A Health Savings Account is a tax-advantaged bank account you own and control

A Health Savings Account (HSA) is a savings 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 stays in the account and grows year to year. Unlike a flexible spending account (FSA), which forces you to spend the money or lose it, an HSA is yours to keep. You can invest the balance, withdraw it in retirement, and pass it to your heirs if you don't use it.

The account is held at a bank or financial institution you choose—not your employer or insurance company, though your employer may help you set one up. You control what you spend it on and when. The money is yours from the moment it goes in.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan (HDHP), and you cannot be claimed as a dependent or covered by other health insurance.
  • Contributions are tax-deductible, withdrawals for medical expenses are tax-free, and money you don't spend rolls over and grows year after year.
  • You can use HSA funds for doctor visits, prescriptions, dental work, vision care, mental health treatment, and many other medical costs—but not for insurance premiums or cosmetic procedures.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.
  • Some HSAs let you invest the balance in stocks and bonds, turning it into a long-term retirement savings tool rather than just a spending account.

Who can open an HSA and what the enrollment rules are

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). The IRS sets the minimum deductible each year—for 2024, that is $1,600 for individual coverage and $3,200 for family coverage. Your plan's out-of-pocket maximum (the most you pay before insurance covers everything) also has to stay within IRS limits. If your employer offers a standard plan with a lower deductible, you cannot use an HSA while covered by that plan.

You also cannot have other health coverage at the same time. This means no spouse's plan, no Medicare, no Medicaid, and no Veterans Affairs coverage. If you are claimed as a dependent on someone else's tax return, you cannot open an HSA. These rules exist because the account is meant to pair with a specific type of insurance—if you have backup coverage elsewhere, the tax advantage disappears.

You can open an HSA through your employer's benefits plan, through your insurance company, or independently at a bank or financial institution. If you set one up on your own, you will contribute after-tax dollars and claim the deduction on your tax return—the result is the same, but the paperwork is on you.

How much you can contribute and what the tax benefit is

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

Money you put into an HSA reduces your taxable income. If your employer deducts contributions from your paycheck before taxes, you see the benefit immediately in your take-home pay. If you contribute on your own, you deduct it on your tax return. Either way, you avoid federal income tax, Social Security tax, and Medicare tax on that money.

When you withdraw money to pay for medical expenses, that withdrawal is also tax-free. This double tax advantage—no tax going in, no tax coming out—is what makes an HSA different from a regular savings account. If you withdraw money for something that is not a medical expense, you pay income tax on it plus a 20 percent penalty (though the penalty goes away after age 65).

What medical expenses you can pay for with HSA funds

HSA funds cover a broad range of medical costs. You can use them for doctor visits, hospital stays, surgery, prescription medications, and mental health counseling. Dental work—fillings, cleanings, root canals, orthodontics—is covered. Vision care, including eye exams, glasses, and contact lenses, is covered. You can also pay for hearing aids, physical therapy, acupuncture, and many other treatments.

Over-the-counter items are covered only if a doctor prescribes them. Aspirin, allergy medicine, or cold medicine you buy on your own is not covered. But if your doctor writes a prescription for any of these, the HSA will pay for it. Insulin is always covered, even without a prescription.

Some things that sound medical are not covered. Cosmetic procedures—teeth whitening, Botox, hair removal—are not covered unless they treat a medical condition. Health club memberships and vitamins are not covered. Maternity clothes are not covered, but childbirth and prenatal care are. If you are unsure whether something qualifies, the IRS publishes a full list, and your HSA provider can also tell you.

How HSA money rolls over and grows year to year

Unlike an FSA, which has a "use it or lose it" rule, an HSA has no expiration date. Any money you do not spend in a given year stays in the account. You can let it sit for five years, ten years, or your entire life. This makes an HSA a long-term savings tool, not just a way to pay this year's medical bills.

Many HSA providers let you invest the balance in mutual funds, index funds, or other securities. If you have $5,000 in your account and invest it, that money can grow. You pay no tax on the growth as long as you eventually use it for medical expenses. Some people treat their HSA like a retirement account, contributing the maximum each year, investing it, and only withdrawing for medical costs when they truly need to.

You can also keep the money in cash within the account, earning little or no interest. The choice is yours. Some providers require a minimum balance—say, $1,000—before you can invest the rest. Check your provider's rules.

What happens to your HSA when you change jobs or retire

Your HSA is yours alone. If you leave your job, the account stays with you. You can keep it at the same financial institution, move it to a new bank, or roll it into another HSA. Your employer has no claim on the money, and you do not lose it when you leave.

If you retire before age 65, you can still use HSA funds for medical expenses tax-free. After age 65, the rules change. You can withdraw money for any reason without the 20 percent penalty, but non-medical withdrawals are taxed as regular income. This makes the HSA function like a traditional IRA after 65—you pay tax on withdrawals, but the penalty is gone. If you use the money for medical expenses, it remains tax-free.

If you die, your HSA passes to your beneficiary. If your spouse is the beneficiary, they can treat it as their own HSA. If anyone else is the beneficiary, they must pay income tax on the full balance, though they can use it for your medical expenses without the penalty.

HSA vs. FSA: which account is right for you

An FSA is a spending account offered by employers. You contribute pre-tax money, but you must spend it within the plan year or lose it (though most plans allow a small carryover or grace period). An FSA does not require a high-deductible plan, so you can have one even if your insurance has a low deductible.

An HSA requires a high-deductible plan but lets you keep the money forever. If you are healthy and do not expect large medical bills, an HSA lets you build savings. If you have ongoing medical expenses and want to spend down the account each year, an FSA may be simpler. Some employers offer both—you can have an FSA for predictable costs and an HSA for long-term savings, though contribution limits apply to each separately.

The key difference: an FSA is "spend it or lose it," while an HSA is "keep it as long as you want." If you think you will have medical expenses every year, an FSA works fine. If you want to save for future medical costs or retirement, an HSA is more powerful.

Frequently Asked Questions

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

No, you cannot use HSA funds to pay the monthly premium for your health plan. You can use it to pay for COBRA continuation coverage, Medicare premiums (Part B, Part D, and supplemental insurance), and long-term care insurance premiums. But your regular health plan premium must come from another source.

What happens if I withdraw money from my HSA for something that is not medical?

You pay income tax on the withdrawal plus a 20 percent penalty. So if you withdraw $1,000 for a non-medical expense and you are in the 22 percent tax bracket, you owe $220 in tax plus $200 in penalty—$420 total. After age 65, the penalty goes away, but you still owe income tax on non-medical withdrawals.

Can I have an HSA and a 401(k) at the same time?

Yes. An HSA and a 401(k) are separate accounts with separate contribution limits. You can max out both if your income allows. Many people use an HSA as a supplemental retirement account because of its triple tax advantage—deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.

What if I lose my high-deductible health plan—do I lose my HSA?

No. You keep the HSA and the money in it, but you cannot make new contributions while you are not enrolled in an HDHP. If you switch back to an HDHP later, you can resume contributions. The account itself never closes.

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

Yes, as long as they are your tax dependents or spouse. You do not have to be enrolled in a family plan—even if you have individual coverage, you can use HSA funds to pay for your spouse's or child's medical bills. The money just has to go toward a may have access to medical expense.