A health savings account holds money you set aside for medical costs, and the money you put in reduces your taxable income

A health savings account (HSA) is a bank account tied to a high-deductible health insurance plan. You contribute pre-tax dollars (money taken from your paycheck before taxes are calculated), use those dollars to pay for medical expenses, and the money grows tax-free if you don't spend it. Unlike a flexible spending account (FSA), which forces you to use the money or lose it each year, an HSA rolls over indefinitely—money you don't spend this year stays in the account next year.

The account belongs to you, not your employer. If you change jobs or retire, you keep the HSA and can continue using it. The money can be invested in stocks, bonds, or mutual funds, similar to a retirement account, so it can grow over decades.

Key Takeaways

  • You must be enrolled in a high-deductible health plan (HDHP) to open and contribute to an HSA, but once you have one, you own it permanently even if you switch plans or jobs.
  • Contributions reduce your taxable income for the year, and withdrawals for may have access to medical expenses are tax-free, creating a double tax advantage.
  • Contribution limits are set annually by the IRS and vary based on whether you have individual or family coverage; for 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage.
  • You can withdraw money for any reason, but non-medical withdrawals are taxed as income plus a 20% penalty if you are under 65; after 65, the penalty disappears but income tax still applies.
  • The account can be used to pay deductibles, copays, prescriptions, dental work, vision care, and many other medical services, but not health insurance premiums (with limited exceptions).

Who can open an HSA and when

You must be enrolled in a high-deductible health plan to open an HSA. The IRS defines a high-deductible plan as one with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage (these thresholds change yearly). Most employer plans and marketplace plans clearly state whether they may have access to; your insurance company or HR department can confirm.

You cannot have other health coverage at the same time—no spouse's plan, no Medicare, no Medicaid, no military coverage. You also cannot claim yourself as a dependent on someone else's tax return. If any of these apply to you, you are ineligible to contribute, though you can keep an existing HSA and withdraw from it for medical costs.

Contribution season runs from January 1 through April 15 of the following year. If you enroll in a high-deductible plan mid-year, you can still open an HSA and contribute a prorated amount for the months you were covered (or the full annual amount if you use the "testing period" rule, which requires you to stay in a high-deductible plan through December 31 of the following year).

How contributions work and what you can deduct

You contribute money to your HSA through payroll deduction (if your employer offers it) or by depositing directly into the account yourself. Payroll contributions are automatically pre-tax, meaning they bypass federal income tax, Social Security tax, and Medicare tax. If you contribute on your own, you deduct the contribution on your tax return (Form 1040, Schedule 1) when you file.

The IRS sets annual contribution limits. 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 ("catch-up contribution"). Your employer may also contribute to your HSA; employer contributions count toward your limit but reduce the amount you can contribute yourself.

If you contribute more than the limit, the excess is taxed as income plus a 6% penalty each year until you withdraw it. If you contribute while ineligible (for example, while on Medicare), the contribution is taxed as income plus a 20% penalty.

Paying for medical expenses and keeping records

You can withdraw HSA money to pay for may have access to medical expenses—costs not covered by insurance and not reimbursed elsewhere. This includes deductibles, copays, coinsurance, prescription drugs, dental work, vision care, hearing aids, mental health treatment, and many other services. The IRS publishes a full list (Publication 502), but the basic rule is: if it treats, diagnoses, or prevents a medical condition, it usually qualifies.

You do not need to submit receipts to the HSA provider when you withdraw money, but you must keep them yourself. The IRS can audit your HSA years later and ask you to prove that withdrawals were for may have access to expenses. If you cannot prove a withdrawal was medical, it is treated as a non-medical withdrawal and taxed as income plus a 20% penalty (or just income tax if you are 65 or older).

You can reimburse yourself for past medical expenses at any time, even years later, as long as you have the receipts. For example, if you paid $500 out of pocket for dental work in 2020 and did not reimburse yourself then, you can withdraw $500 from your HSA in 2024 and use it to reimburse yourself retroactively.

