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 savings account you own that holds money specifically for medical expenses. Unlike a regular savings account, contributions you make to an HSA reduce your taxable income, the money grows tax-free, and withdrawals for may have access to medical costs are not taxed. You control the account — it belongs to you, not your employer or insurance company — and the money stays in the account year to year.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). The IRS sets the minimum deductible each year; for 2024, that means at least $1,600 for individual coverage or $3,200 for family coverage. You cannot have other health coverage at the same time, with limited exceptions for specific plans like dental or vision insurance. Once you meet those conditions, you can open an HSA through a bank, credit union, or insurance company.

Key Takeaways

  • An HSA requires enrollment in a high-deductible health plan and lets you set aside pre-tax money for medical costs.
  • Money you contribute reduces your taxable income, grows without being taxed, and comes out tax-free when used for may have access to medical expenses.
  • You own the account and can carry unused money forward indefinitely — it does not disappear at the end of the year.
  • may have access to expenses include deductibles, copays, prescriptions, dental work, vision care, and many other medical services, but not insurance premiums or cosmetic procedures.
  • If you withdraw money for non-medical reasons before age 65, you pay income tax on the amount plus a 20 percent penalty; after 65, you pay only income tax.

How contributions and tax treatment work

You can contribute money to your HSA in three ways: through payroll deductions if your employer offers it, by depositing money yourself, or through a combination of both. The IRS sets annual contribution limits; for 2024, you can put in up to $4,150 for individual coverage or $8,300 for family coverage. These limits change yearly. If your employer contributes to your HSA, that amount counts toward your limit.

Money you contribute through payroll deductions is taken out before income tax is calculated, which means it lowers your taxable income. If you contribute money yourself after taxes have been withheld, you can deduct that amount on your tax return. Either way, the contribution reduces what you owe in federal income tax. The money in the account earns interest or investment returns (depending on how you invest it) without being taxed each year.

What expenses you can pay for with HSA funds

may have access to medical expenses are broad and include most things you would expect: deductibles and copays, prescription medications, dental work including cleanings and fillings, vision care including glasses and contact lenses, hearing aids, mental health counseling, and physical therapy. You can also use HSA money for over-the-counter medications like pain relievers and allergy medicine, though the rules changed in 2020 to require a prescription for some items.

Expenses that do not count include health insurance premiums (with rare exceptions like COBRA continuation coverage), cosmetic procedures, gym memberships, and vitamins or supplements that are not prescribed by a doctor. Long-term care insurance premiums are covered up to a limit set by the IRS each year. If you are unsure whether a specific expense qualifies, the IRS publishes a full list, and your HSA provider can also answer questions about particular costs.

How the account works after you leave a job

Your HSA stays with you when you change jobs or leave employment. The account is yours to keep, and the money does not go away. If your new job offers an HSA, you can roll your old account into the new one, or you can keep both accounts open. If your new job does not offer an HSA, you can still use the money in your existing account for may have access to medical expenses, but you cannot make new contributions unless you enroll in an HDHP on your own through the health insurance marketplace.

If you lose coverage under an HDHP — for example, you switch to a traditional health plan — you can no longer contribute to the HSA, but you can still withdraw money for may have access to expenses. This is an important difference from other accounts: you do not have to close the account or lose the money just because your employment situation changed.

Investment options and account growth

Most HSAs let you keep your money in a savings account that earns a small amount of interest. Some HSA providers also let you invest the money in mutual funds, stocks, or other investments, similar to a retirement account. The investment option is useful if you do not plan to use the money right away and want it to grow over time. You control which option you choose, and you can usually switch between them.

Because the money grows tax-free and you can carry it forward indefinitely, an HSA can function as a long-term savings tool for future medical expenses. Some people use it as a retirement account by saving receipts for medical expenses they paid out of pocket, then withdrawing that amount from the HSA years later — the IRS allows this as long as you have the receipts to prove the expenses were may have access to and occurred after the account opened.

Penalties and rules for non-medical withdrawals

If you withdraw money from your HSA for something that is not a may have access to medical expense, you 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 $220 in income tax plus $200 in penalties, totaling $420. This penalty applies only to the earnings in the account, not to the contributions you made, in some cases.

The 20 percent penalty does not apply after you turn 65. At that age, you can withdraw money for any reason and pay only income tax on non-medical withdrawals — the same tax treatment as a traditional IRA. This makes an HSA a useful retirement savings tool if you do not spend all the medical money while you are working.

Frequently Asked Questions

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

Yes, as long as your spouse is covered under your health plan or you file taxes jointly. You can use HSA funds for may have access to medical expenses of you, your spouse, and any dependents you claim on your tax return, regardless of whether they are on your insurance plan.

What happens to my HSA if I do not use all the money in a year?

The money rolls over to the next year with no limit on how much you can carry forward. Unlike a flexible spending account (FSA), there is no "use it or lose it" rule. You can let the money accumulate over many years and use it whenever you need it.

Can I have an HSA if I am on Medicare?

Once you enroll in Medicare, you can no longer make new contributions to an HSA. However, you can continue to withdraw money from an existing HSA for may have access to medical expenses, including Medicare premiums and out-of-pocket costs. If you are still working and covered by an employer plan, you may have options depending on your situation.

Do I need receipts to withdraw money from my HSA?

You do not need to submit receipts when you withdraw money, but you should keep them for your records. The IRS can audit your HSA use, and you will need receipts to prove that withdrawals were for may have access to expenses if questioned. Many people keep receipts for years in case of an audit.

Can my employer see what I spend my HSA money on?

Your employer can see that you have an HSA and may see contribution amounts, but they cannot see what you spend the money on. Your HSA provider has access to that information, but it is protected by privacy rules. Your spending is between you and your HSA provider.