A Health Savings Account lets you set aside pre-tax money to pay for medical expenses now or later

A Health Savings Account (HSA) is a savings account tied to a high-deductible health insurance plan. You put money into it before taxes are taken out of your paycheck, use it to pay for medical costs, and any money you don't spend stays in the account and grows. Unlike a flexible spending account (FSA), which you lose if you don't spend the money by the end of the year, an HSA rolls over indefinitely — the balance is yours to keep.

The account works in three stages: you contribute money (usually through payroll deduction), you spend it on may have access to medical expenses, and any remainder sits invested and grows tax-free. You own the account and can take it with you if you change jobs or insurance plans, as long as you stay enrolled in a high-deductible health plan.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan, and you must stay enrolled to keep contributing.
  • Money goes in before taxes, grows tax-free, and comes out tax-free when spent on may have access to medical expenses — giving you a triple tax advantage.
  • You can spend HSA money on deductibles, copays, prescriptions, dental work, vision care, and many other medical costs, but not on insurance premiums or over-the-counter drugs without a prescription.
  • Any balance you don't spend stays in the account and can be invested to grow; you can withdraw it tax-free at any age once you turn 65, though non-medical withdrawals before 65 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, that is $1,600 for individual coverage and $3,200 for family coverage. Your plan must also have an out-of-pocket maximum (the most you pay before insurance covers everything), and you cannot be covered by any other health insurance at the same time, with limited exceptions for accident, disability, or dental-only plans.

You can open an HSA through your employer if they offer one, or you can open one independently through a bank or financial institution if you buy your own high-deductible plan. The account must be set up by December 31 of the tax year you want to contribute for, though you have until 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 if you have individual coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). These limits apply to all your HSAs combined — if you have two accounts, the total across both cannot exceed the limit.

Contributions can come from your paycheck (usually the easiest route, since your employer deducts them before taxes), from you directly to the account, or from your employer as a contribution. If your employer contributes, that amount counts toward your limit. You cannot contribute more than you earn, and if you lose high-deductible coverage partway through the year, you can only contribute a prorated amount for the months you were covered.

What you can spend HSA money on

HSA funds can pay for any medical expense that the IRS considers may have access to. That includes deductibles, copays, coinsurance, prescriptions, dental work, vision care (including glasses and contacts), hearing aids, mental health treatment, physical therapy, and many other services. You can also use HSA money to pay for medical equipment like crutches, wheelchairs, or blood pressure monitors.

What you cannot use it for: over-the-counter drugs (unless prescribed by a doctor), cosmetic procedures, gym memberships, vitamins, or health insurance premiums — with one exception. You can use HSA money to pay premiums for long-term care insurance, COBRA continuation coverage, or health insurance while you are receiving unemployment benefits. You cannot use it to pay premiums for your regular health insurance, Medicare, or supplemental insurance like Medigap.

If you withdraw money for something that is not a may have access to medical expense before age 65, you owe income tax on that amount plus a 20 percent penalty. After age 65, you can withdraw money for any reason without the penalty, though non-medical withdrawals are still taxed as income.

How the money grows and stays yours

Any balance you don't spend in a given year rolls over to the next year — there is no "use it or lose it" deadline like there is with an FSA. The money can sit in the account earning interest, or you can invest it in stocks, bonds, or mutual funds through most HSA providers. Investment gains are tax-free as long as you eventually spend the money on may have access to medical expenses.

The account is yours to keep. If you change jobs, you take the HSA with you. If you switch to a different health insurance plan that is not a high-deductible plan, you can no longer contribute new money, but the balance stays in the account and you can still withdraw it for medical expenses. If you reach age 65, you can withdraw money for any reason without the 20 percent penalty (though non-medical withdrawals are taxed as regular income).

How to pay for medical expenses with your HSA

Most HSA providers give you a debit card linked to the account. You can swipe it at the doctor's office, pharmacy, or hospital like a regular card. Some providers also let you pay online or by check. Keep receipts for everything you buy with HSA money, because the IRS can ask you to prove that expenses were may have access to medical costs.

You can also reimburse yourself. If you pay for a medical expense out of pocket with your own money, you can withdraw that amount from your HSA later — even years later — as long as you have documentation. Some people use this strategy to let their HSA grow invested while they pay medical costs from their regular bank account, then reimburse themselves tax-free later.

What happens if you no longer have a high-deductible plan

If you switch to a different health insurance plan, you can no longer make new contributions to your HSA. However, the money already in the account stays there and remains yours. You can still withdraw it to pay for may have access to medical expenses, and the balance continues to grow if you have it invested. You can also move the account to a different HSA provider if you want better investment options or lower fees.

If you later re-enroll in a high-deductible plan, you can start contributing again. There is no limit to how long you can keep an HSA open — you can hold it for decades and use it in retirement to pay for Medicare premiums, long-term care, or other medical costs.

Frequently Asked Questions

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

Yes, if you have family coverage. HSA money can pay for medical expenses of you, your spouse, and any dependents you claim on your tax return, even if they are not covered by your high-deductible plan. Keep receipts showing whose expense it was.

What if I withdraw money from my HSA and later find out the expense was not may have access to?

You owe income tax on that amount plus a 20 percent penalty. If you discover this after filing your taxes, you can file an amended return. Some people keep detailed records and receipts specifically to avoid this situation.

Can I invest my HSA money, or does it have to sit in a savings account?

Most HSA providers let you invest the balance in mutual funds, stocks, or bonds. Some require a minimum balance (like $1,000 or $2,000) before you can invest. Investment gains are tax-free as long as you spend the money on may have access to medical expenses eventually.

What happens to my HSA if I die?

The account becomes part of your estate. If your spouse is the beneficiary, they can treat it as their own HSA and continue using it tax-free for medical expenses. If anyone else inherits it, they owe income tax on the full balance, though they can still withdraw it for your medical expenses paid before death without the penalty.

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

No, with one exception: you can have an HSA and a limited-purpose FSA that only covers dental and vision expenses. A regular FSA that covers medical expenses makes you ineligible for an HSA.