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

A Health Savings Account (HSA) is a bank account you own that holds money specifically for medical expenses. The account itself is separate from your insurance — you open it through a bank or financial institution — but you can only have one if you're enrolled in a high-deductible health plan (HDHP). The money you put in reduces your taxable income, the money grows tax-free, and you pay no tax when you withdraw it for may have access to medical costs.

Unlike a Flexible Spending Account (FSA), which you lose if you don't spend the money by the end of the year, an HSA rolls over. The balance stays yours year to year, and you can invest it like a retirement account. You own the account even if you change jobs or insurance plans — the account itself doesn't disappear.

The tradeoff is the insurance requirement: your health plan must have a deductible of at least $1,550 for individual coverage or $3,100 for family coverage in 2024 (these amounts change yearly). You also can't be covered by other insurance that isn't an HDHP, and you can't be claimed as a dependent on someone else's tax return.

Key Takeaways

  • You can only open an HSA if you're enrolled in a high-deductible health plan, and the account is separate from your insurance.
  • Money you contribute reduces your taxable income, grows tax-free inside the account, and comes out tax-free when used for may have access to medical expenses.
  • Unlike FSAs, HSA balances roll over year to year and stay with you if you change jobs or insurance.
  • You can invest HSA funds like a retirement account once your balance reaches a certain threshold, usually $1,000 to $2,500 depending on your provider.
  • Withdrawals for non-medical expenses are taxed as income plus a 20% penalty before age 65; after 65, the penalty goes away but income tax remains.

How much you can contribute and who can open one

For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. These limits reset each January and are set by the IRS — they change most years. If you're 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). Your employer can contribute to your HSA too, and that counts toward your limit, not in addition to it.

You open an HSA through a bank, credit union, or financial services company — not through your insurance company or employer, though your employer may offer one as a payroll option. If you open it yourself, you control which institution holds it. Some employers offer HSA plans with limited investment options; opening your own elsewhere gives you more choices about where the money goes.

You must open the account during the same month you enroll in an HDHP, or by April 15 of the following year, to get the tax deduction for that year. If you miss that window, you can still open an HSA, but you won't get the tax break for the previous year.

What you can spend HSA money on

HSA funds cover a wide range of medical, dental, and vision expenses. Common uses include copays, coinsurance, deductibles, prescription medications, dental work, eyeglasses, hearing aids, and mental health treatment. You can also use HSA money for over-the-counter medications like pain relievers or allergy medicine — but only if you have a prescription or a doctor's note saying you need them (this rule changed in 2020).

Some less obvious expenses count too: acupuncture, chiropractic care, physical therapy, and certain medical equipment like crutches or blood pressure monitors. Long-term care insurance premiums and some long-term care services are covered. Cosmetic procedures like teeth whitening or Botox do not count, but the same procedure counts if it's medically necessary — for example, reconstructive surgery after an injury.

You cannot use HSA money for health insurance premiums, with three exceptions: COBRA continuation coverage, Medicare premiums (once you're 65), and long-term care insurance. You also cannot use it for expenses your insurance already paid for, or for anything not related to medical care.

How withdrawals and taxes work

When you withdraw money for a may have access to medical expense, you owe no tax on that withdrawal. You keep receipts and documentation in case the IRS asks — you don't have to submit them with your tax return, but you need to be able to show the expense was real and may have access to.

If you withdraw money for something that isn't a may have access to medical expense, you pay income tax on that amount plus a 20% penalty. For example, if you withdraw $1,000 for a non-medical expense and you're in the 22% tax bracket, you'd owe $220 in income tax plus $200 in penalty, for a total of $420. After age 65, the penalty disappears — you still owe income tax on non-medical withdrawals, but not the extra 20%.

You're responsible for tracking which expenses are may have access to. The IRS doesn't pre-approve withdrawals. If you take money out and later can't document that it was for a may have access to expense, you could owe taxes and penalties even years later.

HSA vs. FSA: which is which

Both accounts let you set aside pre-tax money for medical expenses, but they work differently. An FSA is tied to your employer and disappears when you leave the job (though you have a grace period to spend remaining funds). An HSA is yours to keep regardless of employment. An FSA has a "use it or lose it" rule — money left over at the end of the year is forfeited (with a small carryover option in some plans). An HSA rolls over indefinitely.

