A Health Care Savings Account Lets You Set Aside Pre-Tax Money for Medical Costs

A Health Care Savings Account (HSA) is a bank account you own that holds money specifically for medical expenses. The money you put in is not taxed by the federal government, and you do not pay taxes on the money when you withdraw it to pay for medical care. You control the account — it belongs to you, not your employer or insurance company — and any balance you do not spend in a year rolls over to the next year.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) through your employer, the marketplace, or Medicare. The HDHP is a type of health insurance with a lower monthly premium but a higher deductible — the amount you pay out of pocket before insurance starts to pay. The HSA is designed to help you save money to cover that deductible and other medical costs.

You can contribute money to your HSA through payroll deductions if your employer offers one, or you can open an HSA on your own and deposit money directly. The money sits in the account earning interest or investment returns, depending on how you choose to invest it. When you have a medical expense, you withdraw the money tax-free to pay for it.

Key Takeaways

  • An HSA is a personal savings account for medical expenses that you must pair with a high-deductible health plan, and the money you contribute is not subject to federal income tax.
  • You own the account and control the money — it does not disappear at the end of the year, and you can take it with you if you change jobs or insurance plans.
  • You can withdraw money tax-free only for may have access to medical expenses, which include deductibles, copays, prescriptions, dental work, vision care, and some medical equipment.
  • Contribution limits are set by the IRS each year and vary depending on whether you have individual or family coverage; for 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage.
  • If you withdraw money for non-medical expenses before age 65, you pay income tax on the withdrawal plus a 20 percent penalty, but after 65 you can withdraw for any reason and only pay income tax.

Who Can Open an HSA and What the Income and Coverage Requirements Are

You can open an HSA only if you are enrolled in a high-deductible health plan. The IRS sets the minimum deductible each year — for 2024, it is $1,600 for individual coverage and $3,200 for family coverage. Your plan must also have an out-of-pocket maximum (the most you will pay in a year) of no more than $4,000 for individual coverage or $8,000 for family coverage. If your plan does not meet these thresholds, you cannot open an HSA.

You cannot have other health coverage at the same time, with limited exceptions. You cannot be covered by a spouse's non-HDHP plan, a parent's plan, Medicare, TRICARE, or the Veterans Administration. You also cannot claim someone else as a dependent on your taxes if they have their own HSA, and you cannot be claimed as a dependent yourself.

There is no income limit to open an HSA. Anyone with an HDHP can open one, regardless of how much money they earn. You do not need to be employed — you can open an HSA if you buy an HDHP through the marketplace or through a professional association.

How Much You Can Contribute Each Year and When Contributions Stop

The IRS sets annual contribution limits, and they 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. If you are 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution. These limits apply to all contributions combined — from you, your employer, and anyone else who contributes on your behalf.

You can contribute to your HSA from January 1 through December 31 of each year. If you open an HDHP partway through the year, you can still contribute the full annual amount if you remain enrolled in an HDHP through December 31. However, if you drop your HDHP coverage before the end of the year, you can only contribute a prorated amount based on the months you were covered.

Once you turn 65, you can no longer make new contributions to your HSA. However, the money already in the account stays there and continues to grow. You can withdraw it for any reason after 65 without the 20 percent penalty, though you will pay income tax on non-medical withdrawals.

What Medical Expenses You Can Pay for With HSA Money

You can withdraw money from your HSA tax-free to pay for may have access to medical expenses — costs related to diagnosing, treating, or preventing illness or injury. This includes your health insurance deductible, copays, and coinsurance. It also covers prescription medications, insulin, and over-the-counter drugs if prescribed by a doctor.

Dental and vision care are covered: cleanings, fillings, root canals, eyeglasses, contact lenses, and eye exams all count. You can pay for hearing aids, wheelchairs, crutches, and other durable medical equipment. Mental health treatment, including therapy and psychiatric medications, is a may have access to expense. You can also use HSA money to pay for certain medical equipment and supplies you buy at a pharmacy or medical supply store.

You cannot use HSA money for health insurance premiums, with three exceptions: you can pay for COBRA continuation coverage, Medicare premiums (Part A, B, and D), and long-term care insurance premiums. You cannot use it for cosmetic procedures, gym memberships, or over-the-counter items that are not prescribed by a doctor. If you are unsure whether a specific expense qualifies, the IRS publishes a full list on its website, and your HSA provider can also answer questions about specific items.

