A Health Savings Account Is a Tax-Advantaged Savings Account Paired With a High-Deductible Health Plan

A Health Savings Account (HSA) is a savings account you own and control that holds money specifically for medical expenses. To open one, you must be enrolled in a high-deductible health plan (HDHP) — a type of health insurance with lower monthly premiums but higher out-of-pocket costs before the insurance kicks in. The HSA lets you set aside pre-tax dollars to pay those out-of-pocket costs, which means you save money on taxes.

You contribute money to the HSA yourself, your employer can contribute, or both of you can. The money sits in the account earning interest or investment returns (depending on how you set it up). When you have a medical expense, you withdraw from the HSA to pay for it. Any money you don't spend in a given year rolls over to the next year — you never lose it.

The account stays with you even if you change jobs or leave your employer. You own it outright, which is different from a flexible spending account (FSA), where unspent money typically disappears at the end of the year.

Key Takeaways

  • An HSA requires enrollment in a high-deductible health plan and lets you save pre-tax money for medical costs.
  • You can contribute up to a set annual limit (the amount changes yearly and depends on whether you have individual or family coverage).
  • Money in an HSA rolls over year to year and earns interest, so it functions as a long-term savings tool, not just a spending account.
  • You can withdraw HSA funds tax-free only for may have access to medical expenses; non-medical withdrawals are taxed as income plus a penalty.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are still taxed as regular income.

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

You can open an HSA if you are enrolled in a high-deductible health plan. The IRS sets the minimum deductible each year — for 2024, that is $1,600 for individual coverage and $3,200 for family coverage. Your health plan documents will tell you whether it qualifies as an HDHP.

You cannot have an HSA if you are covered by any other health insurance that is not an HDHP, with narrow exceptions for specific plans like accident-only coverage or dental-only coverage. You also cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare.

There are no income limits for opening an HSA. Anyone with an HDHP can open one, regardless of how much they earn.

How Much You Can Contribute 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. If you are age 55 or older, you can contribute an additional $1,000 per year (called a catch-up contribution).

Your employer may also contribute to your HSA. If they do, the total of your contributions plus their contributions cannot exceed the annual limit. For example, if your employer contributes $1,000 and you contribute $2,000, you have reached $3,000 of your $4,150 individual limit, leaving you room to contribute $1,150 more on your own.

You can contribute to an HSA only during the months you are enrolled in an HDHP. If you drop the HDHP coverage mid-year, you can only contribute for the months you were covered (though there is a special rule if you open an HSA for the first time).

What Medical Expenses You Can Pay From an HSA

You can withdraw HSA money tax-free to pay for may have access to medical expenses — costs that would normally be deductible on your taxes. This includes your health plan's deductible, copayments, coinsurance, and out-of-pocket maximums. It also covers prescription medications, dental work, vision care, mental health treatment, and medical equipment like crutches or wheelchairs.

Some expenses that surprise people: you can use HSA funds for over-the-counter medications (like pain relievers or allergy medicine) if you have a prescription for them, but not if you buy them without a prescription. You can pay for therapy, acupuncture, and chiropractic care if a doctor orders it. You can cover the cost of a gym membership or fitness program if your doctor prescribes it as treatment for a specific condition.

You cannot use HSA funds for health insurance premiums (with three exceptions: COBRA continuation coverage, coverage while you are unemployed and receiving unemployment benefits, and Medicare premiums after age 65). You cannot use it for cosmetic procedures, over-the-counter items without a prescription, or general wellness products.

How to Withdraw Money and What Happens if You Use It for Non-Medical Expenses

You withdraw from an HSA the same way you would from a regular savings account — through a debit card, check, transfer, or direct payment to a provider. Many HSA providers let you pay medical bills directly from the account online. Keep receipts and documentation for every withdrawal in case the IRS asks.

If you withdraw money for a non-medical expense before age 65, you owe income tax on that amount plus a 20 percent penalty. For example, if you withdraw $500 for something that is not a may have access to medical expense and you are in the 22 percent tax bracket, you would owe $110 in taxes plus $100 in penalty — a total of $210 on a $500 withdrawal.

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

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 costs, but they work differently. An FSA is offered through your employer and the money belongs to your employer, not you. An HSA is your account that you own and control.

The biggest difference: FSA money that you do not spend by the end of the year is forfeited (though employers can allow a small carryover or grace period). HSA money rolls over indefinitely. You can let it accumulate for years, invest it, and use it whenever you need to.

An FSA has no investment options — the money just sits there. Many HSAs let you invest the balance in mutual funds or other investments, so your money can grow. You can only have an FSA if your employer offers one. You can open an HSA on your own if you have an HDHP, even if your employer does not offer one.

How HSA Funds Are Taxed and What Records You Need to Keep

Contributions to an HSA reduce your taxable income for the year. If you contribute $2,000, your taxable income drops by $2,000, which lowers your tax bill. Interest and investment gains in the account are not taxed as long as you use the money for may have access to medical expenses.

When you withdraw for a may have access to medical expense, there is no tax. When you withdraw for a non-medical expense before age 65, you owe income tax plus the 20 percent penalty mentioned above. After age 65, you owe only income tax on non-medical withdrawals.

Keep receipts and invoices for every medical expense you pay from the HSA. The IRS can ask for proof that withdrawals were for may have access to expenses. You do not have to submit receipts when you withdraw, but you must be able to produce them if audited. Many people photograph receipts or keep them in a folder for this reason.

Frequently Asked Questions

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

Yes, as long as your spouse is not covered by another health plan that disqualifies them from HSA coverage. You can pay for your spouse's may have access to medical expenses even if they are not enrolled in your HDHP. You can also pay for your children's and dependents' medical expenses.

What happens to my HSA if I lose my HDHP coverage?

The HSA stays yours and the money remains in the account. You cannot make new contributions once you are no longer enrolled in an HDHP, but you can continue to withdraw for may have access to medical expenses. If you re-enroll in an HDHP later, you can resume contributions.

Can I invest the money in my HSA?

It depends on your HSA provider. Some providers offer investment options like mutual funds or index funds once your balance reaches a certain amount (often $1,000 or $2,000). Others keep the money in a savings account earning interest. Check with your provider about what options are available.

Do I have to use my HSA every year or lose the money?

No. Unlike an FSA, there is no "use it or lose it" rule. Money in an HSA rolls over to the next year indefinitely. You can let it accumulate and use it years later for future medical expenses.

Can I withdraw HSA money to pay for health insurance premiums?

Generally no, but there are three exceptions: you can pay for COBRA continuation coverage, coverage while receiving unemployment benefits, and Medicare premiums (including Part B, Part D, and supplemental insurance) after you turn 65.