An HSA is a savings account that lets you set aside pre-tax money for medical expenses

A Health Savings Account (HSA) is a bank account designed specifically for medical costs. You put money into it before taxes are taken out of your paycheck, which lowers your taxable income. The money sits there until you need it for may have access to medical expenses — then you withdraw it tax-free. You own the account and the money in it, even if you change jobs or health insurance.

The catch is that you can only open an HSA if you're enrolled in a high-deductible health plan (HDHP). These are insurance plans with lower monthly premiums but higher deductibles — the amount you pay out of pocket before insurance kicks in. The tradeoff is that an HSA lets you save money on taxes while you're building up funds to cover those higher out-of-pocket costs.

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. Money you don't use stays in the account and grows year after year. After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as regular income.

Key Takeaways

  • You must be enrolled in a high-deductible health plan to open an HSA, and you contribute money before taxes are taken from your paycheck.
  • Money in an HSA rolls over from year to year and can be invested to grow, unlike FSAs which reset annually.
  • You can withdraw HSA funds tax-free only for may have access to medical expenses including deductibles, copays, prescriptions, dental work, and vision care.
  • After age 65, you can withdraw money for any reason, though non-medical withdrawals are taxed as regular income.
  • The account belongs to you — if you change jobs or insurance, the HSA stays yours and the money remains available.

How much you can contribute and when

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. These limits apply to all your HSAs combined — if you have more than one account, the total across all of them cannot exceed the limit.

You can contribute money in two ways: through payroll deductions (the most common method) or by depositing money directly into the account yourself. If you contribute through payroll, the money comes out before taxes, which saves you the most. If you deposit money yourself after taxes have been taken, you can claim a deduction on your tax return to get the same benefit.

You can contribute at any point during the year, but there's a catch: you must be enrolled in an HDHP on the first day of the month to contribute for that month. If you enroll mid-year, you can only contribute for the months you're covered. The exception is the "testing period" — if you enroll in an HDHP by December 31, you can contribute the full annual amount for that year, but you must stay enrolled through March 15 of the following year or pay back the contributions you made before you enrolled.

What counts as a may have access to medical expense

may have access to medical expenses are costs your health insurance doesn't cover or won't pay until you meet your deductible. The IRS maintains a detailed list, but the main categories are: insurance deductibles and copays, prescription medications, dental work (cleanings, fillings, root canals, orthodontics), vision care (eye exams, glasses, contacts, surgery), hearing aids, and mental health treatment. You can also use HSA funds for over-the-counter medications if you have a prescription from your doctor, though plain over-the-counter items like cold medicine without a prescription don't count.

Medical equipment and supplies count too — things like crutches, wheelchairs, blood pressure monitors, and glucose meters. Physical therapy, chiropractic care, and acupuncture are covered if a doctor recommends them. Long-term care insurance premiums and certain long-term care services also may have access to, though the rules are specific and worth checking before you withdraw.

What doesn't count: cosmetic procedures, gym memberships, vitamins (unless prescribed), and most over-the-counter items without a prescription. If you're unsure whether a specific expense qualifies, the IRS website has a searchable database, or you can ask your HSA provider — they often have customer service lines to answer these questions before you spend the money.

How to access your money when you need it

Most HSAs come with a debit card that works like a regular bank card. You can swipe it at the pharmacy, doctor's office, or hospital to pay for may have access to expenses directly. Some cards are set up to work only at medical providers, while others work anywhere but require you to prove the expense was medical if the IRS audits you later.

If your HSA doesn't have a debit card, or if you prefer to pay out of pocket and reimburse yourself later, you can withdraw money by check, bank transfer, or online request. Keep your receipts — you don't have to submit them when you withdraw, but the IRS can ask for proof years later that the money went to may have access to expenses. Many people keep a folder of receipts or take photos of them for this reason.

You can also leave the money in the account and let it grow. Some HSAs offer investment options similar to a 401(k) — you can invest in mutual funds or stocks, and the gains are tax-free as long as you eventually use the money for medical expenses. This makes an HSA a powerful long-term savings tool if you don't need the money immediately.

