An HSA is a tax-advantaged savings account tied to a high-deductible health plan

A Health Savings Account (HSA) is a savings account you own and control that holds money specifically for medical expenses. To open one, you must be enrolled in a high-deductible health plan (HDHP)—a type of health insurance with lower monthly premiums but higher deductibles than traditional plans. The money you put into an HSA is not taxed when you contribute it, grows tax-free while it sits there, and comes out tax-free when you spend it on may have access to medical costs. You keep the account even if you change jobs or health plans, and any money you don't spend in a given year rolls forward to the next year.

The account belongs to you, not your employer or insurance company. If your employer offers an HSA, they may contribute money to it as part of your benefits package, but you control how that money is spent. You can also contribute your own money up to an annual limit set by the IRS, which changes each year. The money is held in an actual bank account or investment account, and you access it through a debit card, check, or reimbursement request.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan, and you lose HSA may be able to access if you switch to traditional insurance.
  • Money you contribute to an HSA is not subject to federal income tax, and withdrawals for may have access to medical expenses are also tax-free.
  • Unused HSA money carries over year to year and never expires, so it functions as a long-term medical savings tool.
  • You can spend HSA money on deductibles, copays, prescriptions, dental work, vision care, and many other medical costs, but not on health insurance premiums or over-the-counter medications without a prescription.
  • After age 65, you can withdraw HSA money for any reason without penalty, though non-medical withdrawals are taxed as income.

Who can open an HSA and when

You are may be able to access to open an HSA only if you are enrolled in a high-deductible health plan. 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 must also have an out-of-pocket maximum (the most you pay before insurance covers everything) that does not exceed $4,050 for individual coverage or $8,050 for family coverage. If your employer offers an HDHP, you can open an HSA through them. If not, you can open one independently through a bank, credit union, or investment firm that offers HSAs.

You lose HSA may be able to access the moment you enroll in any other type of health insurance—Medicare, Medicaid, a traditional PPO or HMO plan, or coverage through a spouse's non-HDHP plan. You can re-open an HSA later if you return to an HDHP, but you cannot contribute to an HSA during months when you are not covered by an HDHP. If your employer contributes to your HSA and you leave that job, the account stays yours; you simply stop receiving employer contributions and can continue to contribute your own money if you remain on an HDHP.

How much you can contribute and what the tax benefit is

The IRS sets annual contribution limits that vary by coverage type. For 2024, you can contribute up to $4,150 if you have individual HDHP coverage, or $8,300 if you have family coverage. These limits change each year. If you are age 55 or older, you can contribute an additional $1,000 per year (called a catch-up contribution). Your employer may also contribute to your HSA, and that money counts toward your total limit—if your employer puts in $2,000 and you put in $2,000, you have hit your $4,000 limit for individual coverage.

The tax benefit works three ways: money you contribute is deducted from your taxable income (reducing what you owe in federal income tax), the money grows tax-free while in the account, and withdrawals for may have access to medical expenses are not taxed. If you contribute through payroll deduction at work, the money is also exempt from Social Security and Medicare taxes. This triple tax advantage makes HSAs one of the most tax-efficient savings tools available, though the benefit only applies if you use the money for medical costs.

What you can and cannot pay for with HSA money

You can use HSA money to pay for your health plan's deductible, copays, and coinsurance. You can also pay for prescription medications, dental work (cleanings, fillings, root canals, orthodontics), vision care (eye exams, glasses, contact lenses), hearing aids, mental health treatment, physical therapy, and many other medical services. The IRS maintains a detailed list of may have access to expenses, but the general rule is that if a doctor orders it or it treats a diagnosed medical condition, it likely qualifies.

You cannot use HSA money to pay for health insurance premiums (with three exceptions: COBRA continuation coverage, Medicare premiums if you are over 65, and long-term care insurance premiums up to a limit). You also cannot pay for over-the-counter medications like cold medicine or pain relievers unless you have a prescription from a doctor. Cosmetic procedures, gym memberships, and vitamins do not may have access to unless they treat a specific medical condition. If you withdraw money for a non-may have access to expense before age 65, you pay income tax on that amount plus a 20 percent penalty.

