A Health Savings Account is a tax-advantaged savings tool paired with a high-deductible health insurance plan

A Health Savings Account (HSA) is a bank account you own that holds money specifically for medical expenses. Unlike a flexible spending account (FSA) that your employer controls, an HSA belongs to you — you can take it with you if you change jobs, and unspent money rolls over year to year. The account earns interest or investment returns, and withdrawals for may have access to medical costs come out tax-free.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) — a type of insurance with lower monthly premiums but higher out-of-pocket costs before coverage kicks in. The IRS sets the minimum deductible each year; for 2024, it's $1,600 for individual coverage and $3,200 for family coverage. You can contribute money to the HSA yourself, your employer can contribute, or both of you can. The money you put in reduces your taxable income, similar to a traditional retirement account.

Key Takeaways

  • An HSA is your personal savings account for medical expenses, and you keep it even if you leave your job or change insurance plans.
  • You can only open an HSA if you have a high-deductible health plan, and you cannot be covered by other health insurance or enrolled in Medicare.
  • Money you contribute to an HSA is not subject to federal income tax, and withdrawals for may have access to medical expenses are tax-free.
  • Unspent HSA money does not disappear at the end of the year — it stays in the account and can grow through interest or investment returns.
  • If you withdraw HSA money for non-medical expenses before age 65, you pay income tax on the withdrawal plus a 20 percent penalty.

Who can open and contribute to an HSA

You are may be able to access to open an HSA if you are enrolled in a high-deductible health plan and meet three conditions: you have no other health insurance coverage (with narrow exceptions for accident, disability, or dental-only plans), you are not claimed as a dependent on someone else's tax return, and you are not enrolled in Medicare. Self-employed people, employees, and people buying insurance on their own can all open HSAs.

Your employer can contribute to your HSA, you can contribute, or both. The IRS sets annual contribution limits — for 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage. If you are age 55 or older, you can add an extra $1,000 per year. Contributions must be made by the tax filing deadline (usually April 15 of the following year) to count toward that tax year.

How HSA money is invested and grows

Once money lands in your HSA, it does not sit idle. Most HSA providers offer a savings account option that earns interest, similar to a regular bank account. Some providers also let you invest HSA funds in stocks, bonds, or mutual funds — the same way you might invest in a retirement account. Any interest or investment gains are tax-free as long as the money is used for may have access to medical expenses.

The investment options vary by HSA provider. Some require you to keep a minimum balance in cash (often $1,000 to $2,500) before you can invest the rest. Others let you invest from dollar one. If you invest HSA money and the market drops, you lose money just like any other investment — but you can hold the account for decades, so time can work in your favor if you do not need the money immediately for medical bills.

What counts as a may have access to medical expense

may have access to medical expenses include doctor visits, prescription medications, dental work, vision care, mental health treatment, and hospital stays. They also cover medical equipment like wheelchairs, crutches, and blood pressure monitors. Copays, coinsurance, and deductibles all count. Over-the-counter medications (like pain relievers or allergy medicine) count only if you have a prescription from a doctor.

Expenses that do not count include cosmetic procedures, gym memberships, vitamins (unless prescribed), and most over-the-counter items without a prescription. Long-term care insurance premiums are allowed up to a limit set by age. If you are unsure whether an expense qualifies, your HSA provider can usually tell you, or you can check IRS Publication 502 for the full list.

Tax advantages and how they work

An HSA offers three tax breaks. First, money you contribute reduces your taxable income — if you earn $60,000 and contribute $3,000 to an HSA, you only pay income tax on $57,000. Second, any interest or investment gains inside the account are not taxed. Third, withdrawals for may have access to medical expenses are tax-free. No other savings account offers all three benefits.

The tax savings depend on your income tax bracket. If you are in the 22 percent federal tax bracket and contribute $3,000 to an HSA, you save roughly $660 in federal taxes that year. State taxes may apply too, depending on where you live. Self-employed people can deduct HSA contributions on their tax return even if they do not itemize deductions, which is an additional advantage.

What happens if you withdraw money for non-medical expenses

If you take money out of your HSA for something other than a may have access to medical expense, you pay income tax on the withdrawal plus a 20 percent penalty — unless you are age 65 or older. For example, if you withdraw $1,000 for a vacation and you are in the 22 percent tax bracket, you owe $220 in income tax plus $200 in penalty, for a total of $420. That penalty makes non-medical withdrawals expensive.

After age 65, the penalty goes away. You can withdraw HSA money for any reason without the 20 percent penalty, though you still pay income tax on non-medical withdrawals. At that point, an HSA functions like a traditional retirement account — you can use it for medical expenses tax-free, or for anything else and pay only income tax.

How to choose an HSA provider and manage your account

If your employer offers an HSA, they usually partner with a specific provider and may contribute money to your account as part of your benefits package. If you are self-employed or your employer does not offer one, you can open an HSA through a bank, credit union, or investment company. Shop around: providers differ in fees, interest rates, investment options, and customer service.

Once your account is open, you receive a debit card or checkbook to pay for medical expenses directly from the HSA. You can also pay out of pocket and reimburse yourself later — some people do this to let the HSA grow longer before withdrawing. Keep receipts for all medical expenses in case the IRS asks. Your HSA provider sends you a statement each year showing contributions, withdrawals, and interest earned, which you need for your tax return.

Frequently Asked Questions

Can I use my HSA to pay my health insurance premium?

You cannot use HSA money to pay your regular monthly health insurance premium. You can use it to pay for COBRA continuation coverage, long-term care insurance premiums (up to an age-based limit), and Medicare premiums if you are age 65 or older. Copays and deductibles count as may have access to expenses.

What happens to my HSA if I change jobs?

Your HSA stays with you. The account is yours, not your employer's. If you change jobs, you keep the money and can continue contributing if your new employer's plan qualifies. If your new plan is not a high-deductible plan, you can no longer contribute, but you can still withdraw money for medical expenses tax-free.

Can I have an HSA and an FSA at the same time?

No, with one exception. You cannot have an HSA and a general-purpose FSA in the same year. You can have an HSA and a limited-purpose FSA (which covers only dental and vision) or an HSA and a dependent care FSA. Check with your employer about which combination they offer.

Do I have to spend my HSA money every year?

No. Unlike an FSA, which has a "use it or lose it" rule, HSA money rolls over indefinitely. You can let it grow for years and withdraw it whenever you need it for medical expenses. This makes an HSA a long-term savings tool, not just a way to pay this year's medical bills.

Can I invest my HSA money in stocks?

Many HSA providers offer investment options, but not all. Some providers require you to keep a minimum balance in cash before investing the rest. Check with your provider about what investment choices they offer and whether there are fees for investing. Remember that investments can lose value, so only invest money you do not expect to need soon.