Money goes in, grows tax-free, and comes out to pay medical bills

A Health Savings Account (HSA) is a bank account that holds money specifically for medical expenses. You put pre-tax dollars into it, the money sits there earning interest or investment returns without being taxed, and you withdraw it tax-free when you pay for may have access to medical costs. Unlike a flexible spending account (FSA), the money does not disappear at the end of the year — it stays in the account indefinitely, and you can invest it like a retirement account once you reach a certain balance.

The account is tied to a high-deductible health plan (HDHP), which is a type of health insurance with lower monthly premiums but higher deductibles. You can only open an HSA if you are enrolled in an HDHP and have no other health coverage. The account acts as a third bucket of money: your insurance pays for some costs, you pay out-of-pocket up to the deductible, and the HSA covers whatever you choose to pay from it.

Key Takeaways

  • You contribute pre-tax money to the account, which reduces your taxable income for the year, and the money grows without being taxed.
  • Withdrawals are tax-free only when you use them to pay for may have access to medical expenses — doctor visits, prescriptions, dental work, vision care, and some medical equipment.
  • Unlike an FSA, HSA money rolls over year to year and never expires, so you can save it for future medical costs or retirement.
  • Once your HSA balance reaches a certain threshold (usually $1,000 to $2,500 depending on the provider), you can invest the money in stocks, bonds, or mutual funds instead of leaving it in cash.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

How money enters the account and what it costs you

You contribute money to your HSA either through payroll deduction or by depositing it yourself. If your employer offers an HSA, they usually set up payroll deduction, which means the contribution comes straight from your paycheck before taxes are calculated. This reduces your taxable income for the year. If you do not have employer payroll deduction, you can open an HSA with a bank or financial institution and deposit money yourself, then deduct the contribution on your tax return when you file.

The IRS sets annual contribution limits, which vary by whether you have individual coverage or family coverage under your HDHP. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. These limits change each year. If you are age 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution. You cannot contribute more than the limit, and if you do, you owe taxes and penalties on the excess.

There is no cost to open an HSA itself, though some providers charge monthly maintenance fees (typically $2 to $5) or per-transaction fees. Shop around — many banks and financial institutions offer HSAs with no fees if you maintain a minimum balance or set up direct deposit.

What happens when you spend the money on medical bills

When you have a medical expense, you can pay for it with your HSA debit card, check, or bank transfer, depending on what your HSA provider offers. The withdrawal is tax-free as long as the expense is may have access to — meaning it is a medical cost that the IRS recognizes. may have access to expenses include doctor visits, hospital stays, prescription medications, dental work, vision care, hearing aids, crutches, wheelchairs, and some over-the-counter medications (but only if prescribed by a doctor).

You do not have to spend your HSA money in the year you contribute it. You can let it sit in the account and spend it years later. This is different from an FSA, where unused money is forfeited at the end of the year. Some people use their HSA as a long-term savings vehicle, paying for medical expenses out of pocket and letting the HSA balance grow and invest.

Keep receipts and documentation for every withdrawal. The IRS can audit your HSA and ask you to prove that withdrawals were for may have access to expenses. If you cannot prove it, you owe income tax on the withdrawal plus a 20 percent penalty.

How the money grows if you do not spend it right away

When your HSA balance reaches a certain threshold — usually $1,000 to $2,500, depending on the provider — you can invest the money instead of leaving it in a savings account. Investment options typically include mutual funds, index funds, stocks, and bonds. Any growth from investments is not taxed, and you can withdraw it tax-free for medical expenses at any time.

This makes an HSA different from a regular savings account. If you have a low medical expense year and your HSA balance grows, you are building a tax-free medical reserve. Some people treat their HSA like a retirement account, investing aggressively and planning to use it for medical costs in retirement.

If your HSA is invested and the market drops, your balance can decrease. You bear the investment risk, just as you would with a 401(k) or IRA. Some HSA providers offer a cash sweep feature, which automatically moves money back into savings if the market declines sharply, but not all do.

