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

A Health Savings Account (HSA) is a savings account tied to a high-deductible health insurance plan. Money you put in is not taxed, money you withdraw for medical costs is not taxed, and any balance you don't spend rolls over year to year. You own the account — if you change jobs or insurance plans, the money stays yours.

The account works because the IRS treats it as a way to save for healthcare costs that your insurance plan won't cover until you meet your deductible. You contribute money before taxes are taken from your paycheck (if your employer offers it) or you contribute after-tax money and deduct it on your tax return. That money sits in the account earning interest or invested in funds, depending on which HSA provider you use. When you have a medical bill, you withdraw what you need tax-free.

The catch is that you must be enrolled in a high-deductible health plan (HDHP) to open or contribute to an HSA. Once you switch to a different type of insurance, you can no longer add money to the account, but you keep what's already there and can still withdraw it for medical expenses.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan, and you lose the right to contribute the moment you switch to other coverage.
  • Contributions are made with pretax dollars through payroll deduction or claimed as a deduction on your tax return, reducing your taxable income.
  • Withdrawals for may have access to medical expenses — copays, deductibles, prescriptions, dental, vision, and many other costs — are never taxed.
  • Money you don't spend stays in the account and grows year to year, making an HSA a retirement savings tool if you can afford to pay medical bills out of pocket now.
  • You can withdraw money for any reason, but non-medical withdrawals are taxed as income plus a 20 percent penalty until age 65, when the penalty drops but income tax remains.

Who can open an HSA and when

You must be enrolled in an HDHP to open an HSA. For 2024, an HDHP means a deductible of at least $1,600 for individual coverage or $3,200 for family coverage, with an out-of-pocket maximum of $4,000 or $8,000 respectively. These numbers change yearly. Your insurance company will tell you if your plan qualifies.

You cannot have other health coverage at the same time — no spouse's plan, no parent's plan, no Medicaid, no Medicare, no TRICARE. You also cannot be claimed as a dependent on someone else's tax return. If any of these apply to you, you are not may be able to access to open an HSA, though you may become may be able to access later if your situation changes.

Most people open an HSA through their employer, who sets up an account and may contribute money on your behalf. If your employer does not offer one, you can open an HSA on your own through a bank, credit union, or investment company — you will need to show proof of HDHP enrollment. You can open an HSA at any point during the year you become may be able to access, and you have until the tax filing deadline (usually April 15) of the following year to make contributions for the prior year.

How much you can contribute each year

The IRS sets annual contribution limits, which 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 add an extra $1,000 per year — this is called a catch-up contribution. These limits apply to all your HSAs combined: if you have accounts at two different banks, your total contributions across both cannot exceed the limit.

If you become may be able to access partway through the year — for example, you switch to an HDHP in June — you can contribute a prorated amount for that year. If you were may be able to access for the entire year, you must contribute the full amount by the tax deadline to claim it on your return, or you will owe taxes on the excess.

Your employer may contribute to your HSA as part of your benefits package. That money counts toward the annual limit. If your employer contributes $2,000 and you contribute $1,500, you have reached $3,500 of your $4,150 limit and can only add $650 more yourself that year.

What you can spend HSA money on

You can withdraw money tax-free for may have access to medical expenses — costs that would normally be deductible on your tax return. This includes copays, coinsurance, deductibles, and out-of-pocket costs your insurance does not cover. Prescription medications, insulin, and over-the-counter drugs (with a doctor's prescription) all count. Dental work, vision care, hearing aids, and mental health treatment are covered.

Some less obvious expenses may have access to: physical therapy, chiropractic care, acupuncture, medical equipment like crutches or blood pressure monitors, and even some long-term care insurance premiums. Gym memberships and general wellness programs do not count unless they treat a specific diagnosed condition. If you are unsure whether an expense qualifies, the IRS publishes a full list, and your HSA provider can usually tell you before you withdraw.

You do not have to withdraw money in the same year you spend it. You can pay a medical bill out of pocket and withdraw from your HSA months or years later, as long as you keep receipts. This flexibility makes an HSA useful as a retirement account: if you can afford to pay medical bills without touching your HSA, the money can grow invested for decades.

