How a Health Savings Account Works and What You Can Use It For

A Health Savings Account lets you set aside pre-tax money to pay for medical expenses now or in retirement

A Health Savings Account (HSA) is a bank account where you deposit money before taxes are taken out of your paycheck. The money sits there until you need it for medical bills — doctor visits, prescriptions, dental work, vision care, and dozens of other health expenses. You pay no federal income tax on the money you put in, no tax on the interest it earns, and no tax when you withdraw it to pay for may have access to medical costs. If you don't spend the money in a given year, it rolls over to the next year. Unlike a flexible spending account (FSA), you don't lose unspent HSA funds at the end of the year.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) — a type of health insurance with lower monthly premiums but a higher deductible. 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 employer may offer an HSA through payroll, or you can open one independently at a bank or financial institution. The account is yours to keep even if you change jobs or leave your employer.

Key Takeaways

You can only open an HSA if you are enrolled in a high-deductible health plan, and you must remain enrolled to contribute money each year.
Money you deposit reduces your taxable income, and withdrawals for may have access to medical expenses are tax-free.
Unlike FSAs, unused HSA money carries over year to year and can be invested to grow for future medical costs or retirement.
After age 65, you can withdraw HSA funds for any reason without penalty, though non-medical withdrawals are taxed as regular income.
You must keep receipts and records showing that withdrawals were for may have access to medical expenses, even though you don't submit them to the HSA provider.

How much you can contribute and who decides

The IRS sets annual contribution limits, which change each year. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). These limits apply to the total of all your HSA accounts combined — if you have two HSAs, your contributions to both cannot exceed the annual limit.

If your employer offers an HSA, you typically set up contributions through payroll deduction, which means the money comes out before taxes are calculated. If you open an HSA on your own, you deposit money directly and claim the deduction on your tax return. You can contribute at any time during the year, but contributions for a given tax year must be made by the tax filing deadline (usually April 15 of the following year).

What medical expenses you can pay for with HSA money

The IRS maintains a long list of may have access to medical expenses. Common ones include doctor visits, hospital stays, prescription medications, dental work, vision care, hearing aids, and mental health treatment. You can also use HSA funds for over-the-counter items like pain relievers, allergy medicine, and first-aid supplies — but only if you have a prescription or a doctor's note saying you need them. Cosmetic procedures like teeth whitening or Botox do not count, but corrective dental work does.

Expenses for your spouse and dependents count too, even if they are not covered by your HDHP. You can pay for their doctor visits, prescriptions, and other may have access to costs using your HSA. The IRS publishes a full list of may have access to expenses on its website, and your HSA provider usually has a searchable database to check whether a specific item or service qualifies.

How to withdraw money and what records you need

You withdraw money from your HSA the same way you would from a regular bank account — through a debit card, check, transfer, or online request. Many HSA providers issue a debit card that you can use at pharmacies, doctor's offices, and hospitals. When you use the card, the provider may ask you to categorize the expense, but they do not verify it at the time of purchase.

You are responsible for keeping receipts and records showing that each withdrawal was for a may have access to medical expense. The HSA provider does not ask to see these records when you withdraw, but the IRS can request them during a tax audit. If you cannot prove that a withdrawal was for a may have access to expense, the IRS treats it as a non-may have access to withdrawal: you owe income tax on the amount plus a 20 percent penalty. Keeping a folder of receipts or photographing them on your phone is the simplest approach.

How an HSA can grow and what happens to unused money

Unlike an FSA, an HSA is an investment account. After you deposit money, you can choose to invest it in mutual funds, stocks, or other options offered by your HSA provider. The money can grow tax-free, and you pay no tax on the gains when you withdraw for medical expenses. Many people use an HSA as a retirement savings tool: they pay current medical bills out of pocket and let the HSA balance grow, then withdraw it tax-free for medical costs in retirement.

Money you don't spend in a given year stays in the account indefinitely. There is no "use it or lose it" deadline. This makes an HSA more flexible than an FSA, where unspent funds typically go back to your employer at the end of the year. Over time, an HSA can accumulate a substantial balance if you don't need to withdraw from it regularly.

What happens to your HSA if you change jobs or leave your employer

Your HSA is your personal property, not your employer's. If you change jobs, you keep the account and the money in it. You can continue to use it to pay for medical expenses as long as you remain enrolled in an HDHP (either through your new employer or on your own). If you leave your job and do not enroll in another HDHP, you can no longer make new contributions, but you can still withdraw money from the account for may have access to medical expenses.

If you switch to a health plan that is not an HDHP — for example, a traditional PPO or HMO — you become ineligible to contribute to an HSA. However, you can still withdraw money from your existing HSA for may have access to medical expenses. Once you re-enroll in an HDHP, you can resume contributions. Some people keep an HSA open for years after leaving an HDHP-based job, using it as a medical expense fund while they are on a different type of insurance.

Tax treatment after age 65 and in retirement

After you turn 65, the rules change. You can withdraw money from your HSA for any reason without the 20 percent penalty. However, non-medical withdrawals are subject to regular income tax. This makes an HSA a useful retirement account: you can use it for medical expenses tax-free, or withdraw it for any other purpose and pay only income tax (not the penalty). At age 65, an HSA functions similarly to a traditional IRA in terms of tax treatment.

If you are enrolled in Medicare, you become ineligible to contribute to an HSA, but you can continue to withdraw from it. Many retirees use their HSA to cover Medicare premiums, copays, and other out-of-pocket medical costs, which are may have access to expenses. This can stretch your retirement savings further since the withdrawals are tax-free.

Frequently Asked Questions

Can I have an HSA if my spouse has a different health plan?

Yes, as long as you are enrolled in an HDHP. Your spouse can be on a different plan. You can use your HSA to pay for your spouse's may have access to medical expenses regardless of what insurance they have. However, if your spouse also has an HSA, you each maintain separate accounts and contribution limits.

What happens if I withdraw money for something that is not a may have access to medical expense?

You owe income tax on the amount withdrawn plus a 20 percent penalty. For example, if you withdraw $500 for a non-may have access to expense, you pay income tax on that $500 plus an additional $100 penalty. After age 65, the penalty goes away, but you still owe income tax on non-may have access to withdrawals.

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

You can use HSA funds to pay premiums for long-term care insurance and COBRA coverage (continuation coverage after leaving a job). You cannot use it for regular health insurance premiums while you are employed, but you can use it for Medicare premiums and other government health coverage premiums after you turn 65.

Do I lose my HSA money if I do not spend it in a year?

No. HSA money rolls over indefinitely. Unlike an FSA, there is no deadline to spend it. You can accumulate a balance over many years and use it whenever you need it, even decades later.

Can I open an HSA if my employer does not offer one?

Yes. You can open an HSA independently at a bank, credit union, or financial services company, as long as you are enrolled in an HDHP. You would make contributions directly and claim the deduction on your tax return. Some people do this when their employer's HDHP does not come with an HSA option.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.