An HSA is a tax-advantaged savings account tied to a high-deductible health insurance plan

A Health Savings Account (HSA) is a savings account you own that lets you set aside money for medical expenses before taxes are taken out of your paycheck. The money stays in the account and grows tax-free. When you pay for may have access to medical costs — doctor visits, prescriptions, dental work, vision care — you can withdraw from the account without paying taxes on that withdrawal.

The catch is that you must be enrolled in a high-deductible health plan (HDHP) to open and contribute to an HSA. An HDHP has a higher annual deductible than a standard health plan, which means you pay more out of pocket before insurance kicks in. In exchange, your monthly premiums are usually lower, and you get access to the HSA.

Unlike a Flexible Spending Account (FSA), which is "use it or lose it" each year, an HSA rolls over. Money you don't spend stays in the account and can be used in future years. After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

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 at the same time.
  • Contributions reduce your taxable income, the account grows tax-free, and withdrawals for may have access to medical expenses are not taxed — a triple tax advantage.
  • Unused money rolls over year to year, making an HSA a long-term savings tool, unlike FSAs which expire annually.
  • You can use HSA funds for doctor visits, prescriptions, dental, vision, mental health care, and many other medical costs, but not 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 regular income.

Who can open an HSA and when

To open an HSA, you must be enrolled in a high-deductible health plan and have no other health coverage — not even a spouse's plan or Medicare. You also cannot be claimed as a dependent on someone else's tax return. If you meet these conditions, you can open an HSA through your employer (if they offer one) or independently through a bank or financial institution.

The timing matters. You can only contribute to an HSA during the months you are enrolled in an HDHP. If you switch to a standard health plan mid-year, you stop being able to contribute for the rest of that year. However, money already in the account stays there and can still be used.

How much you can contribute and the tax benefit

The IRS sets annual contribution limits, and they change each year. 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 extra $1,000 per year. Your employer may contribute on your behalf, and that counts toward your limit.

The tax advantage works three ways. First, contributions reduce your taxable income — if you earn $50,000 and contribute $3,000 to an HSA, you only pay income tax on $47,000. Second, the money in the account grows tax-free; if you invest it, you do not pay taxes on the gains. Third, withdrawals for may have access to medical expenses are not taxed at all. No other savings account offers all three benefits.

What you can and cannot pay for with HSA funds

You can use HSA money for a wide range of medical costs: doctor visits and hospital stays, prescription medications, dental and orthodontic work, vision care and glasses, mental health counseling, physical therapy, and medical equipment like crutches or blood pressure monitors. The IRS maintains a detailed list, but the general rule is that if a doctor prescribes it or it treats a diagnosed medical condition, it usually qualifies.

You cannot use HSA funds for health insurance premiums (with three exceptions: COBRA coverage, Medicare premiums after age 65, and long-term care insurance). You also cannot pay for cosmetic procedures, over-the-counter medications without a prescription, or gym memberships. If you withdraw money for a non-may have access to expense before age 65, you pay income tax on that amount plus a 20 percent penalty.

How to use your HSA and keep records

Most HSAs come with a debit card or checkbook. You can use it to pay at the doctor's office, pharmacy, or hospital. Some people pay out of pocket and then reimburse themselves from the HSA later — this is legal and lets you keep the money invested longer. Either way, you need to keep receipts and documentation showing the expense was may have access to.

The IRS does not require you to submit receipts when you withdraw, but you must keep them for your records in case of an audit. If you cannot prove an expense was medical, the IRS will treat it as a non-may have access to withdrawal and tax it accordingly. Many HSA providers offer apps or online portals to track expenses and store receipts digitally.

HSA as a retirement savings tool

Because HSA money rolls over and grows tax-free, many people use it as a long-term investment account rather than spending it every year. If you can afford to pay medical expenses out of pocket, you can leave the HSA untouched and let it accumulate. At retirement, you have a pool of tax-assistance programs specifically for healthcare costs, which tend to rise with age.

After age 65, the rules change. You can withdraw HSA money for any reason without the 20 percent penalty. Non-medical withdrawals are taxed as regular income, but medical withdrawals remain tax-free. This makes an HSA a flexible retirement account — it functions like a traditional IRA for non-medical expenses but keeps its tax-free status for healthcare.

HSA versus FSA and other health savings options

An FSA is similar to an HSA but has key differences. FSA contributions are "use it or lose it" — money not spent by the end of the year is forfeited (though some plans allow a small carryover or grace period). FSAs do not require a high-deductible plan. You can have both an FSA and an HSA if your FSA is limited to dental and vision only, but a general-purpose FSA blocks HSA contributions.

A Dependent Care FSA is separate and covers childcare or elder care expenses. It has its own contribution limit and does not interfere with an HSA. If you have access to an HSA and can afford to fund it, it is usually the better choice because the money is yours to keep and invest, whereas FSA money reverts to your employer if unused.

Frequently Asked Questions

Can I use my HSA if I change jobs?

Yes. An HSA is your personal account, not tied to your employer. You keep the money and can use it even after you leave the job. If your new employer offers an HSA, you can continue contributing to the same account or open a new one. The money in your old account stays there indefinitely.

What happens to my HSA if I turn 65 and enroll in Medicare?

You can no longer contribute to an HSA once you enroll in Medicare, but you keep the account and can withdraw from it. All withdrawals for may have access to medical expenses remain tax-free. Non-medical withdrawals are taxed as income but have no penalty after 65. Many people use their HSA to pay Medicare premiums and out-of-pocket costs.

Can I invest the money in my HSA?

Most HSA providers let you invest the balance in mutual funds, stocks, or bonds, similar to a brokerage account. Some require a minimum balance (often $1,000 to $2,000) before investing. Gains are tax-free as long as you use the money for may have access to medical expenses. Check with your HSA provider about investment options and fees.

What if I withdraw money for a non-medical expense?

Before age 65, you pay income tax on the amount plus a 20 percent penalty. After age 65, you pay income tax but no penalty. Keep receipts for all medical expenses to prove they may have access to; if the IRS questions a withdrawal, you need documentation to avoid the penalty.

Can my spouse have an HSA if I have one?

Yes, if your spouse is also enrolled in a high-deductible health plan and meets the other requirements. If you both have family coverage under the same HDHP, only one of you can open an HSA (the account covers both). If you each have separate individual HDHPs, you can each open your own HSA.