What an HSA is and how the money moves

A Health Savings Account (HSA) is a bank account that holds money you set aside specifically for medical expenses. You contribute pre-tax dollars from your paycheck (or as a self-employed person, from your income), the money grows tax-free if invested, and you withdraw it tax-free when you pay for may have access to medical costs. The account stays open year to year — unlike a flexible spending account, unused money does not disappear at the end of the year.

The account itself is held at a bank, credit union, or HSA administrator (often a health insurance company or third-party provider). You receive a debit card or checkbook to access the funds, or you can request a check or transfer. When you pay for a doctor visit, prescription, or medical device out of pocket, you withdraw from the HSA to cover it.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) — a type of health insurance with a lower monthly premium but a higher deductible (the amount you pay before insurance kicks in). You cannot have an HSA if you are covered by another health plan, enrolled in Medicare, or claimed as a dependent on someone else's tax return.

Key Takeaways

  • You contribute pre-tax money to an HSA, and withdrawals for may have access to medical expenses are tax-free, making it a way to reduce the cost of healthcare.
  • An HSA requires enrollment in a high-deductible health plan; you cannot open one while covered by traditional health insurance or Medicare.
  • Unlike flexible spending accounts, HSA money rolls over year to year and can be invested to grow, so there is no "use it or lose it" deadline.
  • You can withdraw HSA funds for doctor visits, prescriptions, dental work, vision care, medical equipment, and other IRS-approved medical expenses.
  • After age 65, you can withdraw HSA money for any reason without penalty, though non-medical withdrawals are taxed as income.

Contribution limits and how much you can set aside

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 (called a catch-up contribution). These limits apply to the total amount you and your employer contribute combined — if your employer contributes $1,000, you can only add $3,150 more to reach the individual limit.

You can contribute to an HSA only during the months you are enrolled in an HDHP. If you switch to a different health plan mid-year, you can only contribute a pro-rated amount for the months you were covered. If you leave your job or retire, you can no longer contribute, but the money already in the account remains yours to use.

Contributions are deducted from your paycheck before taxes (if your employer offers payroll deduction) or claimed as a deduction on your tax return (if you contribute on your own). Either way, the money you put in reduces your taxable income for that year.

What medical expenses you can pay for with HSA funds

The IRS maintains a list of may have access to medical expenses — costs that can be paid with HSA money tax-free. These include doctor visits, hospital stays, surgery, prescription medications, insulin, and medical devices like hearing aids or wheelchairs. Dental work (cleanings, fillings, root canals, orthodontics) and vision care (eye exams, glasses, contact lenses, LASIK) also may have access to.

Mental health treatment, physical therapy, chiropractic care, and acupuncture are covered if provided by a licensed practitioner. Over-the-counter medications like pain relievers and allergy medicine may have access to only if you have a prescription from a doctor. Vitamins and supplements do not may have access to unless prescribed for a specific medical condition.

Expenses that do not may have access to include cosmetic procedures (unless medically necessary), gym memberships, general wellness products, and health insurance premiums (with a few exceptions: you can use HSA funds to pay premiums while receiving unemployment benefits, for long-term care insurance, or for Medicare premiums after age 65).

Keep receipts for all HSA withdrawals. The IRS does not require you to submit them when you withdraw, but you must be able to prove the expense was may have access to if audited. Many HSA providers allow you to photograph and upload receipts through their website or app.

How HSA money grows and investment options

Unlike a regular savings account tied to your checking, an HSA can be invested. Most HSA providers offer options to keep money in a cash account (earning little to no interest) or move it into mutual funds, index funds, or other investments. The growth is tax-free, meaning any gains you earn are not taxed as long as the money stays in the account.

Some people use an HSA as a retirement savings tool: they pay for medical expenses out of pocket and leave the HSA money invested for decades. At retirement, they can withdraw it for medical costs (which tend to be high in old age) or, after age 65, withdraw it for any reason. Non-medical withdrawals after 65 are taxed as ordinary income but not penalized.

The investment risk is yours to manage. If you invest HSA funds in stocks or funds and the market drops, your balance drops too. If you need the money soon for medical expenses, keeping it in cash or a low-risk option is safer than investing it.