What happens to your HSA if you change jobs or insurance

The account is yours, not your employer's. If you leave your job, the HSA stays with you. You keep the money and can continue to use it for may have access to medical expenses. Your new employer might offer a different HSA through a different bank, but you don't have to switch — you can keep your old account open and active.

If you drop your HDHP coverage, you can no longer make new contributions to the HSA, but you can still withdraw money from it for may have access to medical expenses. The account doesn't close; it just stops accepting deposits. If you enroll in an HDHP again later, you can resume contributions.

If you switch from one HDHP to another, there's no interruption — you stay covered and can keep contributing. The only time you lose contribution may be able to access is if you enroll in a non-HDHP plan (like a standard PPO or HMO) or if you become covered by Medicare or Medicaid.

How HSA investments work and what risks to know

Many HSA providers let you invest your balance in mutual funds, index funds, or individual stocks — similar to how a 401(k) works. The money you invest grows tax-free, and you can withdraw it tax-free for medical expenses. This is one reason HSAs are sometimes called "the best retirement account nobody uses" — if you don't need the money for medical costs, you can let it compound for decades.

The tradeoff is risk. If you invest your HSA balance and the market drops, your account value drops too. Some people keep a portion in cash (the default at most providers) for near-term medical expenses and invest the rest for long-term growth. Others keep everything in cash if they expect to use it soon.

There's no requirement to invest — you can leave your entire balance in a savings account earning interest. The interest rate is usually low, but there's no market risk. Check what your HSA provider offers and what fees they charge for investing or maintaining the account. Some charge monthly maintenance fees, investment fees, or per-transaction fees, which can eat into your savings.

Tax implications and record-keeping

Contributions to an HSA reduce your taxable income, which is why they save you money. If you contribute through payroll, the reduction happens automatically. If you contribute yourself, you deduct the amount on your tax return using Form 8889. Either way, you're not paying income tax, Social Security tax, or Medicare tax on that money.

Withdrawals for may have access to medical expenses are never taxed. Withdrawals for non-may have access to expenses are taxed as regular income, plus you pay a 20% penalty — so the IRS takes its cut twice. After age 65, the penalty goes away, but non-medical withdrawals are still taxed as income.

Keep records of what you spend HSA money on. You don't have to file receipts with your tax return, but the IRS can audit you years later and ask for proof. A simple spreadsheet or folder of receipts is enough. If you can't prove an expense was medical, the IRS will tax it and possibly add penalties.

Frequently Asked Questions

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

Yes, as long as your spouse is listed as a dependent on your tax return. You can also use HSA funds for any dependent's medical expenses, including children and parents you claim on your taxes. The expense just has to be may have access to — it doesn't matter whose name is on the bill.

What if I withdraw money for something that's not a medical expense?

You'll owe income tax on the amount you withdrew, plus a 20% penalty. So if you withdraw $1,000 for a non-medical expense and you're in the 22% tax bracket, you'd owe roughly $420 in taxes and penalties combined. After age 65, the penalty disappears but the income tax remains.

Can I have an HSA and a Flexible Spending Account at the same time?

No. The IRS doesn't allow you to have an HSA and an FSA in the same year. However, you can have an HSA and a limited-purpose FSA that only covers dental and vision expenses. Check with your employer about what options they offer.

What happens to my HSA if I die?

The account passes to your beneficiary, usually your spouse or estate. If your spouse inherits it, they can treat it as their own HSA and continue using it for medical expenses. If anyone else inherits it, the account is taxed as income to them, though they can still withdraw money for your final medical bills without the 20% penalty.

Do I have to use my HSA every year or lose the money?

No. Unlike an FSA, HSA money rolls over indefinitely. You can let it sit for years without touching it. This is why some people use an HSA as a retirement savings tool — they contribute the maximum each year, invest the money, and don't withdraw it until they're older and have more medical expenses.