A Health Savings Account lets you set aside pre-tax money to pay for medical expenses now or in retirement

A Health Savings Account (HSA) is a tax-advantaged savings account tied to a high-deductible health insurance plan. You contribute money to it before taxes are taken out of your paycheck, use it to pay medical bills, and any money you don't spend stays in the account and grows. Unlike a flexible spending account (FSA), the money doesn't disappear at the end of the year — it rolls over indefinitely and becomes yours to keep.

The account works in three stages: you fund it with pre-tax dollars (either through payroll deduction or direct contribution), you spend it on may have access to medical expenses without paying taxes on that money, and any balance left over stays invested and available for future medical costs or retirement. After age 65, you can withdraw money for any reason, though non-medical withdrawals before 65 trigger taxes and a penalty.

Key Takeaways

  • You must be enrolled in a high-deductible health plan (HDHP) to open and contribute to an HSA; the plan itself is separate from the account.
  • Contributions reduce your taxable income, and withdrawals for may have access to medical expenses are tax-free, creating a double tax advantage.
  • Money you don't spend in a given year stays in the account and earns interest or investment returns, unlike FSA funds which expire.
  • You can use HSA funds to pay deductibles, copays, prescriptions, dental work, vision care, and many other medical costs, but not insurance premiums or over-the-counter medications without a prescription.
  • After age 65, you can withdraw money for any reason, though non-medical withdrawals before that age are taxed as income plus a 20 percent penalty.

What you need to open and fund an HSA

To open an HSA, you must first be enrolled in a high-deductible health plan (HDHP). This is a specific type of insurance plan with a higher deductible than traditional plans — for 2024, the IRS defines an HDHP as one with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. Your employer may offer an HDHP option during open enrollment, or you can purchase one through the health insurance marketplace in your state.

Once you have the HDHP in place, you can open an HSA through a bank, credit union, or investment firm. Many employers offer HSAs directly through payroll, which is the simplest route because contributions come straight from your paycheck before taxes. If your employer doesn't offer one, you can open an account on your own and contribute money yourself. The IRS sets annual contribution limits — for 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage. If you're 55 or older, you can add an extra $1,000 per year.

You don't have to contribute the maximum. You can put in any amount up to the limit, and you can change your contribution amount during the year if your circumstances change. If you enroll in an HDHP mid-year, your contribution limit is reduced proportionally.

How the tax advantage works

An HSA gives you a tax break in two places. First, the money you contribute is deducted from your taxable income. If you contribute $3,000 to an HSA and earn $50,000 a year, you only pay income tax on $47,000. If your employer deducts contributions from your paycheck, this happens automatically. If you contribute on your own, you claim the deduction on your tax return.

Second, when you withdraw money from the HSA to pay for may have access to medical expenses, that withdrawal is not taxed. You're not paying income tax on the money when it goes in, and you're not paying tax when it comes out — as long as you use it for may be able to access medical costs. This is different from a regular savings account, where you pay tax on the interest earned, or a taxable investment account, where you pay tax on gains.

The money in the account can also be invested in stocks, bonds, or mutual funds, just like a retirement account. Any growth or interest earned is not taxed as long as you eventually use it for medical expenses. This makes an HSA function partly as a retirement savings tool, since money you don't spend now can grow for decades.

What counts as a may have access to medical expense

may have access to medical expenses include most things you'd expect: doctor visits, hospital stays, surgery, prescription medications, dental work, vision care, mental health treatment, and medical equipment like wheelchairs or hearing aids. You can also use HSA funds to pay your insurance deductible, copays, and coinsurance. Physical therapy, chiropractic care, and acupuncture count if a doctor prescribes them.

Some things don't count. Over-the-counter medications like cold medicine or pain relievers are not may be able to access unless you have a prescription from a doctor. Health insurance premiums are generally not may be able to access, with narrow exceptions for COBRA continuation coverage, long-term care insurance, or premiums you pay while receiving unemployment benefits. Cosmetic procedures, gym memberships, and general wellness products are not covered.

The IRS publishes a detailed list of may be able to access expenses, and the rules can be specific. If you're unsure whether a particular cost qualifies, check the IRS Publication 502 or ask your HSA provider before you withdraw the money. Withdrawing for ineligible expenses triggers income tax plus a 20 percent penalty on the amount withdrawn.