Portability: your HSA follows you between jobs

An HSA is yours to keep, even if you change jobs, retire, or switch health insurance. The money does not disappear when you leave an employer. You can continue to use it for may have access to medical expenses for the rest of your life.

When you change jobs, you have two options: keep your HSA with the current provider (if they allow it) or roll it over to a new HSA at a different bank or provider. A rollover works like a bank transfer — you request it from your old provider, and they send the funds to the new one. You can do one rollover per year without tax consequences.

If you switch to a health plan that is not an HDHP (such as traditional insurance or Medicare), you can no longer contribute new money to the HSA, but the existing balance remains available to use. This makes an HSA different from a flexible spending account, which you lose access to when you leave the plan.

Penalties and taxes for non-may have access to withdrawals

If you withdraw HSA money for something that is not a may have access to medical expense before age 65, you owe income tax on the amount withdrawn plus a 20% penalty. For example, if you withdraw $1,000 for a non-medical expense and you are in the 24% tax bracket, you would owe $240 in taxes plus $200 in penalty — a total of $440 on top of losing the $1,000.

After age 65, the 20% penalty goes away. You can withdraw HSA money for any reason without penalty, but non-medical withdrawals are taxed as ordinary income. This makes an HSA similar to a traditional retirement account after 65: you can use it for medical costs tax-free or for anything else with only income tax owed.

If you accidentally withdraw money for a non-may have access to expense, you can sometimes correct it. If you return the money to the HSA within a certain timeframe (rules vary by provider), the withdrawal may not be taxed or penalized. Contact your HSA provider immediately if this happens.

HSA vs. flexible spending account: key differences

Both HSAs and flexible spending accounts (FSAs) let you set aside pre-tax money for medical expenses, but they work differently. An FSA is "use it or lose it" — money you do not spend by the end of the year (or a short grace period) is forfeited. An HSA rolls over year to year, so unused money stays in the account indefinitely.

An HSA requires an HDHP; an FSA does not. You can have an FSA with any health insurance plan. An HSA can be invested and grows over time; an FSA is typically held in cash and earns no interest. An HSA is portable — it follows you if you change jobs — while an FSA is tied to your employer and ends when you leave.

FSA contribution limits are also lower: for 2024, the limit is $3,200 per year (compared to $4,150 for an individual HSA). Some employers offer both an HSA and an FSA, but you cannot use both in the same year if the FSA covers the same types of expenses.

Frequently Asked Questions

Can I use my HSA debit card to buy anything at a pharmacy or medical supply store?

The debit card is designed to work only for may have access to medical expenses. At a pharmacy, it may decline if you try to buy non-medical items like shampoo or candy. Some retailers mix medical and non-medical products, so the card might decline the entire transaction. Keep receipts to prove the purchase was medical, and contact your HSA provider if a legitimate expense is declined.

What happens to my HSA if I turn 65 or retire?

Your HSA remains open and usable. You can no longer contribute new money once you enroll in Medicare, but the balance stays yours. After 65, you can withdraw money for any reason without the 20% penalty — only income tax applies to non-medical withdrawals. Many people use their HSA to pay for Medicare premiums, supplemental insurance, and medical expenses in retirement.

Can I use HSA money to pay my health insurance deductible?

Yes. When you owe money toward your deductible because of a doctor visit or hospital stay, you can use HSA funds to pay it. The deductible is a may have access to medical expense. However, you cannot use HSA money to pay your monthly insurance premium unless you are receiving unemployment benefits, buying long-term care insurance, or paying Medicare premiums after age 65.

What if I do not spend all my HSA money in a year?

Unlike an FSA, the money does not disappear. It rolls over to the next year and the year after that, indefinitely. You can let it accumulate and invest it, or withdraw it whenever you have a may have access to medical expense. There is no deadline to use the money.

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

Yes, if your spouse is your dependent. You can use HSA funds to pay for may have access to medical expenses for yourself, your spouse, and any dependent children, even if they are not covered by your health insurance plan. Keep receipts showing the expense and the person it was for.