How to Keep Records and Prove Your Expenses Are may have access to

You are responsible for keeping receipts and documentation showing that money you withdrew was used for may have access to medical expenses. The IRS does not require you to submit receipts when you withdraw money, but you must be able to produce them if the IRS audits your tax return. Many people keep receipts in a folder or photograph them and store the images on their phone or computer.

Your HSA provider will send you a statement each year showing how much you contributed and withdrew, but the statement does not verify that your withdrawals were for may have access to expenses. You need to maintain your own records. If you cannot prove that a withdrawal was for a may have access to expense, the IRS may treat it as a non-may have access to withdrawal, which means you will owe income tax and the 20 percent penalty on that amount.

Some people use their HSA debit card to pay directly at the doctor's office or pharmacy, which creates an automatic record. Others withdraw money and pay out of pocket, then keep the receipt. Either method works as long as you have documentation that matches the withdrawal amount to a specific medical expense.

What Happens to Your HSA Money if You Change Jobs or Insurance Plans

Your HSA is yours to keep. If you leave your job, the account does not close and the money does not disappear. You own it outright, separate from your employer. You can take the account with you, or you can roll it over to a new HSA at a different bank or provider. Some people keep their old HSA open and open a new one at their new employer; others consolidate everything into one account.

If you drop your HDHP coverage and switch to a different type of health insurance, you can no longer make new contributions to your HSA. However, you can still withdraw money from the account for may have access to medical expenses. Once you re-enroll in an HDHP in the future, you can start contributing again.

If you move to a different state, your HSA moves with you. There are no state-specific HSA rules that would affect your account. Your HSA provider may change based on where you live or which employer you work for, but the account itself is portable.

The Tax Penalty for Withdrawing Money for Non-Medical Expenses

If you withdraw money from your HSA for something that is not a may have access to medical expense before you turn 65, you must pay income tax on the withdrawal plus a 20 percent penalty. For example, if you withdraw $1,000 for a non-medical expense and you are in the 22 percent tax bracket, you would owe $220 in income tax plus $200 in penalty, for a total of $420. You report the non-may have access to withdrawal on your tax return.

After you turn 65, the 20 percent penalty goes away. You can withdraw money for any reason without penalty, though you will still owe income tax on non-medical withdrawals. This makes an HSA function like a traditional retirement account after 65 — similar to an IRA or 401(k).

If you accidentally withdraw money for a non-may have access to expense, you can sometimes put the money back into the account within a certain timeframe to avoid the penalty. Rules about correcting mistakes vary, so contact your HSA provider if this happens to you.

Frequently Asked Questions

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

Yes. You can withdraw money from your HSA to pay for may have access to medical expenses for yourself, your spouse, and any dependent you claim on your tax return, even if they are not covered by your health insurance. The expense must still be a may have access to medical expense — the person receiving the care does not have to be on your plan.

What happens to my HSA money if I die?

If your spouse is the beneficiary, they can roll the HSA into their own HSA and continue using it tax-free for medical expenses. If a non-spouse inherits the account, they must pay income tax on the full balance, though they do not pay the 20 percent penalty. You can name a beneficiary when you open the account, just like a bank account.

Can I invest the money in my HSA?

Yes. Many HSA providers let you invest the balance in mutual funds, stocks, or bonds, similar to a brokerage account. Some HSAs require a minimum balance before you can invest — for example, $1,000 or $2,000 — and keep the rest in a savings account. Check with your provider about investment options and any fees.

Do I have to use my HSA money every year or does it roll over?

HSA money rolls over. There is no "use it or lose it" rule. Any balance you do not spend stays in the account and earns interest or investment returns. This is one major difference between an HSA and a Flexible Spending Account (FSA), which typically requires you to spend the money within the calendar year.

Can I open an HSA if I am self-employed?

Yes. You can open an HSA if you buy a high-deductible health plan through the marketplace or through a professional association. You can contribute up to the annual limit set by the IRS, and you can deduct your contributions on your tax return. Self-employed people often use HSAs as a retirement savings tool because of the tax advantages.