What you can and cannot use HSA money for

may have access to medical expenses are specific. You can use HSA money for copays, coinsurance, deductibles, prescription drugs, dental work, vision care, mental health treatment, physical therapy, and medical equipment like glucose monitors or blood pressure cuffs. You can also use it for some over-the-counter items, but only if a doctor prescribes them in writing — for example, a prescribed topical cream or a prescribed pain reliever.

You cannot use HSA money for cosmetic procedures, gym memberships, vitamins (unless prescribed), or health insurance premiums (with a few exceptions: you can use it for COBRA premiums, Medicare premiums after age 65, or long-term care insurance premiums). If you use HSA money for a non-may have access to expense, you owe income tax on the withdrawal plus a 20 percent penalty.

The IRS publishes a detailed list of may have access to expenses on its website. When in doubt, check the list or ask your HSA provider before withdrawing.

What happens to your HSA if you change jobs or leave your HDHP

Your HSA stays with you. It is not tied to your employer or your health plan — it is your personal account. If you change jobs, you keep the HSA and the money in it. If you switch to a different health plan that is not an HDHP, you can no longer contribute new money to the HSA, but the money already in it stays there and you can still withdraw it for may have access to medical expenses.

If you leave your HDHP and enroll in a different type of health insurance (like a PPO or HMO), you have a 30-day grace period during which you can still contribute to your HSA for that month. After that, contributions stop. The account itself does not close — it just becomes inactive until you re-enroll in an HDHP.

If you move your HSA to a different bank or financial institution, you can do a trustee-to-trustee transfer, which moves the money without triggering taxes or penalties. This is different from a withdrawal, which would be taxed if used for non-medical expenses.

HSA withdrawals after age 65 and what changes

After you turn 65, the rules shift. You can withdraw money from your HSA for any reason without the 20 percent penalty. However, if the withdrawal is not for a may have access to medical expense, you owe income tax on it — just as you would with a traditional IRA. This makes the HSA function like a retirement account after 65: you can use it for medical costs tax-free, or use it for living expenses and pay income tax on the withdrawal.

Many people use their HSA as a supplemental retirement savings account for this reason. They contribute the maximum each year, invest the money, and plan to use it for medical expenses in retirement. If they do not need it all for medical costs, they can withdraw the remainder and pay income tax on it, similar to a traditional IRA withdrawal.

Medicare enrollment does not automatically disqualify you from HSA ownership, but it does affect your ability to contribute. Once you enroll in Medicare Part A, you can no longer contribute to an HSA. You can still withdraw money from an existing HSA for may have access to medical expenses, including Medicare premiums, copays, and deductibles.

Frequently Asked Questions

Can I use my HSA debit card at any pharmacy or doctor's office?

Most pharmacies and doctor's offices accept HSA debit cards, but not all. Some smaller practices or specialty clinics may not have the infrastructure to process HSA payments. If your provider does not accept the card, you can pay out of pocket and then submit a receipt to your HSA provider for reimbursement. Keep all receipts for at least three years in case of an audit.

What happens if I withdraw money from my HSA for a non-medical expense?

You owe income tax on the withdrawal plus a 20 percent penalty, unless you are age 65 or older (in which case you owe only income tax, no penalty). 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 penalties, for a total of $420. Keep records of all withdrawals to prove they were medical if audited.

Can I have both an HSA and an FSA at the same time?

No. If you have an FSA through your employer, you cannot open or contribute to an HSA in the same year. However, you can have a limited-purpose FSA (which covers only dental and vision expenses) and an HSA at the same time. Ask your employer's benefits administrator which option is available to you.

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

Unlike an FSA, HSA money does not expire. It rolls over to the next year and the year after that, indefinitely. You can accumulate a large balance over time and use it whenever you have medical expenses. Some people intentionally save their HSA balance for retirement medical costs.

Can I invest my entire HSA balance, or do I have to keep some in cash?

Most HSA providers require you to keep a minimum amount in cash (usually $1,000 to $2,500) before you can invest the rest. This ensures you have money available for immediate medical expenses. Once you meet the minimum, you can invest the remainder. Check your provider's rules — they vary.