How contributions reduce your taxes

If your employer deducts HSA contributions from your paycheck, that money never enters your taxable income. You see the reduction on your pay stub immediately — fewer taxes withheld, higher take-home pay. You do not have to do anything at tax time for employer contributions.

If you contribute on your own — because you are self-employed, your employer does not offer an HSA, or you want to contribute beyond what your employer offers — you deduct the contribution on your tax return. You report it on Form 8889 and subtract it from your total income, which lowers your taxable income and the taxes you owe. This works the same way as a traditional IRA contribution.

The tax savings depend on your tax bracket. If you are in the 22 percent federal tax bracket and contribute $3,000 to an HSA, you save roughly $660 in federal taxes that year. State taxes may apply too, depending on where you live. Over time, if you contribute the maximum every year and let the money grow, the tax savings compound.

Withdrawals and penalties for non-medical use

You can withdraw money from your HSA for any reason, but only medical withdrawals avoid taxes and penalties. If you withdraw money for something other than a may have access to medical expense, you owe income tax on that amount plus a 20 percent penalty — on top of the income tax. So a $1,000 non-medical withdrawal might cost you $220 to $370 in taxes and penalties, depending on your tax bracket.

The penalty drops to zero after age 65, but the income tax remains. This means at 65 you can withdraw HSA money for any reason and only pay income tax, making it similar to a traditional IRA at that point. Many people use this feature to treat an HSA as a retirement account: they contribute the maximum while working, pay medical bills out of pocket, and withdraw the balance tax-free for medical expenses in retirement or for any reason after 65.

You do not have to withdraw money on any schedule. Unlike a traditional IRA, there are no required minimum distributions from an HSA, even after age 65. The money can stay in the account and grow as long as you live, and you can pass it to your heirs — though they will owe income tax on the balance unless they are your spouse.

How HSAs work with insurance and other accounts

An HSA is separate from your health insurance plan, even though you must have an HDHP to use one. Your insurance covers medical costs above your deductible; your HSA pays the deductible and other out-of-pocket costs. You can use both at the same time. If you have a $2,000 deductible and a $500 copay, you might pay the deductible from your HSA and the copay from your checking account, or pay both from your HSA.

You can have only one HSA at a time, but you can move money between HSA providers without penalty. This is called a trustee-to-trustee transfer. If you change jobs and your new employer offers a different HSA provider, you can move your balance over. You can also roll over unused HSA funds if you switch to a different HDHP, as long as you stay may be able to access.

An HSA does not replace a Flexible Spending Account (FSA) or a Dependent Care FSA, but you cannot have both an HSA and a general-purpose FSA in the same year. You can have an HSA and a Dependent Care FSA at the same time. If you leave your job, your HSA stays with you, but an FSA balance is usually forfeited — this is one reason an HSA is often better for long-term savings.

Frequently Asked Questions

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

Yes. HSA money can pay for may have access to medical expenses of you, your spouse, and any dependent you claim on your tax return, regardless of whether they are on your health insurance plan. You do not need to be on the same insurance to use HSA funds for their care.

What happens to my HSA if I lose my high-deductible health plan?

You keep the account and the money in it. You simply cannot add new contributions once you are no longer enrolled in an HDHP. You can still withdraw the balance for may have access to medical expenses anytime. If you return to an HDHP later, you can resume contributions.

Can I invest HSA money or does it just sit in a savings account?

It depends on your HSA provider. Some offer only a savings account earning interest. Others let you invest in mutual funds, stocks, or bonds, similar to a brokerage account. Investment options vary by provider, so compare before opening an account if growth matters to you.

Do I have to spend my HSA money by the end of the year?

No. Unlike a Flexible Spending Account, HSA money rolls over indefinitely. You can accumulate a balance for years and withdraw it whenever you have a may have access to medical expense, even decades later. This makes it a true savings account, not a use-it-or-lose-it benefit.

What records do I need to keep for HSA withdrawals?

Keep receipts and documentation for any medical expense you pay with HSA money. The IRS can audit your withdrawals years later and ask you to prove they were may have access to expenses. You do not have to submit receipts when you withdraw, but you must have them if questioned.