A Health Savings Account is a tax-advantaged savings account tied to a high-deductible health plan

A Health Savings Account (HSA) is a savings account you own that holds money specifically for medical expenses. You contribute pre-tax dollars to it, the money grows tax-free, and you withdraw it tax-free when you pay for may have access to medical costs. Unlike a flexible spending account (FSA), which you lose if you don't spend the money by year-end, an HSA rolls over year to year — the balance stays yours indefinitely.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) through your employer, the individual market, or Medicare Advantage. You cannot have other health coverage at the same time, and you cannot be claimed as a dependent on someone else's tax return. Once you meet those conditions, you can open an HSA through a bank, credit union, or investment firm — not through your health plan itself, though your plan documents will tell you which institutions offer HSAs compatible with your coverage.

The account works in three parts: money goes in (contribution), sits and potentially grows (investment), and comes out (withdrawal). Each part has tax rules. Understanding how they connect tells you whether an HSA makes sense for your situation and how to use it without penalties.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan and have no other health coverage, including Medicare Part A or B.
  • Contributions reduce your taxable income whether you contribute through payroll or on your own, and the money grows tax-free inside the account.
  • Withdrawals for may have access to medical expenses — deductibles, copays, prescriptions, dental, vision, and many other costs — are tax-free; non-medical withdrawals are taxed as income plus a 20 percent penalty before age 65.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are still taxed as regular income.
  • An HSA is portable: it stays with you if you change jobs, leave your HDHP, or retire, as long as you do not violate the coverage rules.

Contribution limits and how the money enters your account

The IRS sets annual contribution limits that change each year. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. If you are 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution. These limits apply to all your HSAs combined — if you have two HSAs, your total contributions across both cannot exceed the annual limit.

Money enters your HSA in two ways. If your employer offers an HSA, you can contribute through payroll deduction, which means the money comes out before taxes are calculated on your paycheck. This is the most common route and saves you both income tax and payroll tax (Social Security and Medicare tax). If you do not have employer coverage or want to contribute beyond what your employer offers, you can deposit money directly to your HSA and deduct it on your tax return when you file.

You do not have to contribute the maximum. You can contribute any amount up to the limit, and you can change your contribution amount or stop contributing at any time. If you leave your job mid-year, you can still contribute for the months you were covered by an HDHP, prorated to the number of months you were may be able to access.

What counts as a may have access to medical expense

The IRS maintains a detailed list of may have access to medical expenses. The broad categories include insurance premiums (for long-term care insurance and COBRA continuation coverage, though not regular health insurance premiums while you are working), deductibles, copays, coinsurance, and out-of-pocket costs. Prescription medications and over-the-counter drugs (with a prescription from your doctor) may have access to. Dental work, vision care, hearing aids, and mental health treatment all count.

Some expenses surprise people. Acupuncture, chiropractic care, and physical therapy are covered if a doctor prescribes them. Insulin and diabetes supplies are covered. Crutches, wheelchairs, and other durable medical equipment are covered. Fertility treatments and certain reproductive health services are covered. Gym memberships are not covered unless they are prescribed by a doctor as treatment for a specific condition, and even then the IRS scrutinizes them closely.

The rule is simple: if it is a medical expense that would normally be deductible on your tax return, it is a may have access to HSA expense. The IRS publishes Publication 502, which lists hundreds of specific items. When in doubt, you can ask the IRS directly or consult a tax professional, but most common medical costs — doctor visits, hospital stays, lab work, imaging, medications — are covered.

How withdrawals work and what happens if you use the money wrong

You withdraw money from your HSA by writing a check, using a debit card (if your HSA provider issues one), or requesting a transfer to your bank account. You do not need to submit receipts to your HSA provider when you withdraw — the burden of proving the expense was may have access to falls on you if the IRS ever audits you. Keep receipts and medical records for at least three years after you file the tax return for the year you made the withdrawal.

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 reason before age 65, you owe income tax on the amount withdrawn plus a 20 percent penalty. For example, if you withdraw $1,000 for a non-medical reason and you are in the 22 percent tax bracket, you owe $220 in income tax plus $200 in penalty, for a total of $420 out of the $1,000 you withdrew.

After age 65, the penalty disappears. You can withdraw money for any reason without the 20 percent penalty. Non-medical withdrawals are still taxed as ordinary income, but the penalty no longer applies. This is why an HSA becomes more like a traditional retirement account after 65 — the tax advantage remains for medical expenses, but the penalty for other uses goes away.