How to access your HSA money and keep records

Most HSAs come with a debit card that you can use at pharmacies, doctors' offices, and hospitals. You can also request a check or transfer money to your bank account and pay out of pocket, then reimburse yourself from the HSA later. Some people use this strategy to let their HSA grow as an investment and only withdraw money when they need it. You are responsible for keeping receipts and records showing that your withdrawals were for may have access to expenses; the IRS does not require you to submit these when you file taxes, but you must have them if you are ever audited.

If you use your HSA debit card at a merchant that does not clearly indicate it is a medical expense (like a pharmacy that also sells groceries), the card issuer may flag the transaction and ask you to verify it was medical. This is a compliance check to prevent misuse. Keep your receipts organized and accessible. Some HSA providers offer online portals where you can upload receipts and track your spending, which makes record-keeping easier.

What happens to unused HSA money and how it grows

Unlike a Flexible Spending Account (FSA), which has a "use it or lose it" rule, HSA money never expires. Any balance you do not spend in a given year rolls forward to the next year and stays in your account indefinitely. This makes an HSA a true long-term savings tool. Some people use it as a retirement account by investing their HSA balance in mutual funds or stocks rather than keeping it in cash, allowing it to grow over decades. The investment earnings are also tax-free as long as you eventually spend the money on medical costs.

After age 65, you can withdraw HSA money for any reason without the 20 percent penalty. If you withdraw for non-medical expenses after 65, you pay ordinary income tax on that amount, but not the penalty. This means an HSA can function as a supplemental retirement account if you do not spend all the money on medical costs during your working years. Some people intentionally save their HSA balances to cover medical expenses in retirement, when healthcare costs typically rise.

What to do if you change jobs or health plans

Your HSA is portable—it stays with you even if you leave your job or switch health plans. If your new employer offers an HSA, you can continue using your existing account and may receive new employer contributions. If your new employer does not offer an HSA, you can keep your account open as long as you remain enrolled in an HDHP (through the individual market or a spouse's plan). You can continue to contribute to it and withdraw from it for medical expenses.

If you switch to a non-HDHP plan (such as traditional insurance through a new employer), you lose HSA may be able to access immediately and cannot make new contributions. However, you can still withdraw money from your existing HSA balance for may have access to medical expenses for the rest of your life. If you later re-enroll in an HDHP, you regain may be able to access and can resume contributions. Some people maintain an HSA specifically for this reason—to preserve the account and its tax benefits even if they temporarily leave an HDHP.

Frequently Asked Questions

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

Yes. HSA money can pay for may have access to medical expenses of you, your spouse, and your dependents, regardless of whether they are covered under your health plan. You do not need to be enrolled in family coverage to use HSA money for your family's medical costs.

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

You lose HSA may be able to access when you enroll in Medicare because Medicare is not an HDHP. You can no longer contribute to your HSA, but you can withdraw money from your existing balance for may have access to medical expenses. After 65, non-medical withdrawals are taxed as income but not penalized.

Can I invest my HSA balance or does it have to stay in cash?

Many HSA providers allow you to invest your balance in mutual funds, stocks, or other investments. Some require a minimum cash balance (often $1,000 to $2,500) before you can invest the rest. Check with your HSA provider about their investment options and any fees involved.

What if I withdraw HSA money for a non-medical expense by mistake?

You will owe income tax on that amount plus a 20 percent penalty if you are under 65. If you catch the error quickly, some HSA providers allow you to return the money within a certain timeframe to avoid the penalty. Contact your HSA provider immediately if this happens.

Do I need to report my HSA on my tax return?

If you contribute to your HSA through payroll deduction, your employer reports it and it does not appear on your tax return. If you contribute on your own, you report it on Form 8889 when you file taxes. Withdrawals for may have access to expenses do not need to be reported, but keep your receipts in case of an audit.