A Health Savings Account lets you set aside pre-tax money for medical expenses, which means you pay less in taxes and keep more of your paycheck

The core benefit is tax savings. Money you put into an HSA is not taxed when you earn it, not taxed when you withdraw it for medical costs, and not taxed on the interest or investment gains it earns while sitting in the account. That triple tax advantage does not exist with regular savings or a checking account. If you earn $50,000 a year and contribute $2,000 to an HSA, you only pay income tax on $48,000. Your employer also saves on payroll taxes, and many employers pass some of that savings back to you as a contribution.

The second benefit is that the money rolls over year to year. Unlike a flexible spending account (FSA), which forces you to spend the balance by December 31 or lose it, an HSA balance stays yours indefinitely. You can let it grow, invest it, and use it whenever you need it—even decades later in retirement.

The third benefit is flexibility in how you use it. You can withdraw money for any medical expense: copays, deductibles, prescriptions, dental work, vision care, mental health treatment, and medical equipment. You can also use it to pay premiums for certain types of insurance, including COBRA coverage and long-term care insurance. After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

Key Takeaways

  • HSA contributions reduce your taxable income, lowering the amount of federal income tax you owe each year.
  • Money in an HSA grows tax-free and can be invested, so balances can compound over time instead of expiring.
  • You can use HSA funds for a wide range of medical expenses, from copays to dental work to medical devices.
  • An HSA is only available if you are enrolled in a high-deductible health plan (HDHP), so it is not an option for everyone.
  • After age 65, you can withdraw HSA money for any reason without the 20 percent penalty, though non-medical withdrawals are taxed as regular income.

How the tax savings work in practice

When you contribute to an HSA through payroll deduction, your employer withholds the money before calculating your income tax. This means you avoid federal income tax, state income tax (in most states), and Social Security and Medicare payroll taxes on that amount. If you are in the 22 percent federal tax bracket and your state has a 5 percent income tax, a $3,000 HSA contribution saves you roughly $810 in taxes that year.

If you contribute outside of payroll—by depositing money yourself—you get the tax deduction when you file your tax return. You report the contribution on Form 8889 and reduce your taxable income by that amount. The tax savings are the same; the timing is just different.

Withdrawals for medical expenses are never taxed, so the money you spend on a doctor visit or prescription comes out tax-free. This is different from a regular savings account, where you pay taxes on the interest earned and then pay again when you spend the money on medical care.

The investment growth advantage

Most HSAs let you invest the balance in mutual funds, stocks, or bonds, similar to a 401(k). This means your money can grow beyond the amount you contribute. If you contribute $3,000 a year for 20 years and earn an average 6 percent annual return, your balance could reach roughly $100,000—far more than the $60,000 you put in.

This makes an HSA a powerful retirement savings tool. Unlike a regular savings account, where you pay taxes on interest earned, HSA investment gains are tax-free as long as you use the money for medical expenses. After age 65, you can withdraw for any reason, and the growth is taxed only on non-medical withdrawals.

Not all HSAs offer investment options. Some are basic savings accounts with no investment feature. If investment growth matters to you, check your plan's options before enrolling or ask your employer if they offer a plan with investment capability.

Medical expenses you can cover with HSA funds

The IRS maintains a long list of may be able to access medical expenses. Common ones include copays and coinsurance, deductibles, prescription medications, dental work (fillings, crowns, orthodontics), vision care (glasses, contacts, exams), hearing aids, mental health counseling, physical therapy, and medical equipment like crutches or blood pressure monitors. You can also use HSA funds to pay premiums for COBRA continuation coverage, long-term care insurance, and health insurance while you are unemployed.

Some expenses are not covered: cosmetic procedures (unless medically necessary), over-the-counter medications (unless prescribed by a doctor), gym memberships, and vitamins or supplements (unless prescribed). If you are unsure whether an expense qualifies, the IRS publishes Publication 502, which lists may be able to access and ineligible costs in detail.

