An HSA is a tax-advantaged bank account you control, not an insurance plan

A Health Savings Account (HSA) is a savings account designed specifically for medical expenses. You put money into it before taxes are taken out of your paycheck, spend it on may have access to medical costs, and the money you don't spend stays in the account and grows year to year. Unlike a flexible spending account (FSA), which forces you to use the money or lose it, an HSA is yours to keep and use whenever you need it.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) — a type of health insurance with lower monthly premiums but higher deductibles. The HSA and the HDHP work together: the HSA helps you pay for costs before you hit your deductible, and for costs your insurance doesn't cover after that.

You can contribute money to your HSA in three ways: through payroll deductions (the most common), by depositing money directly into the account, or by rolling over unused funds from another HSA. The money goes in tax-free, grows tax-free if invested, and comes out tax-free when you spend it on medical expenses.

Key Takeaways

  • An HSA is a personal savings account for medical expenses that you own and control, separate from your health insurance plan.
  • You can only open an HSA if you are enrolled in a high-deductible health plan (HDHP), and you cannot have other health coverage at the same time.
  • Money you contribute is not taxed, money you invest inside the account grows tax-free, and withdrawals for medical expenses are not taxed.
  • Unlike FSAs, HSA money rolls over every year and never expires, so you can save it for future medical costs or retirement.
  • You can withdraw money for non-medical expenses, but you will owe income tax plus a 20% penalty if you are under 65.

How money flows in and out of your HSA

Money enters your HSA through payroll deduction, direct deposit, or transfer from another HSA. If you contribute through payroll, your employer deducts the amount before calculating your income tax and Social Security tax, which lowers your taxable income for the year. You can change how much you contribute each month, and you can stop contributing at any time.

The annual contribution limit varies by year and by whether you have individual or family coverage. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. If you are 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, and that money counts toward your limit.

Money leaves your HSA when you pay for a may have access to medical expense. You can withdraw cash at an ATM using an HSA debit card, pay a provider directly from the account, or reimburse yourself for out-of-pocket costs you paid with your own money. You keep receipts and records in case the IRS asks to verify that withdrawals were for medical expenses.

What counts as a may have access to medical expense

may have access to medical expenses include deductibles, copayments, coinsurance, and prescription drugs. They also include dental work, vision care, mental health treatment, and physical therapy. Over-the-counter medications like pain relievers and allergy medicine count only if you have a prescription for them (a doctor's note saying you need them counts as a prescription).

Some costs do not count: health insurance premiums (with narrow exceptions), cosmetic procedures, gym memberships, and vitamins or supplements that are not prescribed. If you are unsure whether a specific cost qualifies, the IRS publishes a full list, and your HSA provider can usually tell you whether a particular expense is allowed.

You do not have to spend the money in the year you contribute it. If you have $2,000 in your HSA and only spend $800 on medical costs this year, the remaining $1,200 stays in your account and is available next year and every year after that.

How your HSA money can grow

An HSA is not just a checking account — it is an investment account. Once your balance reaches a certain threshold (often $1,000 or $2,500, depending on your provider), you can invest the money in mutual funds, stocks, or bonds. The earnings on those investments are not taxed as long as you eventually spend the money on medical expenses.

Many people use their HSA as a retirement savings tool. If you have enough income to pay for current medical expenses out of pocket, you can leave the HSA untouched and let it grow for decades. After age 65, you can withdraw money for any reason without penalty — you will owe income tax on non-medical withdrawals, but not the 20% penalty that applies to younger account holders.

Your HSA provider sends you statements showing your balance, contributions, and withdrawals. If you invest the money, you will also receive statements showing the value of your investments and any gains or losses.

What happens if you withdraw money for non-medical expenses

If you withdraw money from your HSA for something that is not a may have access to medical expense, you owe income tax on that amount plus a 20% penalty. For example, if you withdraw $500 for a non-medical expense and you are in the 22% tax bracket, you would owe $110 in income tax plus $100 in penalty, for a total of $210.

After age 65, the penalty goes away — you can withdraw money for any reason and only owe income tax on non-medical withdrawals. This makes an HSA a powerful retirement account, because money you spent on medical expenses during your working years came out tax-free, and money you save for retirement grows tax-free.

If you withdraw money by mistake or for an expense you later learn does not may have access to, you can put the money back into the account within a certain timeframe. Your HSA provider can tell you the deadline and process for correcting a withdrawal.

What happens to your HSA if you change jobs or lose coverage

Your HSA belongs to you, not your employer. If you leave your job, the account stays open and the money stays in it. You can keep using it to pay for medical expenses, and you can keep investing it. You do not have to close it or transfer it unless you want to.

If you lose your HDHP coverage, you can no longer make new contributions to your HSA, but you can still withdraw money from it for medical expenses. If you enroll in a new HDHP later, you can start contributing again.

If you want to move your HSA to a different bank or provider, you can do a trustee-to-trustee transfer. The money moves directly from one account to the other without being taxed, and you avoid the 60-day rollover window that applies to some retirement accounts.

How HSAs interact with other insurance and tax situations

You cannot have an HSA if you are covered by Medicare, enrolled in Medicaid (with some state exceptions), or have other health insurance besides your HDHP. You also cannot have an FSA at the same time as an HSA, though some employers offer a limited-purpose FSA that covers only dental and vision expenses.

If you are married and both spouses have HDHPs, you can each open your own HSA, or you can open one family HSA and both contribute to it. The total family contribution limit applies to the account, not to each person.

When you file your taxes, you report HSA contributions and withdrawals on IRS Form 8889. Your HSA provider sends you a Form 1099-SA showing the total amount you withdrew during the year. If you withdrew money for non-medical expenses, you report that on your tax return and pay the penalty.

Frequently Asked Questions

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

Yes. As long as the person is a dependent on your tax return, you can use your HSA to pay for their medical expenses. You do not have to be enrolled in the same health plan.

What happens to my HSA when I turn 65?

Your HSA does not close or change. After 65, you can withdraw money for any reason without the 20% penalty — you will owe income tax on non-medical withdrawals, but the penalty disappears. Many people use their HSA as a retirement account at this point.

Can I withdraw money from my HSA to pay for health insurance premiums?

Generally no, but there are exceptions. You can use HSA money to pay for COBRA premiums (continuation coverage after job loss), premiums for health insurance while you are unemployed, and Medicare premiums after age 65. You cannot use it for regular health insurance premiums while you are working.

What if I do not spend all my HSA money in a year?

The money rolls over to the next year and every year after that. There is no "use it or lose it" rule. You can save HSA money for decades and use it whenever you have medical expenses.

Can I close my HSA and get the money out?

Yes, but if you withdraw money for non-medical expenses before age 65, you owe income tax plus a 20% penalty on the non-medical portion. After 65, you can withdraw money for any reason and only owe income tax on non-medical withdrawals.