A Health Savings Account lets you set aside pre-tax money for medical expenses, and any balance you don't spend rolls over year to year

A Health Savings Account (HSA) is a tax-advantaged savings account tied to a high-deductible health plan. You contribute money before taxes are taken out of your paycheck, use it to pay for medical costs, and keep whatever you don't spend. Unlike a flexible spending account (FSA), which forces you to use the money or lose it each year, an HSA balance stays with you indefinitely and can grow over time.

The account works in three stages: you put money in, you spend it on medical expenses, and any leftover amount earns interest or investment returns. The money you contribute reduces your taxable income, the money you withdraw for medical care comes out tax-free, and the growth on your balance is also tax-free. This triple tax advantage is what makes an HSA different from a regular savings account.

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.
  • Contributions come out of your paycheck before taxes, lowering both your federal income tax and your Social Security tax.
  • You can withdraw money tax-free for any may have access to medical expense: copays, deductibles, prescriptions, dental work, vision care, and many other costs.
  • Money you don't spend stays in the account and grows year after year, making an HSA function as a long-term savings tool as well as a current-year spending account.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as regular 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—and your plan must meet that threshold. You also cannot be covered by any other health insurance at the same time, with limited exceptions for accident, disability, dental, vision, and long-term care coverage.

You can open an HSA through your employer if they offer one, or you can open one on your own at a bank or financial institution if you buy an HDHP through the marketplace or directly from an insurer. Employer HSAs are often easier because contributions can be deducted automatically from your paycheck. If you open your own, you handle contributions yourself and claim the deduction on your tax return.

You can open an HSA at any time during the year, but contribution limits reset on January 1. If you enroll in an HDHP partway through the year, you can still contribute a prorated amount for that year, or you can wait until January 1 to start.

How much you can contribute each year

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. If you are 55 or older, you can add an extra $1,000 per year as a catch-up contribution. 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 the full year's limit even if you enroll partway through the year, as long as you stay enrolled in an HDHP through December 31. If you drop your HDHP coverage before the end of the year, you can only contribute a prorated amount for the months you were covered. Contributions made after the tax filing deadline (usually April 15 of the following year) count toward that year's limit if you file your tax return on time.

Your employer may contribute to your HSA as well. Employer contributions count toward the annual limit, so if your employer puts in $2,000 and you put in $2,000, you have reached the limit. Any contributions above the limit are subject to a 6% excise tax, so it is important to track the total.

What you can spend HSA money on

You can withdraw money tax-free for any may have access to medical expense—a broad category that includes copays, coinsurance, deductibles, prescription drugs, and medical equipment. It also covers dental work, vision care, hearing aids, mental health treatment, physical therapy, and many other services. The IRS publishes a detailed list, but the general rule is that if it is a medical or dental service or product prescribed or recommended by a doctor, it likely qualifies.

Some expenses that surprise people: you can use HSA money for over-the-counter medications (with a prescription), for health insurance premiums if you are unemployed or receiving unemployment benefits, and for long-term care insurance premiums up to a certain amount. You cannot use it for cosmetic procedures, gym memberships, or general wellness products unless they treat a specific medical condition.

You do not have to spend the money in the year you contribute it. You can let it sit in the account and spend it years later. This is different from an FSA, where unspent money is forfeited at the end of the year. Some people use their HSA as a long-term retirement savings tool, contributing the maximum each year and only withdrawing for current medical expenses if they can afford to pay out of pocket.

How your HSA balance grows over time

Money in your HSA earns interest or investment returns, depending on how you hold it. If you keep the balance in a savings account at a bank, it earns interest at whatever rate the bank offers. If you invest it in mutual funds or other securities through an investment-focused HSA, it can grow faster—or decline, depending on market performance. Many HSA providers let you choose: keep some money in a cash account for near-term expenses and invest the rest for long-term growth.

The growth is tax-free as long as you use the money for may have access to medical expenses. If you withdraw money for a non-medical reason before age 65, you pay income tax on the earnings plus a 20% penalty. After age 65, you can withdraw money for any reason without the penalty, though you still pay income tax on earnings from non-medical withdrawals.

