alone or your family.

Who can open an HSA and what the enrollment window looks like

You must be enrolled in a high-deductible health plan (HDHP) to open or contribute to an HSA. Your employer may offer one during open enrollment, or you can buy one directly from an insurance company during the annual open enrollment period (usually November 15 to December 15) or if you have a may have access to life event like losing other coverage or moving to a new state.

Once you enroll in the HDHP, you can open an HSA through your employer's benefits administrator, your bank, or a dedicated HSA provider like Fidelity, HealthEquity, or Lively. The process takes a few days to a week. You do not need to open an account with the same institution that holds your HDHP — you can choose any HSA-may have access to custodian.

If you are already enrolled in an HDHP, you can open an HSA at any time during the year, but contributions for that year must be made by the tax filing deadline (usually April 15 of the following year). If you enroll in an HDHP mid-year, you can contribute a prorated amount based on the months you were covered.

How money gets into the account

Money enters your HSA through three routes: your own contributions, employer contributions, or both. If your employer offers an HSA, they may contribute money on your behalf — this is common and counts toward your annual limit. You can also contribute your own money, and the total from all sources cannot exceed the IRS limit for your coverage type.

For 2024, the contribution limit is $4,150 for individual coverage and $8,300 for family coverage. These limits change each year. Money you contribute is deducted from your gross pay before income tax is calculated, which means you pay no federal income tax, no Social Security tax, and no Medicare tax on that money. If you contribute after taxes (for example, if you are self-employed), you can deduct the contribution on your tax return.

Contributions can be made throughout the year, but any contribution for a given tax year must be deposited by the tax filing deadline. If you over-contribute, you must withdraw the excess plus any earnings on it, and you will owe income tax and a 6% penalty on the overage.

What you can spend HSA money on without tax consequences

You can withdraw money from your HSA tax-free to pay for may have access to medical expenses. These include copays and coinsurance, deductibles, prescription drugs, dental work (fillings, crowns, orthodontics), vision care (glasses, contacts, exams), hearing aids, mental health counseling, physical therapy, and some medical equipment like blood pressure monitors or glucose meters.

Over-the-counter items are may have access to only if you have a prescription or a letter from your doctor stating medical necessity — a bottle of ibuprofen you buy on your own does not count, but one prescribed by your doctor does. Cosmetic procedures do not count unless they are medically necessary (reconstructive surgery after an injury qualifies; elective Botox does not).

You can also use HSA money to pay insurance premiums in specific situations: COBRA premiums (continuation coverage after job loss), long-term care insurance premiums, and health insurance premiums while you are receiving unemployment benefits. You cannot use it for regular health insurance premiums while employed, even if you pay them yourself.

How to withdraw money and what records you need to keep

Most HSAs come with a debit card that works like a regular bank card — you swipe it at the pharmacy, doctor's office, or medical supply store, and the money comes out of your HSA. Some accounts also let you write checks or request a reimbursement by submitting a receipt and claim form online or by mail.

You are not required to submit receipts when you withdraw money, but you must keep them. The IRS can audit your HSA at any time and ask you to prove that withdrawals were for may have access to medical expenses. If you cannot show proof, you owe income tax on the withdrawal plus a 20% penalty. Keep receipts, explanation of benefits statements, and invoices for at least three years.

If you use the debit card at a pharmacy or doctor's office, the merchant usually codes the transaction as medical, so the HSA custodian knows it is may have access to. If you pay out of pocket and then reimburse yourself from the HSA, you have more flexibility in timing — you can pay a bill in 2024 and reimburse yourself in 2026 if you want, as long as the expense was incurred after the HSA was opened.

How money grows if you do not spend it right away

Unlike an FSA, an HSA is a savings account. Any money you do not spend stays in the account and can earn interest or investment returns. Some HSA providers offer interest-bearing savings options (usually 4% to 5% annually as of 2024, though rates vary). Others let you invest the balance in mutual funds or target-date funds, similar to a 401(k).

If you invest HSA money, you bear the investment risk — the balance can go down as well as up. However, any gains are tax-free as long as you use the money for may have access to medical expenses eventually. Some people use an HSA as a retirement savings tool, letting the balance grow for decades and only withdrawing for medical expenses in later years.

The account is portable: if you change jobs, lose your HDHP coverage, or retire, the money stays yours. You can roll the balance to a new HSA at a different provider, or keep it where it is. You do not forfeit unused money, and there is no deadline to spend it.

What happens if you withdraw money for non-medical reasons

If you withdraw HSA money for something that is not a may have access to medical expense, you owe income tax on the amount withdrawn plus a 20% penalty — but only on the withdrawal itself, not on any earnings. For example, if you withdraw $1,000 for a non-medical expense and $200 of that is earnings, you owe income tax on the full $1,000 plus a $200 penalty (20% of the $1,000).

The penalty does not apply after age 65. Once you turn 65, you can withdraw money for any reason without the 20% penalty, though you still owe income tax on non-medical withdrawals. This is why some people view an HSA as a supplemental retirement account — the tax-free growth for medical expenses is valuable, but the account becomes more flexible at 65.

If you accidentally withdraw money for a non-may have access to expense, you can sometimes correct it. If you realize the mistake within a short window (rules vary by provider), you may be able to return the money and avoid the penalty. Contact your HSA custodian immediately if this happens.

Frequently Asked Questions

Can I use my HSA debit card at the grocery store to buy vitamins?

Only if your doctor prescribed them for a specific medical condition. Over-the-counter vitamins and supplements are not may have access to expenses unless you have a letter from your doctor stating medical necessity. If you use the debit card and the merchant codes it as non-medical, you may owe tax and penalty on the withdrawal.

What happens to my HSA if I change jobs or lose my HDHP coverage?

The money stays in your account. You own it. If you move to a new job with a different HSA, you can roll the balance over. If you lose HDHP coverage, you can no longer contribute, but you can still withdraw money for may have access to medical expenses. The account remains yours indefinitely.

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

Yes, as long as your spouse is your dependent for tax purposes. You can also use it for any dependent child's medical expenses. The expense must still be may have access to — copays, prescriptions, dental work — but it does not matter whose name is on the bill.

Do I have to file anything with the IRS about my HSA?

Your employer or HSA custodian files Form 5498-SA with the IRS showing contributions made to your account. You report this on your tax return if you made contributions outside of payroll. You do not need to report individual withdrawals unless you are claiming a deduction for contributions you made yourself.

What if I have both an HSA and an FSA?

You cannot have both in the same year — the IRS treats them as overlapping accounts. If your employer offers both, you must choose one. Some employers offer an FSA for dependent care (childcare) and an HSA for medical expenses; those two can coexist because they cover different things.