A Health Savings Account is a tax-advantaged savings account tied to a high-deductible health plan

A Health Savings Account (HSA) is a savings account you own and control that lets you set aside pre-tax money to pay for medical expenses. The money you put in is not subject to federal income tax, the money grows tax-free, and withdrawals for may have access to medical costs are not taxed. You keep the account even if you change jobs or health plans — the money stays yours.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP), which is a health insurance plan with a higher deductible than standard plans but lower monthly premiums. For 2024, the IRS defines an HDHP as a plan with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. You cannot have other health coverage (with limited exceptions for specific plans like dental or vision insurance) and you cannot be claimed as a dependent on someone else's tax return.

HSAs are offered through employers, banks, and financial institutions. If your employer offers one, you typically enroll during open enrollment and contributions are deducted from your paycheck. If you buy your own HDHP on the individual market, you can open an HSA directly with a bank or investment firm that administers them.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan and have no other health coverage.
  • Money you contribute reduces your taxable income, grows tax-free, and can be withdrawn tax-free for may have access to medical expenses.
  • You own the account and keep it even if you change jobs, health plans, or retire.
  • Unused money rolls over year to year — there is no "use it or lose it" deadline like some employer plans have.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

Contribution limits and how much you can set aside each year

The IRS sets annual contribution limits that change each year. For 2024, you can contribute up to $4,150 if you have individual HDHP coverage or $8,300 if you have family coverage. These limits apply to all your HSAs combined — if you have multiple accounts, the total across all of them cannot exceed the limit.

If you are age 55 or older, you can contribute an additional $1,000 per year (called a catch-up contribution). This extra amount is only available once you turn 55 and continues through the year you turn 65.

Contribution limits for the following year are usually announced by the IRS in September. If you are self-employed or buy your own HDHP, you can contribute any amount up to the limit. If your employer offers an HSA, they may contribute on your behalf, and your contributions plus their contributions cannot exceed the annual limit.

What medical expenses you can pay for with HSA money

You can withdraw HSA funds tax-free to pay for may have access to medical expenses — costs that the IRS defines as necessary to diagnose, cure, mitigate, treat, or prevent disease. This includes doctor visits, hospital stays, prescription medications, dental work, vision care, mental health treatment, and medical equipment like wheelchairs or hearing aids.

Common may have access to expenses include copayments and coinsurance, deductibles, physical therapy, lab tests, X-rays, surgery, insulin and other diabetes supplies, birth control, fertility treatment, and nursing care. Over-the-counter medications like pain relievers or cold medicine are also may have access to if you have a prescription or doctor's note.

Expenses that do not may have access to include cosmetic procedures (unless medically necessary), gym memberships, vitamins, toiletries, and insurance premiums (with narrow exceptions for COBRA, Medicare, or long-term care insurance in specific situations). If you are unsure whether an expense qualifies, the IRS publishes a detailed list, and your HSA administrator can also answer questions.

How to use your HSA money and keep records

Most HSAs come with a debit card that you can use to pay for may have access to medical expenses directly at the point of care — at a pharmacy, doctor's office, or hospital. Some accounts also let you submit receipts for reimbursement after you pay out of pocket. A few HSAs allow you to invest the money in mutual funds or stocks if the balance exceeds a certain threshold, usually $1,000 to $2,500.

You are responsible for keeping records that show each expense was may have access to. This means saving receipts, invoices, and any documentation from your healthcare provider. The IRS can audit HSA withdrawals years later, so do not discard records. Many people photograph receipts or store them digitally to make this easier.

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 only exception is after age 65, when you can withdraw money for any reason without the penalty (though you still owe income tax on non-medical withdrawals).

How HSAs differ from Flexible Spending Accounts and other savings options

An HSA is often confused with a Flexible Spending Account (FSA), but they work differently. An FSA is an employer-sponsored account where you set aside pre-tax money for medical or dependent care expenses, but you lose any money you do not spend by the end of the year (or a short grace period). An HSA has no deadline — unused money stays in your account forever and grows year to year.

An FSA does not require enrollment in an HDHP, so you can have an FSA even if you have standard health insurance. However, you cannot have both an HSA and an FSA in the same year. If your employer offers both, you must choose one.

A Health Reimbursement Arrangement (HRA) is another employer-sponsored option where the employer funds an account for you to use for medical expenses. Unlike an HSA, you do not own an HRA — your employer does — and you cannot take it with you if you leave the job. An HRA is also not a savings vehicle; it is purely for reimbursement.

Tax benefits and how they affect your taxes

The main tax benefit of an HSA is that contributions reduce your taxable income. If you contribute $3,000 to an HSA in a year when you earn $50,000, your taxable income is treated as $47,000 for federal tax purposes. This lowers your income tax bill.

If your employer deducts HSA contributions from your paycheck, those contributions are also exempt from Social Security and Medicare taxes (called FICA taxes), which saves you an additional 7.65 percent. If you contribute on your own, you deduct the contribution on your tax return (Form 8889) when you file.

Money in the account grows tax-free, meaning any interest, dividends, or investment gains are not taxed. When you withdraw money for a may have access to medical expense, that withdrawal is also tax-free. You do not report may have access to withdrawals on your tax return.

How to open an HSA and what documents you need

If your employer offers an HSA, you enroll during open enrollment or when you first become may be able to access. You will need to provide your Social Security number, proof that you are enrolled in an HDHP (usually your employer provides this), and basic personal information. Your employer may handle the setup, or you may need to open the account directly with the HSA administrator they have chosen.

If you buy your own HDHP on the individual market, you can open an HSA with a bank, credit union, or investment firm that administers HSAs. You will need your Social Security number, proof of HDHP enrollment (your insurance documents), and a government-issued ID. The process usually takes a few days to a week.

Once the account is open, you can begin contributing immediately. If you open an HSA partway through the year, you can still contribute up to the annual limit for that year, but the contribution is prorated based on the number of months you were may be able to access.

Frequently Asked Questions

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

Yes, if your spouse is covered under your family HDHP or if you file taxes jointly. You can also use HSA money to pay for the medical expenses of your children or any dependent you claim on your tax return, regardless of whether they are on your health plan.

What happens to my HSA if I leave my job?

The account stays yours. You own it, not your employer. You can keep the money in the account, continue to use it for may have access to medical expenses, and continue to invest it if the balance is high enough. You can also roll it over to an HSA at a different financial institution if you want to change administrators.

Can I contribute to an HSA if I am on Medicare?

No. Once you enroll in Medicare, you are no longer may be able to access to contribute to an HSA. However, you can continue to withdraw money from an existing HSA for may have access to medical expenses, and after age 65 you can withdraw for any reason without the 20 percent penalty.

What if I spend more on medical expenses than I have in my HSA?

Your HSA only covers what is in the account. If you run out of HSA money, you pay remaining medical costs out of pocket or through your health insurance (copayments, coinsurance, deductible). You can always contribute more to your HSA in future years, up to the annual limit.

Can I use HSA money to pay my health insurance premiums?

Generally no, with three exceptions: you can use HSA money to pay premiums for COBRA continuation coverage, Medicare premiums (Part A, B, D, or supplemental), or long-term care insurance. You cannot use it for regular health insurance premiums from your employer or the individual market.