An HSA lets you set aside pre-tax money specifically for medical expenses, and any balance you don't spend rolls over year to year

A Health Savings Account (HSA) is a savings account tied to a high-deductible health insurance plan. You contribute money before taxes are taken out of your paycheck, use it to pay for may have access to medical costs, and keep whatever you don't spend. Unlike a flexible spending account (FSA), which forces you to use the money or lose it each year, an HSA balance stays with you indefinitely and can grow if you invest it.

The account works in three steps: you contribute money (either through payroll deduction or a direct deposit), you pay medical bills from that account, and you keep the receipt as proof the expense was may have access to. The money you contribute reduces your taxable income for that year, and the money you withdraw for medical costs comes out tax-free. If you withdraw money for something that isn't a may have access to medical expense, you pay income tax on it plus a 20 percent penalty.

Key Takeaways

  • You can only open an HSA if you're enrolled in a high-deductible health plan (HDHP), and you cannot have other health coverage like Medicare or a spouse's plan at the same time.
  • Contributions are made with pre-tax money, either through payroll deduction or by depositing your own money and deducting it on your tax return.
  • You can spend HSA money on doctor visits, prescriptions, dental work, vision care, and many other medical costs, but not on insurance premiums or over-the-counter items without a prescription.
  • Any money left in the account at the end of the year stays there and can be invested to grow, making an HSA different from an FSA that resets annually.
  • After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as income.

Who can open an HSA and what the requirements are

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) and have no other health coverage. "Other coverage" includes Medicare, Medicaid, a spouse's employer plan, TRICARE, or the Veterans Administration. If your spouse has an HSA through their own HDHP, you can each have separate accounts, but you cannot both contribute to a family HSA and also be covered by another plan.

Your HDHP must meet minimum deductible amounts set by the IRS each year. For 2024, the minimum deductible is $1,600 for individual coverage and $3,200 for family coverage. Your plan's out-of-pocket maximum (the most you'd pay in a year before insurance covers everything) also has to stay within IRS limits. You can check whether your current plan qualifies by looking at your plan documents or asking your employer's benefits administrator.

You do not need to be employed to open an HSA. Self-employed people and people with individual insurance can open one as long as their plan meets the HDHP requirements. You can open an account through your employer's benefits plan, through a bank, or through a financial services company that offers HSAs.

How much you can contribute each year

The IRS sets annual contribution limits, and they 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're 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). These limits apply to all your HSA accounts combined — if you have two accounts at different banks, your total contributions across both cannot exceed the limit.

You can contribute money through payroll deduction (which is the most common way), by depositing your own money and deducting it on your tax return, or by having your employer deposit money directly. If you enroll in an HDHP partway through the year, you can still contribute a full year's worth of money, but you must remain enrolled in an HDHP through December 31 or you'll owe taxes and penalties on the excess.

Contributions must be made by the tax filing deadline (usually April 15 of the following year). If you contribute too much, you can withdraw the excess and avoid penalties if you do it before the deadline, but you'll owe taxes on the earnings that excess money generated.

What you can and cannot spend HSA money on

may have access to medical expenses include doctor visits, hospital stays, surgery, prescription medications, dental work, vision care, hearing aids, and mental health treatment. You can also use HSA money for medical equipment like crutches, wheelchairs, or blood pressure monitors. Insulin and other diabetes supplies are covered. Physical therapy, chiropractic care, and acupuncture count if they're prescribed by a doctor.

Over-the-counter items like pain relievers, cold medicine, and allergy medication are not covered unless you have a prescription from a doctor. Health insurance premiums are generally not covered, with one exception: if you're receiving unemployment benefits, you can use HSA money to pay for health insurance premiums. Long-term care insurance premiums are covered up to certain limits.

