What happens when you open an HSA and use it

A Health Savings Account is a bank account you own that holds money specifically for medical expenses. You put pre-tax money into it, the money grows without being taxed, and you withdraw it tax-free when you pay for may have access to medical costs. The account stays yours — if you change jobs or health plans, the money comes with you.

The process works in three parts: you contribute money (usually through payroll deduction), the money sits in the account earning interest or investment returns, and you withdraw it to pay medical bills. Unlike a flexible spending account, which you lose if you don't spend the money by year-end, an HSA rolls over every year. Money you don't use stays in the account indefinitely.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan; other insurance types do not allow HSA ownership.
  • Money goes in through payroll deduction (pre-tax), investment earnings are not taxed, and withdrawals for medical expenses are not taxed.
  • You control the account and can use it for doctor visits, prescriptions, dental work, vision care, and many other medical costs.
  • The account is portable — you keep it and the money in it even if you leave your job or switch health plans.
  • 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 when

You must be enrolled in a high-deductible health plan (HDHP) to open or contribute to an HSA. An HDHP is a specific type of health insurance with a higher yearly deductible than standard plans — the IRS sets the minimum deductible amount each year, and it changes annually. If you have Medicare, Medicaid, TRICARE, or a plan that is not an HDHP, you cannot contribute to an HSA, though you may be able to keep an existing account and withdraw from it.

You open an HSA through a bank, credit union, or financial institution that offers them — your employer may provide a list of approved providers, or you can open one independently. The account is opened in your name alone; you cannot have a joint HSA with a spouse, though each spouse can have their own if both are on HDHPs.

You can open an HSA at any point during the year you are covered by an HDHP, but contributions for a given tax year must be made by the tax filing deadline (usually April 15 of the following year). If you enroll in an HDHP mid-year, you can still contribute a prorated amount for that year.

How money gets into your HSA

The most common way to fund an HSA is through payroll deduction. You tell your employer how much to deduct from each paycheck and send to your HSA provider. That money is removed before income tax is calculated, which lowers your taxable income for the year. If you earn $50,000 and contribute $3,000 to an HSA, you pay income tax only on $47,000.

You can also contribute directly by writing a check or transferring money from your bank account to the HSA provider. These contributions are not pre-tax at the time you make them, but you can deduct them on your tax return (Form 1040, Schedule 1) when you file. The result is the same — lower taxable income — but the timing is different.

The IRS sets a maximum contribution limit each year. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage; these amounts change annually. If you are age 55 or older, you can contribute an additional $1,000 per year (called a catch-up contribution). You cannot contribute more than the annual limit, and if you do, you owe a penalty tax on the excess.

What the money in your HSA can pay for

You can withdraw HSA money tax-free to pay for may have access to medical expenses — a specific list defined by the IRS. may have access to expenses include doctor visits and hospital care, prescription medications, dental work, vision care (including glasses and contact lenses), mental health treatment, and medical equipment like wheelchairs or hearing aids. You can also use HSA money to pay insurance premiums in certain situations: COBRA premiums, long-term care insurance premiums, and health insurance premiums while you are receiving unemployment benefits.

Expenses that do not count include cosmetic procedures (unless medically necessary), over-the-counter medications (with some exceptions for specific drugs), gym memberships, and general wellness products. If you are unsure whether an expense qualifies, the IRS publishes a detailed list, and your HSA provider can also answer questions about specific costs.

You do not have to spend the money in the year you contribute it. Unlike a flexible spending account, HSA money rolls over every year, so you can let it accumulate and use it years later. Some people use their HSA as a long-term savings vehicle, contributing the maximum each year and only withdrawing when they have significant medical expenses.

How withdrawals work and what records you need

To withdraw money from your HSA, you request it from your HSA provider — usually through their website, by phone, or by mail. The provider sends the money to you or directly to the medical provider or pharmacy. You keep receipts and bills showing what the money paid for, because the IRS can ask you to prove that withdrawals were for may have access to expenses.

You do not need to submit receipts when you withdraw; you just need to have them if you are audited. However, some HSA providers ask you to certify that a withdrawal is for a may have access to expense before they process it. If you withdraw money for a non-may have access to expense, you owe income tax on that amount plus a 20 percent penalty (the penalty drops to zero after age 65, but income tax still applies).

Keep records for at least three years after you file the tax return for the year in which you made the withdrawal. Medical bills, receipts, and explanation of benefits statements all count as proof. If you cannot document what a withdrawal paid for, the IRS may treat it as taxable income and assess penalties.

How your HSA money grows and what happens to it

HSA money can sit in a savings account earning interest, or you can invest it in stocks, bonds, or mutual funds through your HSA provider. The earnings — whether interest or investment gains — are not taxed as long as the money stays in the account. This makes an HSA different from a regular savings account, where interest is taxable income.

If your HSA provider offers investment options, you choose how to invest the money. Some people keep a portion in savings for near-term medical expenses and invest the rest for long-term growth. Investment performance varies, and you bear the risk if investments lose value — the HSA provider does not may provide returns.

If you change jobs or health plans, your HSA stays with you. The money does not disappear, and you do not lose it. You may need to move the account to a new provider if your new employer uses a different HSA administrator, but you can also keep the account where it is and manage it independently. After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are taxed as regular income.

What to do if you withdraw money by mistake or for the wrong reason

If you withdraw HSA money for a non-may have access to expense, you have a limited window to fix it. You can return the money to the HSA within a set time (rules vary by provider, but typically 60 days), and if you do, the withdrawal is treated as if it never happened. You do not owe taxes or penalties on money you put back.

If you do not return the money, you owe income tax on the amount withdrawn plus a 20 percent penalty. For example, if you withdraw $500 for a non-may have access to expense and do not return it, you owe income tax on $500 (at your tax rate) plus $100 in penalties. Report the non-may have access to withdrawal on your tax return using Form 8889.

Some HSA providers offer a grace period or correction window if you make a mistake. Ask your provider about their specific policy before you withdraw money if you are unsure whether an expense qualifies.

Frequently Asked Questions

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

Yes. HSA money can pay for may have access to medical expenses of you, your spouse, and your dependents, even if they are not on your health plan. You do not need to be married to use HSA money for someone else's medical costs — you just need to be able to claim them as a dependent on your tax return, or in the case of a spouse, be legally married.

What happens to my HSA if I lose my HDHP coverage?

The money stays in your account and remains yours. You cannot make new contributions once you are no longer on an HDHP, but you can withdraw existing money for may have access to medical expenses at any time. If you rejoin an HDHP later, you can resume contributions.

Can I use my HSA to pay for over-the-counter medications?

Most over-the-counter medications do not may have access to, but some do. Insulin and certain other specific drugs are allowed. Vitamins, cold medicine, and pain relievers generally do not may have access to unless prescribed by a doctor. Check the IRS list or ask your HSA provider about a specific medication.

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

No. HSA money rolls over every year with no limit on how much you can carry forward. You can accumulate money over many years and use it whenever you have may have access to medical expenses, even decades later.

What if I have both an HSA and a flexible spending account?

You cannot have both in the same year — the IRS does not allow it. If you have an FSA through your employer, you cannot contribute to an HSA that same year. You must choose one or the other.