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 paired with a high-deductible health plan. You contribute money before taxes are taken out of your paycheck, use it to pay for may have access to medical expenses, 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 balance grows and compounds if you don't touch it.
The account is owned by you, not your employer. If you change jobs or leave your employer, the account goes with you. You can invest the balance in mutual funds or leave it in cash, depending on what your HSA provider offers. The money you withdraw for may have access to medical expenses is never taxed, and the growth on invested balances is tax-free as well.
Key Takeaways
- You can only open an HSA if you are enrolled in a high-deductible health plan (HDHP), and you cannot have other health coverage like Medicare or a spouse's non-HDHP plan at the same time.
- Contributions reduce your taxable income whether you contribute through payroll deduction or deposit money yourself, and contribution limits change each year based on whether you have individual or family coverage.
- Withdrawals for may have access to medical expenses—doctor visits, prescriptions, dental work, vision care, and many other costs—are never taxed, but withdrawals for non-medical expenses are taxed as income plus a 20 percent penalty before age 65.
- You can withdraw money at any time for any reason, but only medical expenses avoid the tax penalty, and you must keep receipts to prove expenses were may have access to if the IRS asks.
- After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as regular income.
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 each year based on deductible and out-of-pocket limits. For 2024, an individual HDHP must have a deductible of at least $1,600 and out-of-pocket maximum of no more than $8,050; a family HDHP must have a deductible of at least $3,200 and out-of-pocket maximum of no more than $16,100. These numbers change annually.
You cannot have an HSA if you are covered by Medicare, enrolled in a non-HDHP plan (including a spouse's plan), or claimed as a dependent on someone else's tax return. You also cannot contribute if you have a health FSA or dependent care FSA, though some employers offer limited-purpose FSAs that work alongside an HSA.
You can open an HSA through your employer's payroll system, through a bank or financial institution that offers HSAs, or through a third-party HSA administrator. If you open one outside of payroll, you contribute after-tax dollars and then deduct the contribution on your tax return.
How much you can contribute each year
The IRS sets annual contribution limits, which vary by coverage type and change each year. For 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage. If you are age 55 or older, you can add an extra $1,000 catch-up contribution. These limits reset on January 1 each year.
If you enroll in an HDHP partway through the year, you can still contribute the full annual amount if you remain enrolled through December 31 and do not have other health coverage. If you drop the HDHP before the year ends, you can only contribute a prorated amount for the months you were covered.
Contributions through payroll are deducted before income tax and Social Security tax are calculated, lowering your taxable income. If you contribute outside of payroll, you deduct the amount on your tax return (Form 1040, Schedule 1). Either way, the contribution reduces what you owe in federal income tax.
What counts as a may have access to medical expense
may have access to medical expenses include most healthcare costs: doctor visits, hospital stays, surgery, prescription medications, dental work, vision care, hearing aids, and mental health treatment. They also include medical equipment like crutches, wheelchairs, and blood pressure monitors; over-the-counter medications like pain relievers and allergy medicine (as of 2020); and health insurance premiums you pay while unemployed or for long-term care insurance.
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 medications or medical devices. Teeth whitening, hair loss treatments, and weight loss programs are not covered unless medically necessary and documented by a doctor.
You do not need to submit receipts to your HSA provider when you withdraw money. However, you must keep receipts and documentation for at least three years in case the IRS audits you and asks you to prove that withdrawals were for may have access to expenses. If you cannot prove an expense was may have access to, the IRS will tax the withdrawal as income and may assess the 20 percent penalty.
How to withdraw money and what happens if you use it for non-medical expenses
You can withdraw money from your HSA at any time using a debit card, check, or electronic transfer, depending on what your provider offers. Many HSA providers issue a debit card that works like a regular bank card. Some allow you to submit receipts for reimbursement after you pay out of pocket. Others require you to request a withdrawal and wait a few business days for the transfer.
