An HSA plan is a savings account paired with a high-deductible health insurance plan

A Health Savings Account (HSA) is a tax-advantaged savings account you can use to pay 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 insurance kicks in. The HSA itself is separate from the insurance; it's a bank account where you set aside pre-tax money specifically for healthcare costs.

The account belongs to you, not your employer or insurance company. Money you don't spend in a given year stays in the account and earns interest or investment returns. Unlike flexible spending accounts (FSAs), which require you to use the money within the plan year or lose it, HSA funds roll over indefinitely. This makes an HSA a long-term savings tool as well as a way to pay current medical bills.

Key Takeaways

  • You can only open an HSA if you're enrolled in a high-deductible health plan; enrollment in other insurance types disqualifies you.
  • Contributions are made with pre-tax dollars, reducing your taxable income for the year, and withdrawals for may have access to medical expenses are tax-free.
  • Unused money stays in your account year to year and can be invested, making it different from FSAs that expire annually.
  • You can withdraw HSA funds for non-medical expenses after age 65, though non-medical withdrawals before 65 are taxed and penalized.

Who can open an HSA and what the income limits are

To open an HSA, you must meet three conditions: you must be covered by a high-deductible health plan, you cannot be covered by any other health insurance (with limited exceptions), and you cannot be claimed as a dependent on someone else's tax return. There are no income limits for HSA may be able to access — anyone meeting the insurance and dependent requirements can open one, regardless of how much they earn.

If you're married and both spouses have HSA-may be able to access coverage, each spouse can open a separate HSA. If one spouse has an HDHP and the other has traditional insurance, only the spouse with the HDHP can contribute. Self-employed people and employees of small businesses can open HSAs as long as they're enrolled in an HDHP.

How much you can contribute each year

The IRS sets annual contribution limits, which change yearly. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. These limits apply to all contributions combined — whether you contribute through payroll deduction, direct deposit, or personal checks. If you're age 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution.

Contributions are made with pre-tax dollars, which means the money you put in reduces your taxable income. If your employer contributes to your HSA, that amount counts toward your annual limit. You can contribute up to the limit even if you enroll in the HDHP partway through the year, though the IRS has specific rules about pro-rating if you enroll after January.

What medical expenses you can pay with HSA funds

HSA funds can pay for a wide range of may have access to medical expenses: doctor visits, hospital stays, prescription medications, dental work, vision care, mental health treatment, and medical equipment like wheelchairs or hearing aids. You can also use HSA money for over-the-counter medications (with a doctor's prescription), physical therapy, and certain preventive care. The IRS maintains a detailed list of what counts as a may have access to expense.

Expenses that don't may have access to include cosmetic procedures, gym memberships, vitamins (unless prescribed for a specific condition), and most over-the-counter items without a prescription. If you're unsure whether a specific expense qualifies, you can ask your HSA provider or check the IRS publication on medical expenses. Keeping receipts is important because if you withdraw money for a non-may have access to expense, you'll owe income tax plus a 20% penalty.

How the tax benefits work

HSAs offer three tax advantages. First, contributions are made with pre-tax dollars, lowering your taxable income. Second, the money in the account grows tax-free — any interest or investment gains are not taxed. Third, withdrawals for may have access to medical expenses are tax-free. This triple tax benefit is why HSAs are considered more tax-efficient than other healthcare savings options.

If you withdraw HSA money for a non-medical expense before age 65, you owe income tax on the withdrawal plus a 20% penalty. After age 65, you can withdraw money for any reason without the penalty, though non-medical withdrawals are still subject to income tax. At that point, the HSA functions like a traditional IRA for non-medical expenses.

How to use your HSA to pay medical bills

Most HSAs come with a debit card you can use at pharmacies, doctor's offices, and hospitals. You can also pay out of pocket and then reimburse yourself from your HSA later — there's no time limit on reimbursement as long as the expense was incurred while you had the account. Some people use this strategy to let their HSA grow invested while paying medical bills from their regular checking account.

When you use your HSA debit card or request a reimbursement, keep the receipt and any documentation of the expense. The HSA provider may ask for proof that the expense was may have access to, especially if the transaction is ambiguous (for example, a pharmacy purchase could be a may have access to medication or a non-may have access to item). Your HSA provider will send you an annual statement showing all deposits, withdrawals, and the account balance.

What happens to your HSA if you change jobs or insurance

Your HSA stays with you even if you leave your job or switch health plans. The account is portable — you own it, and the money remains yours. If you move to a new employer, you can continue contributing to the same HSA as long as you're still enrolled in an HDHP. If you switch to a non-HDHP plan, you can no longer make new contributions, but you can still withdraw money from the account for may have access to medical expenses.

If your employer was contributing to your HSA and you leave that job, those contributions stop, but your existing balance stays in the account. You can roll over your HSA to a new provider if your new employer offers a different HSA plan, or you can keep it where it is. Some people maintain their HSA with the original provider even after leaving the employer, paying any account maintenance fees out of pocket.

Frequently Asked Questions

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

Yes. HSA funds can pay for may have access to medical expenses of you, your spouse, and your dependents, even if they're not covered by your HDHP. You don't need to be on the same insurance plan. Keep receipts showing the expense was for a family member in case the HSA provider asks for documentation.

What's the difference between an HSA and an FSA?

Both are tax-advantaged accounts for medical expenses, but FSAs require you to spend the money within the plan year or lose it (with limited carryover). HSAs roll over indefinitely, can be invested, and are portable if you change jobs. FSAs don't require enrollment in a high-deductible plan. You can't have both at the same time.

Can I invest the money in my HSA?

Yes, many HSA providers allow you to invest the balance in mutual funds, stocks, or bonds, similar to an IRA. Some providers require a minimum balance before investing is available. Investment gains are tax-free as long as you use the money for may have access to medical expenses. Check with your specific HSA provider about investment options.

What happens to my HSA when I turn 65?

You can continue using it for may have access to medical expenses at any age. After 65, you can withdraw money for any reason without the 20% penalty, though non-medical withdrawals are taxed as income. Many people use their HSA as a supplemental retirement account after 65 since Medicare covers most medical expenses.

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

No. Unlike FSAs, HSA funds don't expire. You can let the money accumulate year after year, and it can be invested to grow. This makes HSAs useful for saving toward future medical expenses or retirement healthcare costs.