A health savings account lets you set aside pre-tax money specifically for medical expenses, and keep whatever you don't spend

A health savings account (HSA) is a tax-advantaged container for money you use to pay for medical care. You contribute money before taxes are taken out of your paycheck, which lowers your taxable income for the year. When you spend that money on may have access to medical expenses—copays, deductibles, prescriptions, dental work, vision care—you pay no income tax on it. Any balance you don't spend rolls over to the next year and stays yours indefinitely. Unlike a flexible spending account (FSA), which forces you to use the money or lose it, an HSA is yours to keep.

The account works only if you're enrolled in a high-deductible health plan (HDHP)—a type of health insurance with a lower monthly premium but a higher deductible. The tradeoff is that you pay more out of pocket before insurance kicks in. An HSA bridges that gap by letting you save money tax-free to cover those out-of-pocket costs. You can also use HSA money to pay insurance premiums in certain situations, such as COBRA coverage or long-term care insurance.

Key Takeaways

  • Money you put into an HSA is not subject to income tax, which reduces your tax bill for the year.
  • You can only open an HSA if you're covered by a high-deductible health plan, and you cannot be claimed as a dependent on someone else's taxes.
  • Any money left in your HSA at the end of the year stays in the account and earns interest or investment returns, unlike FSA money which you forfeit.
  • After age 65, you can withdraw HSA money for any reason without penalty, though non-medical withdrawals are taxed as ordinary income.

How the tax savings work in practice

When you contribute to an HSA through payroll deduction, your employer sends the money directly to the HSA provider before your income tax is calculated. This means the contribution doesn't count as taxable wages. If you earn $50,000 and contribute $3,000 to an HSA, you only pay income tax on $47,000. At a 22% federal tax rate, that's $660 in federal tax savings alone, plus state income tax savings depending on where you live.

The second tax advantage applies when you spend the money. If you withdraw $200 from your HSA to pay a copay or buy glasses, that $200 is not taxed again. You're not paying income tax on the withdrawal, and you're not paying sales tax on the medical purchase (in most states). This is different from using after-tax money to pay for the same expenses, where you'd have already paid income tax on the $200 before you could spend it.

The third advantage is growth. If you don't spend all your HSA money in a given year, it stays in the account and can earn interest or be invested in mutual funds, depending on your HSA provider. Any earnings on that money are also tax-free, as long as you eventually use the balance for may have access to medical expenses.

What counts as a may have access to medical expense

may have access to expenses include the obvious ones: copays, coinsurance, deductibles, prescription drugs, and dental and vision care. They also include less obvious items like hearing aids, crutches, wheelchairs, insulin, and allergy medication. You can use HSA money to pay for mental health counseling, physical therapy, and chiropractic care. Over-the-counter medications like pain relievers and cold medicine count, but only if you have a prescription from a doctor (as of 2020, this rule changed).

Expenses that do not may have access to include cosmetic surgery, gym memberships, vitamins (unless prescribed for a specific medical condition), and most dental work that is purely cosmetic. Long-term care insurance premiums do may have access to, as do Medicare premiums once you turn 65. If you're unsure whether a specific expense qualifies, your HSA provider publishes a list, and the IRS maintains a comprehensive reference.

Keep receipts for all HSA withdrawals. The IRS can audit your HSA and ask you to prove that withdrawals were for may have access to expenses. If you can't document a withdrawal, it's treated as a non-may have access to withdrawal, which means you owe income tax on it plus a 20% penalty.

Who can open an HSA and when

You must be enrolled in a high-deductible health plan to open or contribute to an HSA. For 2024, the IRS defines an HDHP as a plan with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. Your plan's out-of-pocket maximum cannot exceed $8,050 for individual coverage or $16,100 for family coverage. These numbers change annually. If your employer offers an HSA-compatible plan, you can open an account through your employer's HSA provider, or you can open one independently through a bank or financial services company.

You cannot open an HSA if you're claimed as a dependent on someone else's tax return, if you're enrolled in Medicare, or if you have other health coverage besides the HDHP (with limited exceptions for specific types of coverage like dental-only or vision-only plans). If you lose HDHP coverage partway through the year, you can still contribute to your HSA for that year, but you cannot make new contributions once coverage ends.

Contribution limits and what happens to unused money

The IRS sets annual contribution limits. For 2024, you can contribute up to $4,150 if you have individual HDHP coverage, or $8,300 if you have family coverage. If you're 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution. These limits change each year. Your employer may contribute to your HSA on your behalf, and those contributions count toward your limit.

Unlike an FSA, which has a "use it or lose it" rule, HSA money rolls over indefinitely. If you contribute $3,000 and spend only $1,500, the remaining $1,500 stays in your account and is available next year. This makes an HSA a long-term savings vehicle. Many people use it as a retirement account for medical expenses, letting the balance grow year after year and only withdrawing when they need to pay for care.

What happens to your HSA if you change jobs or retire

Your HSA belongs to you, not your employer. If you leave your job, the account stays open and the money remains yours. You can continue to use it for may have access to medical expenses even if you're no longer enrolled in an HDHP, though you cannot make new contributions once you lose HDHP coverage. If you move to a new job with a different HSA provider, you can roll your balance over to the new account, similar to rolling over a 401(k).

After age 65, you become may be able to access for Medicare, which disqualifies you from making new HSA contributions. However, you can still withdraw money from your existing HSA balance for may have access to medical expenses without penalty. If you withdraw money for non-medical reasons after 65, you pay ordinary income tax on the withdrawal but no 20% penalty. This makes an HSA particularly valuable as a retirement savings tool—you can let it grow for decades and then use it to cover medical expenses in retirement.

HSA versus FSA: which one to choose

If your employer offers both an HSA and an FSA, the choice depends on your expected medical spending and your comfort with long-term saving. An FSA lets you set aside up to $3,200 per year (for 2024) and must be spent within the plan year or forfeited. An HSA has higher contribution limits, no use-it-or-lose-it rule, and can be invested for growth. If you expect high medical expenses this year, an FSA may be simpler. If you're healthy and want to save for future medical costs, an HSA is usually the better choice.

Some employers allow you to enroll in both an HSA and a limited-purpose FSA, which covers only dental and vision expenses. This combination lets you use the FSA for predictable costs and the HSA for everything else, maximizing your tax savings.

Frequently Asked Questions

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

Yes, as long as your spouse is not enrolled in their own health plan. If your spouse has separate coverage, they need their own HSA. If your spouse is covered under your family HDHP, you can use your HSA to pay for their may have access to medical expenses.

What happens if I withdraw money from my HSA for a non-medical expense?

Before age 65, non-medical withdrawals are subject to income tax plus a 20% penalty. After age 65, you pay income tax but no penalty. Keep records of all withdrawals in case the IRS asks you to prove they were for may have access to expenses.

Can I invest my HSA money?

Many HSA providers allow you to invest your balance in mutual funds or other investments, similar to a brokerage account. Some providers require a minimum balance before you can invest. Check with your provider to see what investment options are available.

Do I lose my HSA if I switch to a different health plan?

No. Your HSA is yours to keep regardless of what health plan you enroll in. However, you can only make new contributions if you're enrolled in an HDHP. You can continue to withdraw money from your existing balance for may have access to medical expenses even after you switch plans.

Can I use my HSA to pay for my parents' medical care?

Yes, if you claim them as dependents on your tax return. You can use your HSA to pay for their may have access to medical expenses. If you don't claim them as dependents, you cannot use HSA money for their care.