A health savings account holds money you set aside for medical costs, and the money you don't spend stays in the account to grow
A health savings account (HSA) is a bank account tied to a high-deductible health insurance plan. You put pre-tax money into it, use it to pay for medical expenses, and any balance you don't spend rolls forward to the next year. The account earns interest or investment returns, so the money can grow over time. Unlike a flexible spending account (FSA), which forces you to spend the money or lose it each year, an HSA is yours to keep and use whenever you need it.
The account works because of the tax structure: money you contribute reduces your taxable income, withdrawals for medical costs are tax-free, and the account itself grows tax-free. This makes an HSA different from paying medical bills out of your regular paycheck, where you use after-tax dollars.
Key Takeaways
- You can only open an HSA if you have a high-deductible health plan (HDHP), which means your deductible is at least $1,600 for individual coverage or $3,200 for family coverage in 2024.
- Money you contribute is not taxed, money you withdraw for medical costs is not taxed, and any balance you don't spend stays in the account year after year.
- You can use HSA funds to pay for doctor visits, prescriptions, dental work, vision care, and many other medical expenses, but not for insurance premiums or over-the-counter items without a prescription.
- After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.
How money flows in and out of an HSA
You contribute money to your HSA through payroll deduction (if your employer offers it) or by depositing money yourself. The contribution limit for 2024 is $4,150 for individual coverage or $8,300 for family coverage. If you contribute through payroll, the money comes out before taxes are calculated, which lowers your taxable income for the year. If you contribute on your own, you can deduct the contribution on your tax return.
When you have a medical expense, you can pay for it out of pocket and then withdraw the same amount from your HSA, or you can use your HSA debit card (if your account comes with one) to pay directly. The withdrawal is tax-free as long as the expense qualifies. You do not have to withdraw money immediately after an expense—you can let it sit in the account and withdraw it months or years later, as long as you can document that the expense happened.
Any money left in the account at the end of the year does not disappear. It rolls forward, and you can use it next year or any year after that. This is the key difference from an FSA, where unspent money is forfeited.
What medical expenses you can pay for with HSA funds
You can use HSA money for a wide range of medical costs: doctor visits, hospital stays, surgery, prescription medications, dental work, vision care (including glasses and contact lenses), hearing aids, and mental health treatment. You can also pay for medical equipment like crutches, wheelchairs, or blood pressure monitors. Physical therapy, chiropractic care, and acupuncture count if a doctor prescribes them.
Over-the-counter medications like pain relievers or cold medicine do not count unless you have a prescription from a doctor. Health insurance premiums themselves do not count, but you can use HSA funds to pay for COBRA coverage (continuation of health insurance after job loss) or Medicare premiums once you turn 65.
Cosmetic procedures do not count unless they are medically necessary—for example, reconstructive surgery after an injury or birth defect would count, but a facelift would not. If you are unsure whether an expense qualifies, your HSA provider can tell you, or you can check IRS Publication 502, which lists all approved medical expenses.
How an HSA grows over time
Unlike a regular savings account where money just sits, an HSA can be invested. Most HSA providers let you invest your balance in mutual funds, stocks, or bonds, similar to a 401(k). The money you invest grows tax-free, and you pay no tax on the gains when you withdraw it for medical expenses. This means an HSA can function as a long-term savings tool, not just a way to pay this year's medical bills.
If you do not invest the money, it typically earns a small amount of interest in a savings account within the HSA. The interest rate varies by provider. Some people use their HSA as a retirement account by investing aggressively, paying medical expenses out of pocket, and letting the HSA balance grow for decades. After age 65, you can withdraw money for any reason, though non-medical withdrawals are taxed as regular income.
What happens if you use HSA money for non-medical expenses
If you withdraw money from your HSA for something that is not a may have access to medical expense, you owe income tax on that amount plus a 20 percent penalty. For example, if you withdraw $500 for a non-medical expense and you are in the 22 percent tax bracket, you would owe $110 in taxes plus $100 in penalty, for a total of $210. This penalty applies until you turn 65, at which point you can withdraw money for any reason without the penalty (though you still owe income tax on non-medical withdrawals).
Your HSA provider should send you documentation of all withdrawals each year. If you cannot document that a withdrawal was for a medical expense, the IRS may assess the penalty if you are audited. Keep receipts and records of medical expenses so you can prove the withdrawal was legitimate if needed.
HSA rules if you change jobs or lose coverage
Your HSA belongs to you, not your employer. If you leave your job, the account stays open and the money stays yours. You can continue to use it for medical expenses, and you can keep investing it. You do not have to close it or transfer it to a new employer's plan.
If you lose your high-deductible health plan coverage—for example, because you switch to a regular health plan—you can no longer make new contributions to your HSA. However, the money already in the account stays there and you can still withdraw it for medical expenses. If you later re-enroll in a high-deductible plan, you can start contributing again.
If you have a spouse with their own high-deductible plan, you each have separate HSAs. If you are on a family plan together, you share one HSA with a higher contribution limit ($8,300 in 2024 instead of $4,150).
HSA versus other ways to save for medical costs
An HSA is different from a flexible spending account (FSA), which is also tied to your health plan but forces you to spend the money each year or lose it. An FSA has a lower contribution limit ($3,300 in 2024) and does not roll over. An HSA is better if you want to save money long-term, but an FSA might be better if you have predictable medical expenses each year and want to use all the money.
An HSA is also different from a regular savings account or a 529 education savings plan. With a regular savings account, you use after-tax dollars and pay tax on the interest. With an HSA, all three layers—contributions, growth, and withdrawals—are tax-free as long as you use the money for medical costs. This makes an HSA one of the most tax-efficient savings tools available.
Frequently Asked Questions
Can I use my HSA to pay for my spouse's or child's medical expenses?
Yes. As long as the person is your spouse or dependent, you can use your HSA to pay for their medical expenses, even if they are not on your health insurance plan. You do not need to be the one receiving the care to use HSA funds for it.
What happens to my HSA if I die?
The HSA becomes part of your estate. If your spouse is the beneficiary, they can continue to use it as an HSA and withdraw money tax-free for their own medical expenses. If a non-spouse inherits it, they must withdraw the full balance and pay income tax on it, though they do not pay the 20 percent penalty.
Can I withdraw money from my HSA before I turn 65 for non-medical reasons?
Yes, but you will owe income tax on the withdrawal plus a 20 percent penalty. After age 65, you can withdraw money for any reason without the penalty, though you still owe income tax on non-medical withdrawals.
Do I have to use my HSA every year or I lose the money?
No. Unlike an FSA, money in an HSA rolls over every year. You can let it sit for decades if you want. There is no deadline to spend it, and you can withdraw it whenever you have a medical expense.
Can I open an HSA if my employer does not offer one?
Yes. You can open an HSA on your own through a bank or financial institution, as long as you have a high-deductible health plan. You contribute the money yourself instead of through payroll, but you can still deduct the contribution on your tax return.