Expenses that don't count include cosmetic surgery (unless it's reconstructive after an injury), gym memberships, vitamins and supplements (unless prescribed for a specific medical condition), and most over-the-counter wellness products. If you're unsure whether an expense qualifies, the IRS publishes a full list on its website, or you can ask your HSA provider.

How to pay for medical expenses from your HSA

Most HSA providers give you a debit card that works like a regular bank card. You can swipe it at the doctor's office, pharmacy, or hospital. Some providers also let you set up automatic transfers to pay bills, or you can request a check. A few providers require you to pay out of pocket first and then request reimbursement by submitting receipts.

Keep all receipts and documentation for at least three years. The IRS can audit your HSA and ask you to prove that withdrawals were for may have access to expenses. You don't have to submit receipts when you withdraw money, but you must be able to produce them if asked. Many HSA providers also let you upload receipts to their website or app, which creates a digital record.

You can withdraw money at any time for any reason, but if it's not for a may have access to medical expense, you'll owe income tax on the amount plus a 20 percent penalty. After age 65, the penalty goes away — you can withdraw money for non-medical reasons and only pay income tax, just like withdrawing from a regular savings account or IRA.

How HSA money grows over time

If you don't spend all your HSA money in a given year, the balance stays in the account and earns interest or investment returns. Many HSA providers let you invest your balance in mutual funds, stocks, or bonds, similar to a brokerage account. Some providers only offer a savings account with a low interest rate. Check what investment options your provider offers before you open an account.

The money you earn through interest or investment gains is not taxed as long as you eventually spend it on may have access to medical expenses. This makes an HSA a powerful long-term savings tool — you can contribute money, let it grow for decades, and withdraw it tax-free when you need it for medical costs in retirement.

If you change jobs or leave your employer's plan, your HSA stays with you. You own the account, not your employer. You can roll the balance to a new HSA at a different provider, or keep it where it is. Some people use an HSA as a retirement account by investing aggressively early on and only spending the money after age 65.

What happens to your HSA if you change insurance or leave your job

Your HSA is yours to keep regardless of what happens with your health insurance. If you switch to a different HDHP, you can continue contributing to the same HSA account. If you leave your job, your HSA doesn't disappear — you own it outright. You can keep the account open, stop contributing, and use the balance whenever you need it for medical expenses.

If you enroll in Medicare, you can no longer contribute to an HSA, but you can still withdraw money from an existing balance for may have access to medical expenses. If you switch to a non-HDHP plan (like a traditional PPO or HMO), you cannot make new contributions, but again, you can keep using the money that's already there.

If you move to a different bank or financial institution, you can roll your HSA balance to a new provider without taxes or penalties. Some employers offer HSA accounts through specific providers, but once you leave that job, you can move the money to an HSA at any bank or brokerage you choose.

Frequently Asked Questions

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

Yes. HSA money can be used to pay for may have access to medical expenses for you, your spouse, and any dependent you claim on your tax return, even if they're not covered by your health insurance. You don't have to be the one receiving the care — you just have to be able to claim them as a dependent.

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

You'll 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 and you're in the 22 percent tax bracket, you'd owe $110 in taxes plus $100 in penalties, for a total of $210. After age 65, the penalty is waived, but you still owe income tax.

Can I have an HSA and an FSA at the same time?

No. You cannot contribute to both an HSA and a traditional FSA in the same year. However, you can have an HSA and a limited-purpose FSA (which only covers dental and vision expenses) at the same time, as long as the FSA is set up that way.

Do I lose my HSA money if I don't use it by the end of the year?

No. Unlike an FSA, an HSA has no "use it or lose it" rule. Money rolls over indefinitely, and you can let it accumulate and grow. This is one of the main advantages of an HSA over other health savings accounts.

Can I invest my HSA balance like a retirement account?

Yes, if your provider offers investment options. You can invest in mutual funds, stocks, or bonds and let the money grow tax-free. Many people use an HSA as a supplemental retirement account by investing aggressively and only withdrawing for medical expenses after age 65.