What an HSA is and how the money moves

A Health Savings Account is a bank account you own that holds money specifically for medical expenses. You put pretax money into it, the money grows tax-free, and you withdraw it tax-free when you pay for medical care. The account stays yours — if you change jobs or retire, the account comes with you.

The mechanics are straightforward. Your employer, or you yourself, deposits money into the HSA. That money sits in an account at a bank or financial institution. When you have a medical expense — a doctor visit, prescription, dental work, vision care — you pay for it and then withdraw from the HSA to reimburse yourself, or you give the HSA debit card to the provider and they charge it directly. Either way, the money comes out tax-free.

The account is separate from your health insurance. Your insurance is what covers the big costs when something serious happens. The HSA is a tool to pay for the smaller, predictable costs that your insurance doesn't cover because of your deductible, copays, or coinsurance.

Key Takeaways

  • You must be enrolled in a high-deductible health plan (HDHP) to open and contribute to an HSA; you cannot have an HSA with a regular health insurance plan.
  • Money you put in is not taxed, grows without tax, and comes out without tax when used for medical expenses — this triple tax advantage is the main reason to use one.
  • You can carry unused HSA money forward year to year; it does not disappear at the end of the calendar year like a flexible spending account does.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.
  • The account belongs to you, not your employer, so you keep it even if you leave your job or retire.

Who can open an HSA and what the income limits are

You can open an HSA only if you are enrolled in a high-deductible health plan (HDHP). A regular health insurance plan — even one with a high deductible — does not may have access to. Your insurance company or employer will tell you whether your plan is an HDHP. If you are unsure, ask your benefits administrator or check your plan documents for the words "high-deductible health plan" or "HDHP."

There are no income limits to open or contribute to an HSA. Anyone with an HDHP can open one, regardless of how much they earn. However, there are annual contribution limits set by the IRS. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. These limits change slightly each year. If you are age 55 or older, you can contribute an extra $1,000 per year.

You cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare. If either of those applies to you, you are not able to open an HSA, even if you have an HDHP.

How much you can put in each year and when

The IRS sets an annual contribution limit. You can contribute up to that limit in a calendar year, and the money can come from your paycheck (through payroll deduction), from your own bank account, or from your employer as a contribution. The limit resets on January 1 each year.

If you enroll in an HDHP partway through the year, you can still contribute a full year's worth of money to the HSA for that year — this is called the "last-month rule." For example, if you enroll in an HDHP in November, you can contribute the full annual amount for that year. However, you must remain enrolled in an HDHP through December 31 of the following year, or you will owe taxes and a penalty on the excess contribution.

You do not have to contribute the maximum. You can put in $500, $1,000, or any amount up to the limit. The money you do not use stays in the account and rolls forward to the next year. There is no "use it or lose it" rule with HSAs, unlike flexible spending accounts.

What counts as a medical expense you can pay from the HSA

The IRS maintains a list of what qualifies as a medical expense. The broad categories are doctor visits, hospital care, surgery, dental work, vision care, mental health treatment, and prescription medications. Copays, coinsurance, and deductibles all count. Physical therapy, hearing aids, and medical equipment like crutches or wheelchairs count. Over-the-counter medications like pain relievers and allergy medicine count only if you have a prescription for them.

Some things do not count: cosmetic procedures (unless medically necessary), gym memberships, vitamins and supplements (unless prescribed), and most over-the-counter items without a prescription. Long-term care insurance premiums count, but regular health insurance premiums do not — with one exception: if you are receiving unemployment benefits, you can use HSA money to pay for health insurance premiums.

If you are unsure whether a specific expense qualifies, you can ask the IRS or check IRS Publication 502, which lists may have access to medical expenses in detail. Many HSA providers also have a list on their website. The safest approach is to keep receipts and documentation for any expense you pay from the HSA, in case you are audited.

How to use the money and what happens if you spend it on non-medical things

You access HSA money in three ways. First, many HSA accounts come with a debit card that you can use at pharmacies, doctors' offices, and hospitals. Second, you can withdraw money by check or electronic transfer from the HSA bank account and pay the provider yourself. Third, you can pay out of pocket and then request a reimbursement from the HSA.

If you withdraw money from the HSA and spend it on something that is not a may have access to medical expense, you owe income tax on that amount plus a 20 percent penalty. For example, if you withdraw $500 and spend it on groceries, you pay income tax on the $500 plus $100 in penalties. The exception is after age 65: at that point, you can withdraw money for any reason, and you only owe income tax (no penalty) on non-medical withdrawals.

Keep receipts and records of what you spend HSA money on. If the IRS audits your return, they may ask for proof that withdrawals were for may have access to expenses. Having documentation protects you.

How the money grows and what happens to unused funds

Most HSA accounts earn interest or can be invested in mutual funds, similar to a retirement account. The growth is tax-free. Some HSAs are set up as savings accounts that earn a small amount of interest. Others let you invest the balance in stocks, bonds, or funds, which can grow faster but also carry risk.

Money you do not spend in a given year stays in the account. There is no deadline to use it. If you have $3,000 in the HSA on December 31, that $3,000 is still yours on January 1. You can let it accumulate for years, or even decades. This is different from a flexible spending account (FSA), which has a "use it or lose it" rule where unspent money disappears at the end of the year.

Because the money rolls forward and can grow, many people use HSAs as a long-term savings tool for retirement medical expenses. You can withdraw money tax-free for medical costs at any age, so the HSA can serve as a supplement to Medicare and other retirement health coverage.

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

The HSA belongs to you, not your employer. If you leave your job, the account stays open and the money stays yours. You can continue to use it for medical expenses, and you can continue to contribute to it if you enroll in another HDHP with your new employer or through the individual market.

If you leave an HDHP and enroll in a different type of health insurance plan, you can no longer make new contributions to the HSA. However, you can still withdraw money from the account for may have access to medical expenses. The money does not disappear — it is yours to use whenever you need it for medical care.

If you move to a new HSA provider (for example, if your employer switches banks), you can transfer the balance directly from one account to another. This is called a trustee-to-trustee transfer and does not count as a withdrawal, so there are no tax consequences.

Frequently Asked Questions

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

Yes. The money in your HSA can be used for may have access to medical expenses of you, your spouse, and your dependents — even if they are not covered by your HDHP. You do not have to be on the same insurance plan. Keep receipts showing whose expense it was.

What if I withdraw money from my HSA and later realize it was not a may have access to expense?

You owe income tax and a 20 percent penalty on that withdrawal. The penalty applies only to non-may have access to withdrawals, not to the full account balance. If you catch the mistake early, some HSA providers allow you to return the money within a certain window, though this varies by provider.

Can I open an HSA if I am self-employed?

Yes, as long as you enroll in an HDHP through the individual market or a professional association. You can contribute to the HSA and deduct the contribution on your tax return. Self-employed people often use HSAs as a tax-efficient way to set aside money for medical expenses.

Do I have to spend my HSA money before I turn 65?

No. You can let the money accumulate for as long as you want. After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are taxed as income. Many people use HSAs as a retirement savings tool for this reason.

What if my employer contributes to my HSA — does that count toward the annual limit?

Yes. The annual contribution limit includes money from your employer, money you contribute through payroll deduction, and money you contribute from your own bank account. All of it counts toward the same limit. If your employer contributes $2,000 and you contribute $1,500, you have reached $3,500 of the annual limit.