How an HSA works in three steps

A Health Savings Account (HSA) is a tax-advantaged savings account tied to a high-deductible health plan. You put money in before taxes are taken out, spend it on may have access to medical expenses, and any balance you don't use rolls forward to next year. The account earns interest or investment returns, and you can withdraw money tax-free as long as you spend it on may be able to access healthcare costs.

The mechanics are straightforward: your employer or you deposits money, the account sits in a bank or investment firm, and you access it through a debit card, check, or reimbursement request. Unlike a flexible spending account (FSA), which forces you to use the money or lose it each year, an HSA is yours to keep and grow indefinitely.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan; having other health insurance usually disqualifies you.
  • Money goes in before income tax and payroll tax are calculated, so contributing $3,000 reduces your taxable income by $3,000.
  • You can spend HSA money on deductibles, copays, prescriptions, dental work, vision care, and many other medical expenses without paying tax on the withdrawal.
  • Any money left in the account at the end of the year stays there and continues to grow; there is no "use it or lose it" rule.
  • After age 65, you can withdraw money for any reason, though non-medical withdrawals are taxed as income.

Who can open an HSA and when

You must be enrolled in a high-deductible health plan (HDHP) to open or contribute to an HSA. The IRS sets the minimum deductible each year—for 2024, it is $1,600 for individual coverage and $3,200 for family coverage. Your plan must also have an out-of-pocket maximum that does not exceed $8,050 for individual or $16,100 for family coverage. If your employer offers an HSA-may be able to access plan, you can enroll during open enrollment or when you first become may be able to access.

You cannot have other health coverage at the same time, with narrow exceptions for accident, disability, dental, vision, and long-term care insurance. If you have Medicare or are claimed as a dependent on someone else's tax return, you cannot contribute. Once you meet the requirements, you can open an account through your employer's plan administrator, a bank, or an investment firm that offers HSAs.

How money gets into your HSA

If your employer offers an HSA, the simplest route is payroll deduction. You tell your employer how much to set aside each pay period, and that amount is deducted before federal income tax, Social Security tax, and Medicare tax are calculated. For 2024, the annual contribution limit is $4,150 for individual coverage and $8,300 for family coverage. If you are 55 or older, you can add an extra $1,000 per year.

You can also contribute on your own if you have an HDHP but your employer does not offer an HSA, or if you want to contribute more than your employer allows. You make these deposits directly to the HSA provider and claim the deduction on your tax return. The contribution deadline is the same as your tax filing deadline—usually April 15 of the following year—so you can still contribute for the prior year after the calendar year ends.

What you can spend HSA money on

HSA funds cover a wide range of medical expenses. The most common are deductibles, copays, and coinsurance on your health plan. Prescriptions, insulin, and over-the-counter medications (with a doctor's note) are covered. Dental work—fillings, crowns, root canals, orthodontics—qualifies. Vision care including eye exams, glasses, and contact lenses is may be able to access. Mental health treatment, physical therapy, and chiropractic care count as well.

Less obvious expenses that may have access to include hearing aids, medical equipment like crutches or wheelchairs, and travel to receive medical care. Cosmetic surgery does not may have access to unless it is reconstructive after an injury or illness. Gym memberships and general wellness programs do not may have access to, though some specific treatments do. The IRS publishes a full list, and your HSA provider can tell you whether a specific expense is may be able to access before you spend the money.

How to access your HSA money

Most HSA providers issue a debit card that works like a regular bank card at pharmacies, doctors' offices, and hospitals. You can also request a check or electronic transfer to reimburse yourself for out-of-pocket medical expenses you have already paid. Some providers let you submit receipts online and receive reimbursement within a few business days.

Keep receipts and records of what you spend, because the IRS can audit your account and ask you to prove that withdrawals were for may have access to expenses. If you withdraw money for a non-may have access to expense before age 65, you owe income tax on the amount plus a 20 percent penalty. After age 65, you can withdraw money for any reason without the penalty, though non-medical withdrawals are taxed as regular income.

What happens to money you don't spend

Unlike an FSA, an HSA has no "use it or lose it" deadline. Any balance remaining at the end of the year rolls forward automatically. You can let the money sit in the account, earning interest, or invest it in stocks, bonds, or mutual funds through your HSA provider. Many people use an HSA as a retirement savings tool, letting the balance grow over decades and withdrawing it for medical expenses in retirement.

If you change jobs, you keep your HSA. The account stays open and the money remains yours. You can roll the balance to a new HSA at your new employer's plan or keep it at the original provider. If you lose your HDHP coverage—because you enroll in Medicare, switch to a different health plan, or gain other health insurance—you can no longer contribute, but you can still withdraw money for may have access to medical expenses.

HSA investment options and growth

Most HSA providers offer a savings account that earns interest, similar to a regular bank account. Some also let you invest the balance in a brokerage account with stocks, bonds, index funds, or other securities. Investment options vary by provider, so check what is available before you open an account if investment growth matters to you.

Any interest or investment gains in the account are not taxed as long as you use the money for may have access to medical expenses. This makes an HSA a powerful long-term savings tool: you get a tax deduction going in, tax-free growth while the money sits there, and tax-free withdrawal when you spend it on healthcare. Some people intentionally do not withdraw from their HSA during working years, letting it grow, and then use it to cover medical expenses in retirement.

Frequently Asked Questions

Can I use my HSA for my spouse or children?

Yes. If you have family coverage, you can spend HSA money on may have access to medical expenses for your spouse and any dependent children, even if they are not on your health plan. You cannot spend it on expenses for adult children or other relatives unless they are your tax dependents.

What happens to my HSA if I quit my job?

The account is yours to keep. You own the money and the account stays open. You can continue to withdraw it for may have access to medical expenses, and you can roll it to a new HSA if your new employer offers one. You simply cannot make new contributions unless you enroll in an HDHP.

Can I withdraw money from my HSA before I spend it on medical care?

Yes, you can withdraw the money anytime. But if you use it for non-medical expenses before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. After age 65, you can withdraw for any reason without the penalty, though non-medical withdrawals are taxed as income.

Do I have to spend my HSA money in the same year I contribute it?

No. You can contribute in 2024 and spend the money in 2030 if you want. The money rolls forward indefinitely. Some people contribute for years without withdrawing, letting the balance grow, then use it to cover medical expenses later.

What if I lose my high-deductible health plan coverage?

You can no longer make contributions, but you keep the account and the money inside. You can still withdraw for may have access to medical expenses. If you enroll in a new HDHP later, you can resume contributions at that time.