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 has three features that make it different from a regular savings account: money you put in is not taxed as income, the money grows without being taxed, and you can withdraw it tax-free as long as you spend it on medical costs. You control the account — not your employer or your insurance company — and the money stays yours even if you change jobs or insurance plans.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP), which is an insurance plan with a higher yearly deductible than a standard plan. The IRS sets the minimum deductible each year; for 2024, it is $1,550 for individual coverage and $3,100 for family coverage, though these numbers change annually. You cannot have an HSA if you are covered by Medicare, enrolled in a non-HDHP plan, or claimed as a dependent on someone else's tax return.

Key Takeaways

  • You must have a high-deductible health insurance plan to open an HSA, and you control the account yourself rather than your employer or insurer.
  • Money you contribute is not counted as taxable income, it grows without being taxed, and withdrawals for medical expenses are not taxed — a triple tax advantage.
  • You can use HSA funds to pay for deductibles, copays, prescriptions, dental work, vision care, and many other medical costs, but not for insurance premiums or over-the-counter items without a prescription.
  • If you withdraw money for non-medical reasons before age 65, you pay income tax on it plus a 20 percent penalty; after 65, you pay only income tax.
  • Unused money rolls over year to year and never expires, so an HSA can function as a long-term retirement savings tool.

How much you can contribute each year

The IRS sets annual contribution limits, and they vary based on whether you have individual or family coverage. For 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage; these limits increase slightly each year. If you are 55 or older, you can add an extra $1,000 per year as a catch-up contribution. Your employer may contribute to your HSA as well, but the total from all sources cannot exceed the annual limit.

You can contribute money to your HSA through payroll deductions (which is common if your employer offers an HSA), by making deposits directly to the account, or by transferring money from another HSA. Contributions must be made by the tax filing deadline of the following year — typically April 15 — to count toward that year's limit.

What medical expenses you can pay for with HSA funds

HSA funds cover a broad range of medical costs. You can use the money to pay deductibles, copays, and coinsurance on your health insurance. You can also pay for prescription medications, dental work (including cleanings, fillings, and orthodontia), vision care (including eye exams, glasses, and contact lenses), hearing aids, mental health counseling, physical therapy, and many over-the-counter medical items if you have a prescription from a doctor.

Some expenses are not covered. You cannot use HSA funds to pay health insurance premiums, with the exception of COBRA continuation coverage, long-term care insurance, or premiums while you are receiving unemployment benefits. You also cannot use HSA money for cosmetic procedures, gym memberships, or over-the-counter items like pain relievers or cold medicine unless a doctor has written a prescription for them.

How to withdraw money and what happens if you use it for non-medical costs

You withdraw money from your HSA by writing a check, using a debit card linked to the account, or requesting a transfer to your bank account. You do not need to submit receipts or get approval from anyone — the account is yours to manage. However, you are responsible for keeping records of your medical expenses in case the IRS audits your account.

If you withdraw money for something other than a medical expense before you turn 65, you must pay income tax on that amount plus a 20 percent penalty. For example, if you withdraw $1,000 for a non-medical reason and you are in the 22 percent tax bracket, you would owe $420 in taxes and penalties combined. After age 65, you can withdraw money for any reason without the 20 percent penalty, though you still pay income tax on non-medical withdrawals.

How an HSA differs from a Flexible Spending Account

Both HSAs and Flexible Spending Accounts (FSAs) let you set aside pre-tax money for medical expenses, but they work differently. An FSA is run by your employer, not owned by you, and any money you do not spend by the end of the year is forfeited — though some employers allow a grace period or a small carryover. An HSA is your own account, unused money rolls over indefinitely, and you keep it even if you leave your job.

You can have an FSA and an HSA at the same time, but if you have an FSA that covers medical expenses, you cannot open an HSA. You can have an HSA alongside a limited-purpose FSA that covers only dental and vision expenses. HSAs also allow you to invest unused funds in stocks or mutual funds, whereas FSA funds typically sit in a cash account.

Using an HSA as a retirement savings tool

Because HSA money rolls over year to year and never expires, many people use it as a long-term savings account for retirement. You can let the balance grow over decades, invest it in the stock market through your HSA provider, and withdraw it tax-free for medical expenses at any age. After age 65, you can withdraw money for any reason without penalty, paying only income tax — which makes an HSA function similarly to a traditional retirement account.

This strategy works best if you can afford to pay medical expenses out of pocket rather than using HSA funds, allowing the account to grow untouched. However, you must keep receipts for any medical expenses you paid out of pocket, because you can reimburse yourself from the HSA at any point in the future, even decades later, as long as you have documentation that the expense was medical and occurred after the account was opened.

How to open an HSA and what documents you need

To open an HSA, you first need to enroll in a high-deductible health plan through your employer, the health insurance marketplace, or a private insurer. Once you have the HDHP in place, you can open an HSA through a bank, credit union, or investment firm. Many employers offer HSA accounts directly through payroll, which makes setup automatic.

When you open an account, you will need to provide your Social Security number, proof of HDHP coverage (usually a copy of your insurance card or enrollment confirmation), and standard banking information. Some HSA providers require a minimum opening deposit, though many have no minimum. You can open an HSA at any time during the year, but contributions for a given tax year must be made by the tax filing deadline to count toward that year's limit.

Frequently Asked Questions

Can I have an HSA if my employer does not offer one?

Yes. You can open an HSA independently through a bank or investment firm as long as you are enrolled in a high-deductible health plan. You do not need your employer's involvement. If you buy your own HDHP through the health insurance marketplace or a private insurer, you can open an HSA on your own.

What happens to my HSA if I change jobs?

Your HSA stays with you. The account is yours, not your employer's, so the money and the account itself transfer with you. You may choose to move the account to a different HSA provider, or you can leave it where it is and continue to manage it independently.

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

Yes, as long as your spouse is not covered by their own health insurance plan that would disqualify them from HSA coverage. You can use your HSA to pay for medical expenses for your spouse, children, and any dependent you claim on your tax return, even if they are not on your health insurance plan.

Do I have to use my HSA funds before the end of the year?

No. Unlike an FSA, HSA funds do not expire. Any money you do not spend carries over to the next year and the year after that, indefinitely. This is one of the main advantages of an HSA over other tax-advantaged medical savings accounts.

Can I invest my HSA balance?

Many HSA providers allow you to invest unused funds in stocks, bonds, or mutual funds, though some require you to keep a minimum cash balance first. Check with your specific HSA provider about investment options. Any earnings on your investments grow tax-free as long as you use the money for medical expenses.