A Health Savings Account 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. You contribute pre-tax dollars (money taken from your paycheck before taxes are calculated), and that money grows tax-free. When you withdraw it to pay for may have access to medical costs, you pay no tax on that withdrawal either. The account stays yours even if you change jobs or health plans.
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. For 2024, the IRS defines a high-deductible plan as one with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. You cannot have an HSA if you are covered by any other health insurance, including Medicare, a spouse's non-HDHP plan, or TRICARE.
The account itself is portable. You open it through a bank, credit union, or financial services company—not through your employer, though your employer may offer one as a payroll option. If you leave your job, the account and its balance remain yours. You can invest the money in the account (similar to a retirement account) or keep it in a cash balance, depending on what your HSA provider offers.
Key Takeaways
- You can only open an HSA if you are enrolled in a high-deductible health plan and have no other health coverage.
- Contributions reduce your taxable income, the account grows tax-free, and withdrawals for may have access to medical expenses are tax-free.
- You can use HSA funds to pay for deductibles, copays, prescriptions, dental work, vision care, and many other medical costs not covered by insurance.
- Money left in your HSA at the end of the year rolls over and stays in the account indefinitely—there is no "use it or lose it" deadline.
- After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.
How much you can contribute each year
The IRS sets annual contribution limits that change yearly. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. These limits apply to all your HSA contributions combined—if you have an HSA through your employer and also open one on your own, the total across both accounts cannot exceed the limit.
If you are age 55 or older, you can contribute an additional $1,000 per year (called a catch-up contribution). This extra amount is available only to you, not to your spouse, even if they are also 55 or older and have their own HSA.
Contributions can come from your paycheck (through payroll deduction, which is the most common route), from your employer as a contribution on your behalf, or from you directly if you open an HSA outside of work. If you contribute through payroll, those dollars never appear on your W-2 as taxable income. If you contribute on your own, you deduct the contribution on your tax return.
What medical expenses you can pay for with HSA funds
HSA money can cover a broad range of medical costs. The IRS publishes a list of may have access to expenses, which includes deductibles, copays, and coinsurance for any health plan. You can use it for prescription medications, over-the-counter drugs (with a doctor's prescription), dental work, vision care including glasses and contact lenses, hearing aids, mental health treatment, and physical therapy. You can also pay for medical equipment like crutches, wheelchairs, or blood glucose monitors.
Some expenses that surprise people: you can use HSA funds to pay for a gym membership or fitness classes if a doctor prescribes them as treatment for a specific condition. You can pay for certain cosmetic procedures if they treat an injury or illness (reconstructive surgery after an accident, for example), but not purely cosmetic work. You cannot use HSA money for health insurance premiums, with three exceptions: COBRA continuation coverage, Medicare premiums (once you turn 65), and long-term care insurance premiums (up to certain limits).
The IRS maintains a searchable database of may have access to medical expenses on its website. If you are unsure whether a specific cost qualifies, you can look it up there or ask your HSA provider before you spend the money.
How the tax advantage works
An HSA gives you a tax break at three stages. First, contributions reduce your taxable income for the year. If you earn $60,000 and contribute $4,150 to an HSA, you only pay income tax on $55,850. Second, any interest or investment gains inside the account are never taxed. If your HSA balance grows to $10,000 and you invest it, the earnings on that $10,000 are tax-free. Third, withdrawals for may have access to medical expenses are not taxed.
This three-layer tax advantage makes an HSA different from a regular savings account or even a flexible spending account (FSA). An FSA also uses pre-tax dollars, but money left in an FSA at the end of the year is forfeited (with limited carryover rules depending on your plan). An HSA has no such deadline—your balance rolls over indefinitely, and you can let it grow year after year.
If you withdraw HSA money for a non-medical expense before age 65, you owe income tax on that withdrawal plus a 20% penalty. After age 65, you can withdraw money for any reason without the penalty, though non-medical withdrawals are taxed as ordinary income. This makes an HSA function somewhat like a retirement account after 65.
How to keep records and avoid penalties
You are responsible for tracking which expenses you paid for with HSA funds and keeping receipts. The IRS does not require you to submit receipts when you withdraw money, but you must be able to prove that the expense was may have access to if you are ever audited. Keep receipts, invoices, and explanation of benefits (EOB) statements from your health plan for at least three to five years.
If you withdraw money and later realize it was not a may have access to expense, you can return it to the account within a certain timeframe to avoid the tax and penalty. Rules vary by HSA provider, so check with yours about their process. Some providers allow a grace period; others do not.
If you lose HSA may be able to access (for example, you switch to a non-high-deductible plan or enroll in Medicare), you can no longer contribute to the account, but you can continue to withdraw money for may have access to medical expenses tax-free for the rest of your life. The account does not close.
HSA vs. FSA vs. regular savings
| Feature | HSA | FSA | Regular Savings Account |
|---|---|---|---|
| Pre-tax contributions | Yes | Yes | No |
| Money rolls over year to year | Yes, indefinitely | No (with limited carryover) | Yes |
| Tax-free growth | Yes | No | No |
| Tax-free withdrawals for medical expenses | Yes | Yes | No |
| Portable if you change jobs | Yes | No | Yes |
| Requires high-deductible health plan | Yes | No | N/A |
Frequently Asked Questions
Can I use my HSA debit card for anything other than medical expenses?
Most HSA providers issue a debit card linked to the account. You can swipe it at pharmacies, doctor's offices, and medical suppliers, and the transaction is automatically flagged as a medical expense. If you use it for a non-medical purchase, you are responsible for repaying the HSA from your own funds. Some providers have safeguards that block non-medical transactions; others do not.
What happens to my HSA if I switch to Medicare?
Once you enroll in Medicare, you can no longer contribute to an HSA. However, you can continue to withdraw money from the account tax-free for may have access to medical expenses, including Medicare premiums, copays, and deductibles. The account remains yours and does not close.
Can my spouse have their own HSA if we have family coverage?
Yes. If you both are enrolled in the same high-deductible family plan, you can each open a separate HSA. Your combined contributions cannot exceed the family limit ($8,300 for 2024), so you would need to decide how to split that amount between the two accounts.
Do I have to use my HSA every year or lose the money?
No. Unlike a flexible spending account, there is no deadline to spend HSA money. Your balance carries over to the next year and the year after that, indefinitely. You can let it grow and use it whenever you need it, even decades later.
Can I invest my HSA balance like a retirement account?
Many HSA providers allow you to invest your balance in mutual funds, stocks, or other investments, similar to an IRA or 401(k). Some require a minimum balance (often $1,000 or $2,000) before you can invest. Check with your specific provider about what investment options they offer.