You use an HSA by setting money aside before taxes, then spending it on medical costs tax-free

An HSA works like a personal medical savings account that your employer or you can fund with pre-tax dollars. The money sits in an account (usually with a bank or investment firm) until you need it for a medical expense. When you pay for something that counts—a doctor visit, prescription, dental work, glasses—you withdraw from the HSA to cover it, and that withdrawal is not taxed. If you don't spend the money in a given year, it rolls over to the next year. You keep the account even if you change jobs.

The catch is that you can only use an HSA if you're enrolled in a high-deductible health plan (HDHP). The IRS sets the income limits for how much you can contribute each year, and those limits change annually. You can contribute through payroll deduction (which is easiest), deposit money yourself, or both.

Key Takeaways

  • You fund an HSA with pre-tax money, either through payroll deduction or by depositing your own money and deducting it on your tax return.
  • You can only withdraw from an HSA to pay for medical expenses that the IRS recognizes—doctor visits, prescriptions, dental, vision, and some medical equipment, but not insurance premiums or cosmetic procedures.
  • Money you don't spend in a year stays in the account and earns interest or investment returns, unlike a flexible spending account (FSA) which has a use-it-or-lose-it rule.
  • You access the money through a debit card, check, or reimbursement request, depending on how your HSA provider set it up.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are still taxed as income.

How to fund your HSA each year

If your employer offers an HSA, the easiest way to fund it is through payroll deduction. You tell your employer how much to contribute (up to the annual IRS limit), and that amount comes out of your paycheck before taxes are calculated. This reduces your taxable income for the year. Your employer may also contribute money to your HSA as part of benefits—that money is not taxed to you either.

If you don't have an employer HSA or want to add more money beyond what your employer offers, you can open an HSA on your own and deposit money directly. You then deduct that contribution on your tax return (Form 1040, Schedule 1). You have until the tax filing deadline (usually April 15) to make contributions for the previous year.

The IRS sets annual contribution limits. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage, but these amounts change each year. If you're 55 or older, you can contribute an extra $1,000 per year (called a catch-up contribution). Check your HSA provider's website or the IRS website each January to confirm the current year's limits.

What counts as a medical expense you can pay from an HSA

The IRS maintains a specific list of medical expenses you can pay with HSA money tax-free. These include doctor visits, hospital stays, surgery, prescription medications, dental work (fillings, crowns, root canals), vision care (eye exams, glasses, contact lenses), hearing aids, and some medical equipment like blood pressure monitors or crutches. Mental health treatment, physical therapy, and chiropractic care also count.

Some expenses are less obvious but still allowed: over-the-counter medications (including pain relievers and allergy medicine), insulin, diabetic supplies, and certain vitamins if prescribed by a doctor. Menstrual products, sunscreen, and first-aid supplies also may have access to. You can even pay for some long-term care insurance premiums with HSA money.

What does not count: health insurance premiums (with narrow exceptions for COBRA, Medicare, or long-term care insurance), cosmetic procedures, gym memberships, weight-loss programs, or teeth whitening. If you're unsure whether an expense qualifies, ask your HSA provider or check IRS Publication 969, which lists hundreds of specific items.

How to access and withdraw money from your HSA

Most HSA providers issue a debit card linked to your account. You use it like any other debit card at the pharmacy, doctor's office, or hospital. The transaction comes straight from your HSA balance. Some providers also let you write checks against the account or submit a reimbursement request online—you pay out of pocket and then request the HSA to reimburse you.

When you use the debit card at a medical provider, the transaction is usually flagged as medical automatically. At a pharmacy or general retailer, you may need to confirm that the purchase is for a medical expense. Keep your receipts. If the IRS ever audits your HSA, you'll need to prove that withdrawals were for may have access to medical expenses.

Some HSA providers let you invest the money in mutual funds or other investments if you keep a minimum balance (often $1,000 to $2,500) in cash. Any interest or investment gains are tax-free as long as you use the money for medical expenses. If you withdraw for non-medical reasons before age 65, you pay income tax plus a 20% penalty on the earnings (though not on your original contributions).

Keeping records and proving your expenses

You are not required to submit receipts to your HSA provider every time you withdraw money, but you must keep them for your own records. The IRS can ask you to prove that your withdrawals were for may have access to medical expenses, and if you can't, you'll owe income tax and possibly penalties on those amounts.

Save receipts, explanation of benefits (EOB) statements from your insurance, and invoices from medical providers. If you're reimbursing yourself for a past expense, keep the receipt and the date you paid. Some people photograph receipts or scan them into a folder on their computer. The key is being able to show, years later if needed, that the money went to a real medical expense.

If you withdraw money and later realize it wasn't a may have access to expense, you can put the money back into the account (called a "recontribution") within a set timeframe, usually 60 days. Check with your provider on their specific rules.

What happens to unused HSA money and how it carries over

Unlike a flexible spending account (FSA), which operates on a use-it-or-lose-it basis, an HSA is yours to keep. Any money you don't spend in a given year rolls over to the next year automatically. There's no annual limit on how much can accumulate in the account. Some people use their HSA as a long-term retirement savings vehicle, funding it every year and only withdrawing for medical expenses when they're older.

The account stays with you even if you change jobs, leave your employer's plan, or retire. You keep the same HSA account and can continue to use it for medical expenses for the rest of your life. If you move to a job that doesn't offer an HSA, you can still withdraw from your existing HSA for may have access to medical expenses.

When you die, your HSA passes to your beneficiary (usually your spouse or estate). If your spouse inherits it, they can treat it as their own HSA. Other beneficiaries must pay income tax on the full balance, though they can still use it to pay your final medical bills tax-free.

HSA rules after age 65 and in retirement

At age 65, the rules change. You can still withdraw money for medical expenses tax-free. But you can also withdraw money for any reason without the 20% penalty—you'll just pay income tax on non-medical withdrawals, the same as you would with a traditional IRA. This makes an HSA a powerful retirement savings tool if you've accumulated a large balance.

Once you turn 65, you're also may be able to access for Medicare. You can't contribute to an HSA while you're enrolled in Medicare, so most people stop funding it at that point. But you can keep using the existing balance for medical expenses, including Medicare premiums, copays, and deductibles.

Frequently Asked Questions

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

Yes, if they are covered under your health plan. You can use your HSA to pay for medical expenses of your spouse and any dependent children on your plan, even if they're not listed on the HSA account itself. If they have their own health plan and their own HSA, they should use their own account first.

What happens if I withdraw money from my HSA for something that's not a medical expense?

Before age 65, you owe income tax on the amount plus a 20% penalty. After age 65, you owe only income tax, no penalty. Keep receipts so you can prove an expense was medical if the IRS questions it later.

Can I use my HSA to pay for health insurance premiums?

Generally no, with three exceptions: COBRA continuation coverage, Medicare premiums (once you're 65), and long-term care insurance premiums. You cannot use HSA money to pay for your employer's health plan premiums or individual marketplace insurance.

Do I lose my HSA if I switch to a different health plan?

No. Your HSA belongs to you, not your employer or your health plan. You keep the account and the money even if you change jobs or switch to a different type of insurance. You just can't make new contributions unless you're enrolled in an HDHP.

Can I invest my HSA money?

Many HSA providers offer investment options if you maintain a minimum balance (often $1,000 to $2,500). You can invest in mutual funds, stocks, or bonds. Any gains are tax-free as long as you eventually use the money for medical expenses. Check with your specific provider about what investment options they offer.