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

A Health Savings Account (HSA) is a savings account you own that holds money specifically for medical expenses. Unlike a regular savings account, the money you put in is not taxed, the money that grows inside is not taxed, and withdrawals for may have access to medical costs are not taxed. You must be enrolled in a high-deductible health plan (HDHP) to open one, and the account stays yours even if you change jobs or health plans.

The account works like this: you contribute money (up to a yearly limit set by the IRS), that money sits in the account earning interest or investment returns, and you withdraw it to pay for medical expenses. You are not required to spend the money in any particular year — it rolls over and accumulates. Some people use HSAs as long-term retirement savings vehicles because of the tax advantages, while others use them to cover immediate medical bills.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan; you cannot have other health coverage at the same time.
  • Contributions, growth, and withdrawals for may have access to medical expenses are all tax-free, which is the main financial advantage over a regular savings account.
  • Unused money stays in your account year to year and belongs to you permanently, even if you leave your job or change health plans.
  • You can withdraw money for a broad range of medical costs including deductibles, copays, prescriptions, dental work, vision care, and some equipment and supplies.
  • 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.

Who can open an HSA and when

You must meet three conditions to open an HSA. First, you must be 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, though these numbers change annually. Second, you cannot be covered by any other health insurance at the same time, with limited exceptions for specific plans like dental-only or vision-only coverage. Third, you cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare.

You can open an HSA through your employer if they offer one, or you can open one independently through a bank, credit union, or financial services company. If you open one through your employer, they may contribute money on your behalf, which counts toward your yearly contribution limit. You can open an account at any time during the year, but contributions for a given tax year must be made by the tax filing deadline (usually April 15 of the following year).

What you can and cannot pay for with HSA money

HSA funds can cover a wide range of medical, dental, and vision expenses. may have access to expenses include insurance deductibles and copayments, prescription medications, over-the-counter medications (with a doctor's prescription), dental work including cleanings and orthodontia, vision care and eyeglasses, hearing aids, medical equipment like crutches or blood pressure monitors, and therapy or counseling. You can also use HSA money to pay for long-term care insurance premiums and certain types of long-term care services.

Expenses that do not may have access to include cosmetic procedures (unless medically necessary), gym memberships, vitamins and supplements (unless prescribed by a doctor for a specific condition), and general wellness products. Health insurance premiums themselves do not may have access to, except for COBRA continuation coverage, Medicare premiums (once you turn 65), and long-term care insurance. If you are unsure whether a specific expense qualifies, the IRS publishes a detailed list, and your HSA provider can also answer questions about particular items.

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 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). These limits apply to the total of all contributions from you, your employer, and anyone else — if your employer contributes $2,000, you can only contribute $2,150 more to reach the individual limit.

You contribute money through payroll deduction if your employer offers an HSA, which means the money comes out before taxes are calculated, lowering your taxable income. If you open an HSA on your own, you contribute after-tax dollars but can deduct the contribution on your tax return. Contributions must be made by the tax filing deadline for the year they cover, though some employers allow a grace period into the following year.

How the money grows and what happens to unused funds

Money in an HSA can sit in a regular savings account earning minimal interest, or you can invest it in mutual funds, stocks, or other investments through your HSA provider. The investment options vary depending on which bank or financial company holds your account. Any interest or investment gains are not taxed, which is a significant advantage over a regular taxable investment account. You can move your HSA to a different provider if you want different investment options, though you may face transfer fees.

Unlike a Flexible Spending Account (FSA), which requires you to spend the money within the plan year or lose it, HSA money rolls over indefinitely. If you do not spend it this year, it stays in your account next year and the year after that. This makes HSAs useful for building a medical savings cushion over time. Some people intentionally do not withdraw money from their HSA and instead pay medical bills out of pocket, letting the HSA grow as a retirement medical fund.

Withdrawals, taxes, and penalties

When you withdraw money from your HSA for a may have access to medical expense, that withdrawal is tax-free. You do not need to file paperwork or get pre-approval — you simply withdraw the money and keep receipts showing the expense was medical. If you withdraw money for a non-medical reason before you turn 65, you owe income tax on the withdrawal plus a 20 percent penalty. After age 65, you can withdraw money for any reason and pay only income tax (no penalty), though withdrawals for non-medical expenses are still taxable.

You are responsible for tracking which expenses are may have access to and keeping receipts. The IRS can audit HSA withdrawals, so documentation matters. If you withdraw money and later realize the expense does not may have access to, you can put the money back into the account (called a recontribution) before the tax filing deadline to avoid the penalty, though you will still owe income tax on the amount.

HSAs and employment changes

Your HSA belongs to you, not your employer. If you leave your job, change health plans, or retire, the account stays open and the money remains yours. You can continue to use the account to pay for medical expenses, and you can continue to contribute to it as long as you remain enrolled in an HDHP (whether through a new employer, the individual market, or Medicare Advantage). If you lose your HDHP coverage, you can no longer make new contributions, but you can still withdraw money for may have access to medical expenses without penalty.

If your employer contributed money to your HSA while you worked there, that money is yours to keep. Some employers offer a vesting schedule, meaning you own the money immediately or after a certain period; check your plan documents to see if this applies. When you change jobs, you can roll your HSA balance to a new provider or keep it where it is.

Frequently Asked Questions

Can I use my HSA to pay for my family members' medical expenses?

Yes. You can use HSA funds to pay for may have access to medical expenses of your spouse and any dependent children, even if they are not covered by your health plan. The person receiving the care does not need to be on your tax return. Keep receipts showing who the expense was for.

What happens to my HSA if I turn 65 and enroll in Medicare?

You can no longer make new contributions once you enroll in Medicare, but the money already in your account stays there. You can continue to withdraw it for may have access to medical expenses, including Medicare premiums, copayments, and deductibles. After 65, you can also withdraw money for non-medical reasons and pay only income tax (no 20 percent penalty).

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

Not for regular health insurance premiums. You can use HSA funds to pay for COBRA continuation coverage, Medicare premiums (once you are 65), and long-term care insurance premiums. You cannot use it for premiums from your employer's health plan or individual market plans.

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

No. Unlike a Flexible Spending Account, HSA money does not expire. Unused funds roll over to the next year and stay in your account indefinitely. You can let the balance grow over many years and use it whenever you need it for may have access to medical expenses.

What if I have questions about whether a specific expense qualifies?

Your HSA provider can answer questions about specific expenses. You can also check the IRS Publication 969, which lists may have access to and non-may have access to expenses in detail. When in doubt, keep the receipt and consult your provider or a tax professional before withdrawing the money.