A health savings account lets you set aside pre-tax money for medical expenses, and any balance you don't spend rolls over year to year

A health savings account (HSA) is a tax-advantaged savings account tied to a high-deductible health plan. You contribute money before taxes are taken out of your paycheck, use it to pay for medical costs, and any money left over stays in the account indefinitely. Unlike a flexible spending account (FSA), which forces you to spend the balance or lose it each year, an HSA is yours to keep and grow.

The account works in three stages: you deposit money (usually through payroll deduction), you withdraw it to pay for may have access to medical expenses, and any unused balance earns interest or investment returns depending on how your plan is set up. The money you contribute reduces your taxable income for the year, and withdrawals for medical expenses are not taxed either.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan; having other health coverage (except certain exceptions) disqualifies you.
  • Contributions come out of your paycheck before taxes, lowering both your federal income tax and Social Security tax for the year.
  • You can withdraw money tax-free only for may have access to medical expenses: copays, deductibles, prescriptions, dental work, vision care, and some medical equipment.
  • Money you do not spend stays in the account forever and can be invested in mutual funds or left in cash, depending on your HSA provider.
  • If you withdraw money for non-medical expenses before age 65, you owe income tax on the withdrawal plus a 20 percent penalty; after 65, you owe only income tax.

Who can open an HSA and when

You must be enrolled in a high-deductible health plan (HDHP) to open or contribute to an HSA. An HDHP is defined by the IRS and changes annually, but generally means a plan with a deductible of at least $1,550 for individual coverage or $3,100 for family coverage (2024 figures; these amounts increase most years). You cannot have other health coverage at the same time—with narrow exceptions for accident, disability, dental, vision, and long-term care insurance.

You can open an HSA through your employer if they offer one, or you can open one independently through a bank, credit union, or investment company. If you open one on your own, you must still be enrolled in an HDHP to contribute. You can open an HSA at any point during the year, but contributions for a given tax year must be made by the tax filing deadline (usually April 15) to count toward that year's deduction.

How much you can contribute each year

The IRS sets annual contribution limits, which increase most years. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). These limits apply to all your HSAs combined—if you have two HSAs at different banks, your total contributions across both cannot exceed the limit.

Contributions can come from your paycheck (the most common route), from a personal check or bank transfer, or from your employer as part of compensation. If your employer contributes, that money counts toward your limit. You do not have to contribute the maximum; you can put in any amount up to the limit, or nothing at all in a given year.

What expenses you can pay for with HSA money

Withdrawals are tax-free only for may have access to medical expenses as defined by the IRS. These include copays, coinsurance, deductibles, prescription drugs, insulin, medical equipment (crutches, wheelchairs, hearing aids), dental work, vision care, mental health treatment, and physical therapy. Over-the-counter medications like pain relievers and cold medicine also count, as do some medical supplies like bandages and blood pressure monitors.

Expenses that do not count include cosmetic procedures, gym memberships, vitamins (unless prescribed by a doctor), and most over-the-counter items that are not medical in nature. If you are unsure whether an expense qualifies, the IRS publishes a detailed list, and your HSA provider can usually tell you whether a specific item is allowed.

You do not have to withdraw money in the same year you incur the expense. You can pay for a medical bill out of pocket and withdraw the equivalent amount from your HSA months or years later, as long as you have records showing the expense was incurred while you had an active HSA. This flexibility makes an HSA useful as a long-term savings tool.

How to withdraw money and what happens if you use it wrong

Most HSA providers give you a debit card linked to the account, so you can pay for medical expenses directly at the point of care. You can also request a check, transfer money to your bank account, or reimburse yourself for expenses you already paid. Keep receipts and documentation for all withdrawals; the IRS does not require you to submit them with your tax return, but you must be able to prove the expense was may have access to if audited.

If you withdraw money for a non-medical expense before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. For example, if you withdraw $1,000 for a non-may have access to expense and you are in the 22 percent tax bracket, you would owe $220 in income tax plus $200 in penalty, totaling $420. After age 65, you can withdraw money for any reason without the penalty, though you still owe income tax on non-medical withdrawals.

How HSA money grows and what happens when you change jobs or insurance

If your HSA balance is large enough, you can invest it in mutual funds, stocks, or bonds rather than leaving it in cash. Not all HSA providers offer investment options, so check with yours. Any earnings on your investments are tax-free as long as you use the money for may have access to medical expenses. If you withdraw invested money for non-medical expenses, you owe tax and penalty on the earnings, not just the original contribution.

Your HSA belongs to you, not your employer. If you leave your job, the account stays open and the money remains yours. You can continue to contribute to it if you stay enrolled in an HDHP (through a spouse's plan, the individual market, or Medicare Advantage in some cases). If you switch to a plan that is not an HDHP, you can no longer contribute, but you can still withdraw money for may have access to medical expenses. The account never expires.

HSA versus FSA: the key differences

An FSA is also a tax-advantaged account for medical expenses, but it works differently. FSA money must be spent by the end of the plan year or you lose it (though some plans allow a small carryover or a grace period). An HSA has no use-it-or-lose-it rule; money rolls over forever. FSAs also typically have lower contribution limits and are available only through employers, whereas you can open an HSA on your own.

You cannot have both an HSA and an FSA at the same time, with one exception: you can have an HSA and a limited-purpose FSA that covers only dental and vision expenses. If you have a regular FSA, you must close it or spend down the balance before opening an HSA. The choice between them depends on whether you prefer the flexibility of keeping money year to year (HSA) or the simplicity of a smaller account you spend down annually (FSA).

Frequently Asked Questions

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

Yes. HSA money can be used for may have access to medical expenses of you, your spouse, and any dependent you claim on your tax return, regardless of whether they are covered by your health plan. You do not need to be on a family plan; even individual coverage allows this.

What happens to my HSA if I turn 65 and enroll in Medicare?

You can no longer contribute to an HSA once you enroll in Medicare, but the account stays open and you can continue to withdraw money for may have access to medical expenses tax-free. After 65, non-medical withdrawals are taxed as income but not subject to the 20 percent penalty, making an HSA a useful retirement savings tool.

Can I transfer money from an HSA to another account or investment?

You can transfer money between HSAs without penalty, which is useful if you switch providers. You cannot transfer HSA money to an IRA, 401(k), or other retirement account. If you need the money for non-medical reasons, you must withdraw it and pay tax and penalty (before age 65) or tax only (after 65).

Do I have to file anything with my taxes to use an HSA?

If your employer deducts HSA contributions from your paycheck, they report it on your W-2 and you do not need to file anything extra. If you make contributions on your own, you report them on Form 8889 when you file your tax return. Withdrawals for may have access to expenses do not need to be reported; keep your own records in case of an audit.

What if I do not use all my HSA money by the end of the year?

Unlike an FSA, HSA money does not expire. Any balance you do not spend stays in the account and can be used in future years. This makes an HSA a long-term savings tool; many people use it to save for medical expenses in retirement.