If you withdraw money for a may have access to medical expense, the withdrawal is tax-free and penalty-free, regardless of your age. If you withdraw money for a non-medical expense before age 65, you owe income tax on the amount plus a 20 percent 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 income tax plus $200 in penalty, for a total of $420.
After age 65, you can withdraw money for any reason without the 20 percent penalty. Non-medical withdrawals are still taxed as regular income, but the penalty goes away. This makes an HSA function like a traditional retirement account after 65, though it remains more flexible because you can still withdraw for medical expenses tax-free at any age.
How HSA money grows and what happens when you change jobs
Any balance you do not spend in a given year stays in the account and earns interest or investment returns, depending on how you invest it. Some HSA providers keep balances in a cash account earning a small interest rate. Others let you invest in mutual funds, index funds, or other securities. The growth on invested balances is tax-free, and you never pay tax on the earnings as long as you use withdrawals for may have access to medical expenses.
The HSA belongs to you, not your employer. If you leave your job, change employers, or retire, the account goes with you. You can transfer the balance to a new HSA provider, roll it into an HSA offered by your new employer, or keep it where it is. There is no time limit on how long you can hold the money, and no requirement to spend it by a certain age.
If your new employer offers an HSA, you can choose to keep your existing account or open a new one with the employer's provider. Some people keep multiple HSAs, though you cannot exceed the annual contribution limit across all accounts combined. If you have more than one HSA, you must track contributions carefully to avoid over-contributing.
How HSAs interact with Medicare and retirement
Once you enroll in Medicare, you can no longer make contributions to an HSA. However, you can continue to withdraw money from an existing HSA for may have access to medical expenses, and those withdrawals remain tax-free. Many people use HSAs to pay for Medicare premiums, deductibles, copayments, and coinsurance.
An HSA can be a powerful retirement savings tool because the balance grows tax-free and you can use it to pay for medical expenses throughout retirement. Some people intentionally do not withdraw from their HSA during working years, allowing the balance to compound, and then use it to cover healthcare costs in retirement. After age 65, non-medical withdrawals are taxed but not penalized, making the account similar to a traditional IRA at that point.
If you die, your HSA passes to your beneficiary according to your will or the beneficiary designation you set with your provider. If your spouse is the beneficiary, they can treat the HSA as their own. If a non-spouse beneficiary inherits the account, they must pay income tax on the full balance, though they can still use it to pay for the deceased person's may have access to medical expenses incurred before death.
Frequently Asked Questions
Can I use my HSA to pay for my family members' medical expenses?
Yes. You can withdraw money to pay for may have access to medical expenses of your spouse and dependents, even if they are not covered by your health plan. You do not need to be the one receiving the care or the one paying the provider directly. Keep receipts showing the expense and who it was for.
What happens if I withdraw money and later find out the expense was not may have access to?
You owe income tax and the 20 percent penalty on that withdrawal, even if you did not know the expense was not may have access to at the time. The IRS does not waive the penalty based on mistake or misunderstanding. If you discover this after filing your tax return, you can file an amended return to report the additional income and penalty.
Can I use my HSA to pay for health insurance premiums?
You can use HSA money to pay premiums for long-term care insurance and health insurance while you are unemployed and receiving unemployment benefits. You cannot use it for premiums on your employer's health plan or for Medicare premiums while you are still working, though you can use it for Medicare premiums after you retire.
Do I have to use my HSA money by the end of the year?
No. Unlike a flexible spending account, an HSA has no "use it or lose it" rule. Money rolls over indefinitely, and you can withdraw it years or decades after you contribute it. There is no deadline to spend the balance.
What if my employer contributes to my HSA?
Employer contributions count toward your annual limit and are not taxed as income to you. If your employer contributes $2,000 and you contribute $2,150, your total contribution is $4,150 (the 2024 individual limit), and you cannot contribute more that year. Employer contributions are deductible by the employer and reduce your taxable income.