What a Health Savings Account Does

A Health Savings Account (HSA) is a bank account you own that holds money specifically for medical expenses. You put pre-tax dollars into it, the money grows tax-free, and you withdraw it tax-free when you pay for medical care. Unlike a flexible spending account (FSA), the money rolls over year to year — you don't lose what you don't spend.

The account is tied to a high-deductible health plan (HDHP), a type of health insurance with lower monthly premiums but higher deductibles. You can only open an HSA if you're enrolled in an HDHP. The account itself is separate from your insurance; your bank or HSA provider holds it, and you control how much you contribute and when you withdraw.

Key Takeaways

  • You contribute pre-tax money to an HSA, which reduces your taxable income for the year.
  • Money in an HSA rolls over year to year and earns interest or investment returns, unlike FSAs which expire.
  • You can withdraw HSA funds tax-free only for may have access to medical expenses: copays, deductibles, prescriptions, dental work, vision care, and many other healthcare costs.
  • If you withdraw money for non-medical expenses before age 65, you pay income tax plus a 20 percent penalty; after 65, you pay only income tax.
  • You must be enrolled in an HDHP to open or contribute to an HSA, and you cannot have other health coverage like a spouse's plan or Medicare.

How Money Goes In: Contribution Limits and Tax Treatment

You contribute money to your HSA through payroll deduction, a direct transfer from your bank, or a check mailed to your HSA provider. The money you put in reduces your taxable income dollar-for-dollar. If you earn $50,000 and contribute $3,000 to an HSA, you report only $47,000 as income on your tax return.

The IRS sets annual contribution limits. For 2024, the limit is $4,150 if you have individual coverage under an HDHP, or $8,300 if you have family coverage. If you're 55 or older, you can contribute an additional $1,000 per year (called a catch-up contribution). Your employer may also contribute to your HSA; employer contributions count toward the same annual limit.

You can contribute only during the months you're enrolled in an HDHP. If you switch to a different health plan mid-year, you can contribute only for the months you were covered by the HDHP. Some employers allow a grace period of up to 2.5 months into the following year to contribute for the prior year, but this varies.

How Money Grows: Interest and Investment Options

Once money sits in your HSA, it earns interest or investment returns depending on how your account is set up. Some HSA providers offer a savings account that earns a small interest rate, similar to a regular bank account. Others let you invest the money in mutual funds, stocks, or bonds, which can grow faster but also carry risk.

You decide how much to keep in savings versus how much to invest. Many people keep enough in the savings portion to cover expected medical expenses for the year, then invest the rest for long-term growth. Unlike a regular savings account, the growth is tax-free — you don't pay taxes on the interest or investment gains.

This long-term growth is one major difference from an FSA. If you contribute $3,000 to an HSA and never touch it, that money can sit there for decades, earning returns. An FSA, by contrast, typically expires at the end of the year (with limited exceptions), so unused money is forfeited.

How Money Comes Out: may have access to Medical Expenses

You withdraw money from your HSA to pay for may have access to medical expenses. These include copays, coinsurance, deductibles, prescription drugs, dental work, vision care, mental health treatment, and many other healthcare costs. The IRS publishes a detailed list, but the general rule is: if it's a medical expense your insurance doesn't cover or only partially covers, an HSA can pay for it.

Some common may have access to expenses are dental cleanings and fillings, eyeglasses and contact lenses, hearing aids, physical therapy, and over-the-counter medications (with a prescription from your doctor). You can also use HSA funds to pay insurance premiums in specific situations: COBRA premiums, long-term care insurance premiums, and health insurance premiums if you're receiving unemployment benefits.

You don't have to use the money in the year you contribute it. You can let it accumulate for years and then withdraw it later. Keep receipts for any medical expenses you pay out of pocket, because the IRS can audit your HSA withdrawals and ask you to prove they were may have access to expenses.

What Happens If You Withdraw for Non-Medical Reasons

If you withdraw money from your HSA for something other than a may have access to medical expense, you owe income tax on that amount plus a 20 percent penalty. For example, if you withdraw $1,000 to pay rent and you're in the 22 percent tax bracket, you'd owe $220 in income tax plus $200 in penalty — a total of $420 in taxes on that $1,000.

The penalty applies only before age 65. Once you turn 65, you can withdraw money for any reason without the 20 percent penalty. You still owe income tax on non-medical withdrawals after 65, but the penalty goes away. This makes an HSA function somewhat like a retirement account after age 65, though it's most valuable when used for medical expenses.

If you accidentally withdraw money for a non-may have access to expense, you can put it back into the account within a certain timeframe in some cases, but this depends on your HSA provider's rules. It's safer to keep careful records and withdraw only for expenses you're certain are may have access to.

Enrollment Requirements and Coverage Restrictions

To open an HSA, you must be enrolled in an HDHP. For 2024, an HDHP has a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage. Your employer may offer an HDHP as one of the health plan choices during open enrollment, or you can purchase one on the individual market through your state's health insurance marketplace.

You cannot have other health coverage at the same time. If your spouse has a traditional health plan (not an HDHP) and covers you under it, you're ineligible for an HSA. Similarly, if you're enrolled in Medicare, you cannot contribute to an HSA, though you can continue to withdraw from an existing HSA for medical expenses.

Some people are covered by a spouse's FSA or health reimbursement arrangement (HRA). These also disqualify you from opening an HSA. The rule is strict: you can have only an HDHP and nothing else, with limited exceptions for specific types of coverage like dental-only or vision-only plans.

How to Set Up and Manage Your Account

If your employer offers an HDHP, they typically partner with an HSA provider (like HealthEquity, Lively, or Fidelity) and handle enrollment for you. You'll receive login credentials and can start contributing through payroll deduction. If you purchase an HDHP on your own, you'll need to open an HSA separately through a bank or HSA provider.

Once your account is open, you can manage it online. Most HSA providers let you view your balance, set up automatic contributions, choose investment options, and request withdrawals. Some offer debit cards linked to the HSA, so you can pay medical providers directly from the account. Others require you to pay out of pocket and then request reimbursement.

Keep records of all medical expenses and receipts. The IRS doesn't require you to submit receipts when you withdraw, but you must be able to prove the expense was may have access to if audited. Many people photograph receipts or save them in a folder for this reason.

Frequently Asked Questions

Can I use my HSA to pay for my gym membership or vitamins?

No. A gym membership is not a may have access to medical expense. Vitamins and supplements are also not may have access to unless prescribed by a doctor to treat a specific medical condition. Over-the-counter pain relievers, allergy medicine, and cold medicine are may have access to only if you have a prescription from your doctor.

What happens to my HSA if I change jobs?

Your HSA stays with you. It's your account, not your employer's. You keep the money and can continue to withdraw it for medical expenses. If your new employer offers an HSA, you can contribute to the same account or open a new one. Some people consolidate multiple HSAs into one account for easier management.

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

Yes, if your spouse is covered under your HDHP family plan. You can also use HSA funds to pay for medical expenses of your spouse or dependents even if they're not on your insurance plan, as long as you claim them as dependents on your tax return.

What if I don't use all my HSA money by the end of the year?

The money rolls over to the next year. There's no "use it or lose it" rule like with FSAs. You can let the balance grow indefinitely and use it whenever you have may have access to medical expenses, even years later.

Can I withdraw HSA money to pay for my child's braces?

Yes. Orthodontic treatment is a may have access to medical expense. You can use HSA funds to pay for braces, retainers, and related dental work for yourself, your spouse, or your dependents.