How to use your HSA funds

Most HSAs come with a debit card that works like a regular bank card. You can swipe it at the doctor's office, pharmacy, or hospital to pay for may be able to access expenses directly. Some providers also let you set up automatic bill pay to send money to medical providers. If you pay out of pocket and want to reimburse yourself later, you can submit a claim to your HSA provider with a receipt, and they'll transfer the money to your personal bank account.

You don't have to spend the money in the year you contribute it. Unlike an FSA, which has a "use it or lose it" rule, HSA money rolls over indefinitely. You can let it accumulate for years, invest it, and draw on it whenever you have a medical expense. This makes an HSA useful as a long-term savings tool, not just a way to pay this year's medical bills.

Keep receipts and records of what you spend HSA money on. The IRS can audit your account and ask you to prove that withdrawals were for may be able to access expenses. If you can't document a withdrawal, it's treated as a non-may have access to withdrawal and you owe income tax plus the 20 percent penalty.

What happens to your HSA if you change jobs or insurance

Your HSA belongs to you, not your employer. If you leave your job, the account stays open and the money stays yours. You can continue to use it to pay medical expenses, and you can keep it invested if you want. You don't have to close it or move the money anywhere.

If you switch to a different health insurance plan that is not an HDHP, you can no longer make new contributions to the HSA. However, you can still withdraw money from the account to pay for medical expenses. The account essentially goes into a holding pattern — the money is there, but you're not adding to it. If you later re-enroll in an HDHP, you can start contributing again.

If you lose your HDHP coverage because you become may be able to access for Medicare, you have a special enrollment period to use up remaining HSA funds before your coverage ends. After you enroll in Medicare, you can no longer contribute to an HSA, but you can continue to withdraw money for medical expenses.

HSA versus FSA: the key differences

Both HSAs and FSAs let you use pre-tax money for medical expenses, but they work differently. An FSA is a "use it or lose it" account — money you don't spend by the end of the year is forfeited, though some employers allow a small carryover or grace period. An HSA has no expiration; money rolls over forever and becomes part of your long-term savings.

An FSA is not tied to a specific health insurance plan; you can have an FSA with any type of insurance. An HSA requires enrollment in an HDHP. An FSA is usually offered only through an employer, while you can open an HSA on your own. An HSA can be invested like a retirement account; most FSAs are held in a non-interest-bearing account.

If your employer offers both, you can choose one or the other, but not both in the same year. The choice depends on whether you expect to spend all the money in a given year (FSA might make sense) or whether you want to build long-term savings (HSA is better). If you rarely have medical expenses, an HSA lets you accumulate money over time; an FSA would just forfeit unused funds.

Frequently Asked Questions

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

Yes. If you have family coverage, you can use the HSA to pay for medical expenses for your spouse and any dependent children, even if they're not on your insurance plan. The money belongs to the account holder, but it can be used for any family member's may have access to medical expenses.

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 to use it for medical expenses. If a non-spouse beneficiary inherits it, the account is taxed as income to them, though they can still withdraw money for the deceased person's medical expenses without the 20 percent penalty.

Can I withdraw HSA money for something other than medical expenses?

Yes, but there's a cost. After age 65, you can withdraw money for any reason without penalty — you'll just pay income tax on the amount, like a regular retirement account. Before age 65, non-medical withdrawals are taxed as income plus a 20 percent penalty. Keep receipts to prove medical expenses if you're audited.

Do I have to use my HSA debit card, or can I pay out of pocket and reimburse myself later?

You can do either. Some people pay medical bills from their personal account and then submit receipts to their HSA provider for reimbursement. This lets the HSA money stay invested longer. Others use the debit card for convenience. Both methods are allowed as long as you have receipts documenting the expense.

What if my HDHP deductible is very high and I can't afford to meet it?

That's a real concern with HDHPs. The trade-off for the tax-advantaged HSA is a higher deductible and lower premiums. If you have predictable medical expenses or a chronic condition, an HDHP might not be the right choice. Compare the total cost — premium plus expected out-of-pocket expenses — against other plan options before enrolling.