This makes an HSA a powerful retirement savings tool. If you have the financial means to pay for medical expenses out of pocket and let your HSA grow, you can accumulate a substantial balance over decades. At retirement, you can use it to cover medical costs, or you can withdraw it for any reason and treat it like a regular retirement account (with taxes owed on the earnings portion).

How to use your HSA when you need medical care

When you have a medical expense, you can pay for it in several ways. Many HSA providers issue a debit card that works like a regular card at pharmacies, doctors' offices, and hospitals. You swipe it and the money comes out of your HSA balance. Some providers require you to submit a receipt or claim form to verify the expense is may have access to before they reimburse you.

If you do not have a debit card or prefer not to use it, you can pay out of pocket and then submit a receipt to your HSA provider for reimbursement. You can also keep receipts and reimburse yourself later—there is no time limit on when you can claim a reimbursement for a past expense, as long as you have documentation.

Keep all receipts and medical statements. If the IRS ever audits your HSA, you need to show that withdrawals were for may have access to expenses. The burden is on you to prove it, so documentation is essential.

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 with you. You can roll it over to a new HSA at a different bank or financial institution, or you can leave it where it is. If your new employer offers an HSA, you can transfer the balance to that account or keep both accounts open.

If you lose your HDHP coverage and enroll in a different type of health plan, you can no longer contribute to your HSA. However, you can still withdraw money from the existing balance for may have access to medical expenses. The account does not close; it just stops accepting contributions. If you re-enroll in an HDHP later, you can start contributing again.

If you become may be able to access for Medicare, you can no longer contribute to an HSA. You can still withdraw money for may have access to expenses, but contributions stop. Some people delay Medicare enrollment specifically to keep their HSA active and continue contributing, though this requires careful planning and understanding of Medicare rules.

The tax benefits explained

An HSA offers three layers of tax savings. First, contributions reduce your taxable income. If you contribute $3,000 to your HSA and earn $50,000, you only pay income tax on $47,000. Second, withdrawals for may have access to medical expenses are not taxed. Third, any interest or investment growth in the account is not taxed as long as you use the money for medical costs.

If you contribute through your employer's payroll, the contribution also reduces your Social Security and Medicare taxes (the 6.2% and 1.45% that come out of your paycheck). This is an additional savings that does not apply to FSAs or other benefit accounts. Over a career, this can add up to hundreds or thousands of dollars.

To claim the tax benefit, you need to report your contributions and withdrawals on your tax return. If you contribute through payroll, your employer reports it on your W-2 and you do not need to do anything. If you contribute on your own, you deduct it on Form 1040 as an above-the-line deduction, which means you get the benefit even if you do not itemize deductions.

Frequently Asked Questions

Can I use my HSA to pay for my health insurance premiums?

You can use HSA money to pay for health insurance premiums only in specific situations: if you are receiving unemployment benefits, if you are retired and over 65 and enrolled in Medicare, or if you are paying for long-term care insurance (up to a limit set by the IRS). You cannot use it to pay for your current employer health plan premium or a marketplace plan premium while you are actively working.

What happens if I withdraw money for something that is not a medical expense?

Before age 65, you pay income tax on the amount withdrawn plus a 20% penalty. After age 65, you pay income tax but no penalty. Keep receipts for all withdrawals in case you need to prove they were medical expenses; the IRS can audit your HSA and ask you to justify withdrawals.

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

No, you cannot have an HSA and a general-purpose FSA at the same time. However, you can have an HSA and a limited-purpose FSA that covers only dental and vision expenses, or a dependent care FSA. Check with your employer about which combination is allowed.

Do I lose my HSA money if I do not use it by the end of the year?

No. Unlike an FSA, an HSA has no "use it or lose it" rule. Your balance rolls over every year and stays in the account indefinitely. You can accumulate money over many years and spend it whenever you need to.

Can I invest my HSA balance in stocks or mutual funds?

Yes, many HSA providers offer investment options. You can typically keep a portion in a cash account for near-term expenses and invest the rest. Investment returns are tax-free as long as you use the money for may have access to medical expenses. Check with your HSA provider about what investment options they offer.