Investment options and how your balance can grow

Most HSA providers let you invest your balance in mutual funds, stocks, bonds, or money market funds, similar to a brokerage account. Some providers require you to keep a minimum balance (often $1,000 to $2,500) in cash before you can invest the rest. Others let you invest everything immediately. The investment options vary by provider — a bank-based HSA might offer only savings accounts and CDs, while a brokerage-based HSA offers hundreds of mutual funds and ETFs.

Any gains from investments — dividends, capital gains, interest — are tax-free as long as you eventually use the money for may have access to medical expenses. If you withdraw invested money for a non-medical reason, you owe tax on the gains plus the 20 percent penalty (before age 65). This makes HSAs powerful long-term savings vehicles: you can contribute pre-tax money, invest it for decades, and withdraw it tax-free for medical expenses in retirement.

You are not required to invest your HSA balance. You can leave it in a cash account earning minimal interest. Many people do this if they expect to use the money within a few years for known medical expenses. Others invest aggressively if they do not anticipate needing the money soon and want to build a medical expense reserve for retirement.

Portability and what happens when you change jobs or leave your HDHP

Your HSA belongs to you, not your employer. If you leave your job, change health plans, or retire, your HSA stays with you. You can keep the account open indefinitely, even if you are no longer enrolled in an HDHP, as long as you do not make new contributions. This is a key difference from an FSA, which you typically lose when you leave your job.

If you leave your HDHP and enroll in a different type of health plan (a PPO, HMO, or traditional plan), you can no longer contribute to your HSA, but you can continue to withdraw money from it for may have access to medical expenses. If you later re-enroll in an HDHP, you can resume contributions. The account itself never closes unless you close it intentionally.

Some people use this portability strategically. They contribute aggressively to an HSA while enrolled in an HDHP, then leave the HDHP and let the balance grow untouched for years. When they retire and face significant medical expenses, they withdraw from the accumulated balance tax-free. This strategy requires discipline — you cannot contribute once you leave the HDHP, so the balance only grows through investment returns or by not touching it.

HSA versus FSA: the main differences

A Flexible Spending Account (FSA) is a different account offered by many employers. Both are tax-advantaged, but they work differently. An FSA requires you to estimate your medical expenses for the year and contribute that amount through payroll. Any money you do not spend by the end of the year is forfeited — you lose it. An HSA has no "use it or lose it" rule; your balance rolls over forever.

An FSA does not require you to be enrolled in a high-deductible plan. You can have an FSA with any health plan. An HSA requires an HDHP and no other coverage. An FSA is portable only if your employer offers a COBRA continuation option; otherwise, you lose the account when you leave. An HSA is always portable.

An FSA typically offers lower contribution limits (usually $3,200 per year) than an HSA. An FSA cannot be invested; the money sits in a cash account. An HSA can be invested. For most people, an HSA is more flexible and powerful, but if your employer does not offer an HDHP or you prefer the simplicity of a use-it-or-lose-it account, an FSA may be the only option available to you.

Frequently Asked Questions

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

No. If you have an FSA, you cannot open or contribute to an HSA in the same year. The only exception is a limited-purpose FSA, which covers only dental and vision expenses — you can have both a limited-purpose FSA and an HSA. Ask your employer whether they offer a limited-purpose FSA if you want both accounts.

What happens to my HSA if I turn 65 and enroll in Medicare?

You can keep your HSA after you enroll in Medicare, but you cannot make new contributions once you are on Medicare Part A or B. You can continue to withdraw money for may have access to medical expenses tax-free. After 65, non-medical withdrawals are taxed as income but no longer subject to the 20 percent penalty.

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

Yes, as long as your spouse is not covered by another health plan. You can withdraw HSA money tax-free for any family member's may have access to medical expenses, even if they are not on your health insurance. Keep receipts showing the expense and the family member's name.

What if I withdraw money and later find out it was not a may have access to expense?

You owe income tax and the 20 percent penalty on that withdrawal (if you are under 65). You cannot undo the withdrawal, but you can correct it by reporting it on your tax return. If the IRS audits you, bring documentation showing why you believed the expense was may have access to. Mistakes are common, and the IRS generally does not penalize good-faith errors if you can show your reasoning.

Can I roll over money from another retirement account into my HSA?

Yes, but only from another HSA or from an IRA. A one-time HSA rollover from an IRA is allowed, and the amount rolled over does not count toward your annual contribution limit. This is a specialized strategy; consult a tax professional before attempting it, as the rules are strict and mistakes trigger penalties.