You do not have to spend the money in the same year you contribute it. You can accumulate funds and use them whenever you need them, even years later. This flexibility is one reason an HSA is more valuable than an FSA, which typically expires at year-end.

Who can open an HSA and what it requires

You must be enrolled in a high-deductible health plan (HDHP) to open or contribute to an HSA. The IRS sets the minimum deductible each year—for 2024, it is $1,600 for individual coverage and $3,200 for family coverage. Your employer or insurance company will tell you if your plan qualifies. You cannot have an HSA if you are covered by Medicare, enrolled in a non-HDHP, or claimed as a dependent on someone else's tax return.

You can open an HSA through your employer's benefits plan, or independently through a bank, credit union, or investment firm. If you open one on your own, you report the contribution on your tax return. If you open one through your employer, the contribution is usually deducted from your paycheck before taxes.

Contribution limits are set by the IRS and change yearly. 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 contribute an additional $1,000 per year as a catch-up contribution.

The penalty for non-medical withdrawals before age 65

If you withdraw HSA money for something other than a medical expense before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. For example, if you withdraw $1,000 for a vacation and you are in the 22 percent federal tax bracket, you owe $220 in income tax plus $200 in penalty—a total of $420. This makes HSAs less flexible than regular savings for non-medical emergencies.

After age 65, the penalty goes away. You can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as regular income. This is why an HSA can function as a retirement savings account: you can let it grow for decades and then use it flexibly in retirement.

How an HSA compares to other savings options

An HSA offers better tax treatment than a regular savings account or a 401(k) for medical expenses. With a 401(k), you get a tax deduction on contributions and tax-free growth, but withdrawals are taxed as income. With an HSA, contributions are deductible, growth is tax-free, and withdrawals for medical expenses are never taxed. This makes it the only account where the money going in, the growth, and the money coming out are all tax-free—as long as you use it for medical costs.

An FSA also offers tax-free contributions and withdrawals for medical expenses, but the money expires at year-end if you do not spend it. An HSA has no expiration, so you can save for future medical costs or retirement. An HSA also lets you invest the balance; most FSAs do not.

If you have a choice between an HDHP with an HSA and a traditional health plan with an FSA, the HSA is usually better if you are healthy and can afford to save. The lower premiums on an HDHP often offset the higher deductible, and the HSA gives you a tax-advantaged way to build medical savings over time.

Frequently Asked Questions

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

Yes, if your spouse is covered under your family HDHP plan. You can also use HSA funds to pay for the medical expenses of your spouse or dependents even if they are not on your plan, as long as you could claim them as dependents on your tax return. The IRS does not require the person receiving the care to be the account owner.

What happens to my HSA if I leave my job?

The HSA stays yours. Your employer does not own it, and you do not lose the balance when you leave. You can continue to use the funds for medical expenses, and you can keep contributing if you remain enrolled in an HDHP. If you switch to a non-HDHP plan, you can no longer contribute, but you can still withdraw for medical expenses.

Can I use my HSA to pay for health insurance premiums?

You can use HSA funds to pay premiums for COBRA continuation coverage, long-term care insurance, and health insurance while you are unemployed and receiving unemployment benefits. You cannot use it for regular employer health insurance premiums or Medicare premiums (except Medicare Part B, Part D, and long-term care premiums after age 65).

Do I have to spend my HSA money every year?

No. Unlike an FSA, an HSA has no use-it-or-lose-it rule. You can let the balance grow indefinitely and use it whenever you need it. This makes it useful for saving toward future medical expenses or retirement healthcare costs.

What records do I need to keep for HSA withdrawals?

Keep receipts and documentation for all medical expenses you pay with HSA funds. The IRS can audit your account and ask for proof that withdrawals were for may be able to access medical expenses. You do not have to submit receipts when you withdraw, but you must have them available if the IRS asks.