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

An HSA (Health Savings Account) is a savings account attached to a high-deductible health plan. You contribute money to it before taxes are taken out of your paycheck, spend it on may have access to medical costs, and keep whatever you don't use. The money grows tax-free, and you can withdraw it tax-free as long as you spend it on medical expenses. If you leave your job or switch health plans, the account stays yours.

The account works differently from a flexible spending account (FSA), which forces you to spend the money within the calendar year or lose it. An HSA has no "use it or lose it" rule. You can let the balance sit for decades if you want, which makes it a long-term savings tool as much as a way to pay for immediate medical bills.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan, and you cannot have other health coverage like Medicare or a spouse's plan at the same time.
  • Contributions come out of your paycheck before income tax, and the money grows tax-free inside the account.
  • 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 money left in the account at the end of the year stays there and earns interest or investment returns, unlike an FSA.
  • 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.

Who can open an HSA and when

You must be enrolled in a high-deductible health plan (HDHP) to open an HSA. Your employer may offer one, or you can buy one on the individual market. The IRS sets the minimum deductible each year—for 2024, it is $1,600 for individual coverage and $3,200 for family coverage. Plans with higher deductibles may have access to.

You cannot have an HSA if you are covered by Medicare, enrolled in a spouse's health plan, or claimed as a dependent on someone else's tax return. You also cannot have an FSA or health reimbursement arrangement (HRA) at the same time, though some employers offer both—in that case, you choose one. If your employer offers an HSA, you can enroll during open enrollment or when you first become may be able to access. If you buy your own HDHP on the individual market, you can open an HSA at any time that year.

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. Your employer may contribute on your behalf, and that counts toward the limit. If you are 55 or older, you can add an extra $1,000 per year as a catch-up contribution.

You contribute through payroll deduction, which means the money comes out before federal income tax is calculated. If you are self-employed or your employer does not offer payroll deduction, you can contribute directly to the account and deduct it on your tax return. Contributions must be made by the tax filing deadline (usually April 15) to count for that tax year, though some employers allow contributions through March 15 of the following year if you enroll during open enrollment.

What you can spend HSA money on

You can use your HSA to pay for any medical expense that the IRS considers may have access to. This includes deductibles, copays, coinsurance, and out-of-pocket costs on your health plan. It also covers prescriptions, dental work, vision care, hearing aids, mental health treatment, and physical therapy. You can use it to pay for over-the-counter medications if you have a prescription from your doctor, but not if you buy them without one.

You cannot use HSA money for health insurance premiums, except for COBRA continuation coverage, long-term care insurance, or Medicare premiums once you turn 65. You also cannot use it for cosmetic procedures, gym memberships, or vitamins unless they treat a specific medical condition and your doctor prescribes them. Keep receipts for everything you buy with HSA money, because the IRS can ask you to prove that expenses were may have access to.

How the money grows and what happens to unused balance

Money in your HSA earns interest or investment returns depending on how you hold it. Many HSAs function like savings accounts and earn a small interest rate. Others let you invest the balance in mutual funds or other securities, similar to a 401(k). The growth is tax-free as long as you eventually spend it on medical expenses.

Unlike an FSA, there is no deadline to spend the money. Any balance you do not use at the end of the year rolls over to the next year, and the year after that. You can accumulate thousands of dollars over time. Some people use an HSA as a retirement savings tool, letting the balance grow for decades and then withdrawing it for medical expenses in retirement.

Withdrawals and penalties for non-medical spending

You can withdraw money from your HSA anytime, but the tax treatment depends on what you spend it on. If you withdraw money for a may have access to medical expense, there is no tax or penalty. If you withdraw money for something else, you pay ordinary income tax on the amount plus a 20 percent penalty—so a $1,000 withdrawal for a non-medical expense could cost you $300 or more in taxes and penalties, depending on your tax bracket.

The 20 percent penalty goes away after you turn 65. At that point, you can withdraw money for any reason and pay only income tax, just like a traditional IRA. This is why some people treat an HSA as a long-term retirement account: they contribute the maximum each year, invest the balance, and let it grow. After 65, they can use it for medical expenses tax-free or for anything else and pay only income tax.

What happens to your HSA if you change jobs or health plans

Your HSA is yours to keep, regardless of what happens with your job or insurance. If you leave your employer, the account does not close. You keep the balance and can continue to use it for medical expenses. If your new employer offers an HSA, you can roll your old balance into the new account, or keep both accounts open.

If you switch from an HDHP to a different type of health plan, you can no longer contribute to the HSA, but you can still withdraw money from it for may have access to medical expenses. Once you are no longer enrolled in an HDHP, you have a limited window to move money from an FSA or HRA into the HSA if your employer offers that option. After that window closes, the money stays in the old account.

Frequently Asked Questions

Can I use my HSA to pay my health insurance deductible?

Yes. Your deductible is a may have access to medical expense, so you can use HSA money to pay it. In fact, this is one of the main reasons people use HSAs—to set aside pre-tax money specifically for the deductible and other out-of-pocket costs on their health plan.

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

You owe income tax on the amount plus a 20 percent penalty. If you discover the mistake before filing your tax return, you can put the money back into the account and avoid the penalty. After you file, you would need to amend your return. Keep good records so you can prove what you spent the money on.

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

Yes, as long as your spouse is not enrolled in a separate health plan. If your spouse has their own coverage, they cannot be covered by your HSA. If your spouse is covered under your family HDHP, you can use your HSA for their may have access to medical expenses.

Do I have to spend my HSA money every year, or can I save it?

You can save it indefinitely. Unlike an FSA, an HSA has no "use it or lose it" rule. Any balance rolls over to the next year, and you can let it grow for as long as you want. Many people use this feature to build a medical savings cushion over time.

What if I am no longer may be able to access for an HSA—can I keep the account open?

You can keep the account and the money in it, but you cannot make new contributions. Once you lose may be able to access (by switching to a non-high-deductible plan, enrolling in Medicare, or other reasons), you can still withdraw money for may have access to medical expenses without penalty. After age 65, you can withdraw for any reason and pay only income tax.