A Health Savings Account Lets You Set Aside Pre-Tax Money to Pay Medical Bills

A Health Savings Account (HSA) is a bank account you own that holds money specifically for medical expenses. The money you put in is not taxed by the federal government, and you can withdraw it tax-free when you use it to pay for doctor visits, prescriptions, dental work, vision care, and other medical costs. You can only open an HSA if you are enrolled in a high-deductible health plan (HDHP) — a type of health insurance with lower monthly premiums but higher out-of-pocket costs before insurance kicks in.

The account belongs to you, not your employer or your insurance company. Money you do not spend in a given year stays in the account and rolls over to the next year. You can invest the balance if you want it to grow, and you can take the account with you if you change jobs or retire. This makes an HSA different from a flexible spending account (FSA), which is also tax-advantaged but which you lose if you leave your job and which does not roll over unused money.

Key Takeaways

  • You can only open an HSA if your health insurance is a high-deductible plan, which means lower premiums but higher deductibles and out-of-pocket maximums.
  • Money you contribute to an HSA is not taxed, and withdrawals for medical expenses are not taxed, which saves you money compared to paying medical bills with after-tax income.
  • The account is yours to keep even if you change jobs, and unused money rolls over each year instead of disappearing.
  • You can use HSA funds to pay for a wide range of medical costs including insurance deductibles, copays, prescriptions, dental work, vision care, and medical equipment.
  • If you withdraw HSA money for non-medical expenses before age 65, you pay income tax on the withdrawal plus a 20 percent penalty.

How an HSA Saves You Money on Taxes

The tax advantage works in three ways. First, money you contribute to your HSA reduces your taxable income for the year. If you earn $50,000 and put $3,000 into an HSA, the IRS treats your income as $47,000 for tax purposes. Second, any interest or investment gains your HSA balance earns are not taxed. Third, when you withdraw money to pay for medical expenses, that withdrawal is not taxed either.

Compare this to paying a medical bill with a regular paycheck: you earn the money, pay income tax on it, then use what is left to pay the bill. With an HSA, you skip the tax step entirely. The larger your HSA balance and the longer you hold it, the more you benefit from the investment growth and the compounding effect. Some people treat an HSA as a retirement savings tool precisely because of this — they pay medical expenses out of pocket and let the HSA grow untouched.

What Medical Expenses You Can Pay With HSA Money

The IRS maintains a list of approved medical expenses. Common ones include insurance deductibles, copays, coinsurance, and out-of-pocket maximums. You can also use HSA funds for prescription medications, over-the-counter drugs (with a doctor's prescription), dental work, vision care including glasses and contacts, hearing aids, mental health treatment, physical therapy, and medical equipment like crutches or blood pressure monitors.

Some expenses are less obvious but still covered: acupuncture, chiropractic care, fertility treatment, and certain cosmetic procedures if they treat a medical condition (like surgery to correct a deviated septum). Expenses that are not covered include cosmetic procedures done purely for appearance, most vitamins and supplements, gym memberships, and weight-loss programs unless prescribed by a doctor for a specific medical condition.

You do not have to use HSA money only for your own medical expenses. You can pay for the medical costs of your spouse and dependents, even if they are not covered by your health insurance plan. Keep receipts for all HSA withdrawals — you do not have to submit them to the IRS, but you need them if the IRS ever audits your account.

Contribution Limits and Who Can Contribute

The IRS sets annual contribution limits, and they change each year. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. These limits apply to all contributions combined — whether you contribute through payroll deductions, your employer contributes, or you contribute on your own. If you are age 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution.

You can only contribute to an HSA during the months you are enrolled in an HDHP. If you switch to a different type of health insurance mid-year, you can no longer contribute for the rest of that year, though you can still withdraw money from your existing HSA balance. If you have other health coverage — such as a spouse's non-HDHP plan or Medicare — you cannot contribute to an HSA, even if you also have an HDHP.

What Happens to Money You Do Not Spend

Unlike a flexible spending account, HSA money does not disappear at the end of the year. Any balance you do not spend rolls over to the next year and stays in your account indefinitely. This means you can build up a reserve over time and use it to cover large medical expenses in future years, or even in retirement.

If you invest your HSA balance, the growth is not taxed as long as you eventually use the money for medical expenses. Some people deliberately keep their HSA balance invested and pay medical expenses out of pocket, allowing the account to grow like a retirement account. After age 65, you can withdraw HSA money for any reason without penalty — you will owe income tax on non-medical withdrawals, but not the 20 percent penalty that applies before age 65.

Penalties and Rules for Non-Medical Withdrawals

If you withdraw HSA money before age 65 and use it for something other than a may have access to medical expense, you owe income tax on the withdrawal 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. This makes non-medical withdrawals expensive and is why HSAs are best used only for their intended purpose.

If you lose your HDHP coverage and switch to a different type of health insurance, you can no longer contribute to the HSA, but you keep the account and can continue to withdraw money for medical expenses tax-free. If you become ineligible for an HSA for any reason other than turning 65, you can still withdraw your balance, but non-medical withdrawals will be subject to the penalty.

How to Open and Manage an HSA

You open an HSA through a bank, credit union, or financial institution that offers HSA accounts. Your employer may offer one through payroll, in which case contributions are deducted automatically from your paycheck before taxes. If your employer does not offer an HSA, you can open one on your own at any financial institution that administers them. You will need to show proof that you are enrolled in an HDHP — your insurance company or employer can provide this.

Once the account is open, you can choose how to manage the balance. You can leave it in a savings account earning interest, or you can invest it in stocks, bonds, or mutual funds through the HSA provider. Most HSA providers offer a debit card that lets you pay medical expenses directly from the account. Keep records of what you spend and what receipts you have, because you may need them to prove the withdrawal was for a may have access to medical expense.

Frequently Asked Questions

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

You cannot use HSA money to pay your regular monthly health insurance premium. You can use it to pay your deductible, copays, and coinsurance once you have enrolled. The one exception is COBRA continuation coverage or premiums you pay while receiving unemployment benefits — those can be paid with HSA funds.

What if I have both an HSA and a spouse's FSA?

You can have an HSA and your spouse can have an FSA, but you cannot have both at the same time yourself. If you are married and file taxes jointly, your spouse's FSA does not prevent you from opening an HSA as long as you are enrolled in an HDHP. However, if your spouse's FSA covers you as a dependent, you become ineligible for an HSA.

Do I lose my HSA if I retire?

No. Your HSA stays with you after you retire. You can continue to withdraw money for medical expenses tax-free. After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are subject to income tax.

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

Yes, as long as your child is your dependent for tax purposes. You can use HSA funds to pay for their doctor visits, prescriptions, dental work, and other medical costs, even if they are covered by a different health insurance plan.

What if I move to a different state?

Your HSA moves with you. The account is federal, not state-specific, so changing states does not affect your HSA or your ability to use it. You can continue to withdraw money for medical expenses tax-free regardless of where you live.