You can have an FSA and an HSA at the same time, but only if your FSA is a limited-purpose FSA that covers only dental and vision, or a post-deductible FSA that doesn't cover medical expenses until after your deductible is met. A general-purpose FSA and an HSA cannot coexist.

FSAs typically have lower contribution limits than HSAs — usually $3,200 per year for individual coverage. HSAs allow you to invest the money; most FSAs do not. If you're likely to change jobs or want to build long-term savings for medical costs, an HSA is more flexible. If you have predictable medical expenses each year and want a simpler account, an FSA may be enough.

How to open an HSA and what to do with the money

First, confirm you're enrolled in an HDHP and that you meet all the may be able to access rules. Then contact a bank, credit union, or financial institution that offers HSAs — many major banks do, as do online-only banks and investment firms. You'll provide your name, Social Security number, and proof of HDHP enrollment (your insurance card or a letter from your employer). The account opens within days.

Once open, you can contribute money by payroll deduction (if your employer offers it), by direct transfer from your bank, or by check. Payroll deduction is often easiest because the money comes out before taxes, reducing your taxable income automatically. If you contribute outside of payroll, you claim the deduction on your tax return.

Many HSA providers let you invest the balance once it reaches a threshold — typically $1,000 to $2,500, depending on the provider. You can choose from mutual funds, stocks, or bonds, similar to a retirement account. Some people keep a portion in cash for immediate medical expenses and invest the rest for long-term growth. Others keep everything in cash if they expect to use it soon.

What happens to your HSA when you change jobs or retire

Your HSA stays with you. If you leave your job, the account doesn't close — you keep the money and the investment options may change depending on your provider, but the balance is yours. You can keep the account at the same institution or transfer it to another HSA provider without tax consequences.

If you lose HDHP coverage, you can no longer contribute to the HSA, but you can still withdraw money for may have access to medical expenses tax-free. Once you turn 65, you can withdraw money for any reason — you'll pay income tax on non-medical withdrawals, but not the 20% penalty. This makes an HSA function like a retirement account after 65.

If you die, your HSA passes to your beneficiary (usually your spouse or estate). A spouse can treat the HSA as their own and continue using it. Non-spouse beneficiaries must pay income tax on the full balance, though they can still use it for the deceased person's medical expenses without the 20% penalty.

Common mistakes and how to avoid them

One frequent error is withdrawing money without keeping documentation. The IRS doesn't require you to submit receipts when you file taxes, but you must keep them and be able to prove the expense was may have access to if audited. Keep receipts, invoices, and explanation of benefits statements for at least three to seven years.

Another mistake is using HSA money for something that seems medical but isn't covered — like gym memberships (not covered even if prescribed for health), cosmetic procedures, or over-the-counter items without a prescription. Before you withdraw, check the IRS list of may have access to expenses or ask your HSA provider.

Some people also fail to track that they've already paid an expense with insurance. If your insurance paid for a doctor visit, you cannot use HSA money to reimburse yourself for that same visit. You can only use HSA funds for costs you actually paid out of pocket.

Frequently Asked Questions

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

Yes, if your spouse is covered under your family HDHP or is not covered by any other health insurance. If your spouse has their own separate health insurance, you cannot use your HSA for their expenses. The key is whether they're may be able to access for an HSA themselves — if they are, they should have their own account.

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

You owe income tax plus a 20% penalty on that amount. You can sometimes fix this by redepositing the money within a certain timeframe, though rules vary by provider. Contact your HSA provider immediately if this happens — some allow corrections, and acting quickly improves your chances.

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

Only for COBRA, Medicare, or long-term care insurance. You cannot use it for your regular health insurance premiums, including marketplace plans or employer coverage. The exception is once you turn 65 — then you can use it for Medicare premiums.

Do I lose my HSA if I switch to a different health plan?

No. Your HSA is separate from your insurance. If you switch to a plan that isn't an HDHP, you keep the account and the money in it, but you cannot make new contributions. You can still withdraw for may have access to medical expenses tax-free.

Is there a deadline to use HSA money, or does it expire?

No expiration date. Unlike FSAs, HSA money never expires. You can let it sit for years and use it whenever you have a may have access to medical expense, even decades later. This makes it useful as a long-term savings tool for retirement medical costs.