A Health Savings Account lets you set aside pre-tax money for medical costs, then withdraw it tax-free when you need it

A Health Savings Account (HSA) is a bank account paired with a high-deductible health insurance plan. You put money into it before taxes are taken from your paycheck, use it to pay medical bills, and never pay income tax on the money you withdraw for medical expenses. The account stays open year to year — money you don't spend rolls forward, unlike a flexible spending account.

The mechanics work in three parts: you contribute money (usually through payroll deduction), the money sits in an account earning interest, and you withdraw it to pay doctors, pharmacies, and other medical providers. The IRS sets annual contribution limits and defines which medical expenses count. If you withdraw money for something that isn't a medical expense, you pay income tax on it plus a 20 percent penalty.

Key Takeaways

  • You must be enrolled in a high-deductible health plan to open an HSA, and you cannot have other health coverage like Medicare or a spouse's plan that isn't high-deductible.
  • Money goes in before taxes, grows tax-free, and comes out tax-free for medical expenses — the only account type that gets all three tax breaks.
  • The IRS sets yearly contribution limits (for 2024, $4,150 for individual coverage and $8,300 for family coverage), and you can contribute until you turn 65.
  • You can pay for doctor visits, prescriptions, dental work, vision care, and many other medical services; you cannot use it for insurance premiums or cosmetic procedures.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

Who can open an HSA and what the enrollment rules are

To open an HSA, you must be covered by a high-deductible health plan (HDHP) — a plan with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage (2024 limits; these change yearly). You cannot have other health coverage at the same time, with narrow exceptions: you can have dental, vision, or accident insurance, and you can have coverage for specific diseases like cancer. You cannot be covered by Medicare, and if you are married, your spouse's plan cannot be a low-deductible plan.

You open an HSA through a bank, credit union, or insurance company — not through your employer, though your employer may offer one as a payroll option. If you open it yourself, you choose the institution. The account is yours to keep even if you change jobs or leave your HDHP later. Once you are no longer in an HDHP, you can no longer contribute new money, but you can keep the account and withdraw from it for medical expenses for the rest of your life.

How money flows in: contribution limits and payroll deduction

You contribute money to your HSA either through payroll deduction (the most common route) or by depositing it yourself. If your employer offers an HSA, you typically elect it during open enrollment, choose how much to contribute per paycheck, and the money is deducted before federal income tax is calculated. This means you save money on taxes immediately — if you contribute $200 per month, you do not pay income tax on that $2,400 per year.

The IRS sets an annual contribution limit. 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). You can contribute until December 31 of the year you turn 65. If you enroll in Medicare, you can no longer contribute to an HSA, though you can still withdraw from it.

If you contribute more than the annual limit, the excess is taxed as income and you pay a 6 percent penalty on the overage. If you contribute through payroll and also deposit money yourself, you must track both to stay under the limit. Some HSA providers send you a notice if you are approaching the limit; others do not, so you are responsible for keeping track.

What you can and cannot pay for with HSA money

You can use HSA funds to pay for most medical expenses: doctor visits, hospital stays, prescription medications, dental work, vision care, mental health treatment, physical therapy, and medical equipment like crutches or hearing aids. You can also pay for over-the-counter medications like pain relievers and allergy medicine, though you could not before 2020. You can pay for your deductible, copays, and coinsurance — essentially any out-of-pocket medical cost.

You cannot use HSA money for health insurance premiums, with two exceptions: you can pay for COBRA continuation coverage (temporary coverage if you lose a job) and you can pay for Medicare premiums after you turn 65. You cannot use it for cosmetic procedures, gym memberships, or vitamins unless they treat a specific medical condition. You cannot use it for your spouse's or dependent's medical expenses unless they are claimed as dependents on your tax return.

If you withdraw money for something that is not a medical expense, you owe income tax on the withdrawal plus a 20 percent penalty. The exception is after age 65 — at that point, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as regular income.

How the account grows and how you access the money

HSA funds sit in an account that earns interest or can be invested. Some HSA providers offer only a savings account; others let you invest in mutual funds or stocks. The money you do not spend stays in the account and rolls forward year to year — there is no "use it or lose it" deadline like there is with flexible spending accounts. This means you can build a balance over time and use it for medical expenses later in life.

When you need to pay a medical bill, you can withdraw money in several ways. Many providers issue a debit card that works like a regular bank card at pharmacies and medical offices. You can also write a check, transfer money to your bank account, or reimburse yourself after you pay out of pocket. Some medical providers can bill your HSA directly. Keep receipts for all medical expenses — the IRS can audit HSA withdrawals and ask you to prove the money went to a medical expense.

If you withdraw money and later realize it was not a medical expense, you can put it back into the account within a certain timeframe (rules vary by provider). If you do not correct it, you will owe taxes and penalties when you file your tax return.

Tax reporting and what happens at tax time

HSA contributions made through payroll are reported on your W-2 form and do not appear on your taxable income. If you contribute money yourself, you deduct it on your tax return (Form 1040, Schedule 1). Withdrawals for medical expenses do not need to be reported to the IRS unless you withdraw more than you contributed in a year (which would mean you are drawing down a balance from prior years).

If you withdraw money for a non-medical expense, you report it on your tax return and pay income tax plus the 20 percent penalty. The HSA provider sends you a Form 1099-SA showing all your withdrawals; you use this to fill out your tax forms. If you cannot document that a withdrawal was for a medical expense, the IRS treats it as a non-medical withdrawal.

After age 65, withdrawals for non-medical expenses are taxed as income but do not incur the 20 percent penalty. This makes an HSA a powerful retirement savings tool — you can use it like a traditional IRA after 65, though the tax advantage is smaller for non-medical expenses.

What to do if you lose your high-deductible plan

If you change jobs and your new employer's plan is not high-deductible, or if you enroll in Medicare, you can no longer contribute new money to your HSA. However, you keep the account and can withdraw from it for medical expenses for the rest of your life. The money is yours — it does not disappear and you do not forfeit it.

If you switch to a different high-deductible plan (even with a different employer), you can resume contributing. Some people move between HSA-may be able to access and non-HSA-may be able to access plans multiple times in their career and simply pause contributions during the years they are not in an HDHP.

Frequently Asked Questions

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

Only if your spouse is claimed as a dependent on your tax return. If you file taxes jointly but do not claim your spouse as a dependent (which is rare), you cannot use HSA funds for their medical bills. You can use it for your children's medical expenses if they are your dependents.

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 withdrawing for medical expenses. If a non-spouse beneficiary inherits it, they must withdraw the full balance and pay income tax on it (no 20 percent penalty applies after death).

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

Yes. Your deductible is a medical expense, so you can use HSA funds to pay it. This is one of the main reasons people contribute to an HSA — to have money set aside specifically for the deductible they have to meet before insurance starts paying.

Do I have to spend all my HSA money before the year ends?

No. Unlike a flexible spending account, an HSA has no deadline. Money rolls forward year to year, and you can let it accumulate. Some people use it as a retirement savings account and do not touch it until after age 65.

What if I contribute too much to my HSA by mistake?

You can withdraw the excess contribution and any earnings on it before your tax deadline (usually April 15) without penalty. After that date, you owe income tax on the excess plus a 6 percent penalty. Contact your HSA provider immediately if you realize you have over-contributed.