What happens if you withdraw money for non-medical reasons

If you withdraw HSA money for something other than a may have access to medical expense, the withdrawal is taxed as ordinary income, and you owe a 20% penalty on top. For example, if you withdraw $1,000 for a vacation, you owe income tax on the $1,000 plus a $200 penalty. The income tax rate depends on your tax bracket; the penalty is flat.

After age 65, the penalty disappears. You can withdraw money for any reason without the 20% penalty, but you still owe income tax on non-medical withdrawals. This makes an HSA function like a traditional retirement account after 65—a useful feature if you have not spent down the account by then.

If you lose HSA may be able to access (for example, you enroll in Medicare or switch to a non-high-deductible plan), you can no longer contribute, but you can still withdraw for medical expenses without penalty. Non-medical withdrawals after you lose may be able to access still trigger the 20% penalty (unless you are 65 or older).

How HSA money grows and investment options

Most HSA providers let you invest the money in mutual funds, stocks, or bonds, similar to a 401(k). The earnings grow tax-free as long as you eventually use the money for medical expenses. If you withdraw for non-medical reasons, the earnings are taxed as income plus the 20% penalty (or just income tax after 65).

Some HSA providers require a minimum balance (often $1,000 to $2,500) before you can invest; money below that sits in a cash account earning little or no interest. Check your provider's rules. If you are young and healthy, investing HSA money can turn it into a significant retirement asset over decades, especially if you pay medical expenses out of pocket and let the HSA grow untouched.

The account is portable: if you change HSA providers, you can roll the balance to a new account without tax or penalty. You can also roll unused HSA money into a new HSA if you switch employers or insurance plans.

HSA vs. FSA and other savings accounts

An HSA differs from a flexible spending account (FSA) in three key ways. First, an HSA rolls over year to year; an FSA has a "use it or lose it" rule (though some FSAs allow a $640 carryover for 2024). Second, an HSA is yours to keep if you change jobs; an FSA ends when you leave your employer. Third, an HSA can be invested; an FSA is usually just a cash account.

A dependent care FSA (for childcare) and a limited-purpose FSA (for dental and vision only) can coexist with an HSA. A general-purpose FSA cannot—if you have one, you cannot contribute to an HSA that year, though you can still withdraw from an existing HSA for medical expenses.

A regular savings account offers no tax advantage. A 529 plan is for education, not medical costs. An HSA is the only account that combines pre-tax contributions, tax-free growth, and tax-free withdrawals for medical expenses.

Frequently Asked Questions

Can I use HSA money to pay my health insurance premium?

Generally no, but there are exceptions. You cannot use HSA money to pay premiums for a regular health plan. You can use it to pay premiums for COBRA (continuation coverage after job loss), long-term care insurance, or health insurance while you are receiving unemployment benefits. You can also use it to pay Medicare premiums and long-term care insurance after age 65.

What if I have leftover HSA money when I die?

If your beneficiary is your spouse, they can inherit the HSA and treat it as their own. If your beneficiary is anyone else, the account is closed and the balance is paid to them as a lump sum. They owe income tax on the full balance; if the money was not used for medical expenses, they also owe a 20% penalty (unless they are 65 or older).

Can I use HSA money for over-the-counter medications?

Yes, but only if you have a prescription or a doctor's note. Starting in 2020, over-the-counter drugs (like ibuprofen or allergy medicine) are may have access to expenses only with a prescription. Vitamins and supplements are not may have access to unless prescribed to treat a specific medical condition.

What if I contribute too much to my HSA by mistake?

You can withdraw the excess contribution and any earnings on it before your tax return is due (including extensions). The excess contribution is not taxed, but the earnings are taxed as income. If you do not withdraw by the deadline, the excess is taxed as income plus a 6% penalty each year until you correct it.

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

Yes. You can withdraw HSA money to pay for may have access to medical expenses of your spouse or any dependent you claim on your tax return, even if they are not on your health insurance plan. Keep receipts in case of audit.