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 and control that holds money specifically for medical expenses. Unlike a regular savings account, contributions you make to an HSA are not taxed as income, the money inside grows without being taxed, and withdrawals for may have access to medical costs are not taxed either. This triple tax advantage is what makes an HSA different from simply setting aside money in a checking account.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) — a type of health insurance with lower monthly premiums but a higher deductible than traditional plans. The IRS sets the minimum deductible each year; for 2024, that minimum is $1,600 for individual coverage and $3,200 for family coverage. You cannot have an HSA if you are covered by any other health insurance, Medicare, or claimed as a dependent on someone else's tax return.

You own the account outright. The money stays in your account from year to year — it does not disappear at the end of the calendar year like a Flexible Spending Account (FSA) does. This means you can save for medical costs over time and use the account strategically across multiple years.

Key Takeaways

  • An HSA requires enrollment in a high-deductible health plan and allows you to set aside pre-tax money for medical expenses.
  • Contributions, growth, and withdrawals for may have access to medical costs are all tax-free, creating a significant tax advantage over regular savings.
  • You can contribute up to $4,150 per year for individual coverage or $8,300 for family coverage in 2024, though these limits change annually.
  • Money in an HSA rolls over year to year and can be invested to grow, making it useful for long-term medical savings.
  • Withdrawals for non-medical expenses are taxed as income and subject to a 20 percent penalty, unless you are age 65 or older.

Who can open an HSA and what the enrollment rules are

You must meet three conditions to open an HSA. First, you must be enrolled in a high-deductible health plan offered by your employer, purchased on the individual market, or obtained through a spouse's plan. Second, you cannot be covered by any other health insurance at the same time — this includes Medicare, Medicaid (with limited exceptions), military coverage, or a spouse's non-HDHP plan. Third, you cannot be claimed as a dependent on someone else's tax return.

If you lose coverage under an HDHP, you can no longer make contributions to your HSA, but you keep the account and can continue to withdraw money for medical expenses. If you turn 65 and enroll in Medicare, your HSA remains yours; you stop contributing but can still use it for Medicare premiums, copayments, and other may have access to costs.

You can open an HSA through your employer's benefits plan, through a bank or financial institution that offers HSAs, or through a health insurance marketplace. Some employers automatically enroll employees in an HSA when they choose an HDHP; others require you to set one up separately. Check with your employer's benefits administrator or your insurance company to learn how to open an account.

How much you can contribute and where the money comes from

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 amount you and your employer contribute combined — if your employer contributes $1,000, you can only add $3,150 more.

Money for an HSA can come from three sources: your own paycheck (usually through payroll deduction, which is pre-tax), your employer (as a contribution or match), or your own funds deposited directly to the account. If you contribute through payroll deduction, that money is taken out before income tax is calculated, lowering your taxable income for the year. If you contribute money directly from your bank account, you claim the deduction on your tax return.

You do not have to contribute the maximum amount. You can contribute whatever amount makes sense for your situation, as long as you do not exceed the annual limit. Some people contribute small amounts throughout the year; others make one large contribution early in the year to take advantage of investment growth.

What medical expenses you can pay for with HSA money

The IRS maintains a detailed list of may have access to medical expenses. Common ones include deductibles, copayments, and coinsurance for any health insurance plan; prescription medications and over-the-counter drugs (with a prescription); dental work including cleanings, fillings, and orthodontia; vision care including eye exams, glasses, and contact lenses; mental health counseling and therapy; and physical therapy and rehabilitation.

Less obvious may have access to expenses include insulin and diabetes supplies, hearing aids and batteries, crutches and wheelchairs, acupuncture, chiropractic care, and certain medical equipment prescribed by a doctor. You can also use HSA funds to pay for long-term care insurance premiums (up to certain limits) and Medicare premiums once you turn 65.

Expenses that do not may have access to include cosmetic surgery (unless medically necessary), over-the-counter medications without a prescription, gym memberships, vitamins, and general wellness products. If you are unsure whether a specific expense qualifies, the IRS website maintains a searchable database of may have access to and non-may have access to expenses, or you can ask your HSA provider.

How to use your HSA money and what happens if you withdraw for non-medical costs

You can withdraw money from your HSA by writing a check, using a debit card linked to the account, or requesting a transfer to your bank account. Some HSAs allow you to submit receipts for reimbursement, meaning you can pay for medical expenses out of pocket and then withdraw the matching amount from your HSA later. This strategy lets you leave money in the account to grow through investment while still covering current medical costs.

If you withdraw money for a non-medical expense before age 65, that withdrawal is taxed as ordinary income and you owe a 20 percent penalty on top of the income tax. For example, if you withdraw $1,000 for a non-medical expense and you are in the 22 percent tax bracket, you would owe $220 in income tax plus $200 in penalty, for a total of $420. After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as income.

Keep receipts and records of all medical expenses you pay for with HSA funds. The IRS can audit HSA accounts, and you may need to prove that withdrawals were for may have access to expenses. If you cannot document a withdrawal, the IRS may treat it as a non-medical withdrawal and assess taxes and penalties retroactively.

How HSA money can be invested to grow over time

Unlike an FSA, which is typically held in cash, many HSAs allow you to invest the money in mutual funds, stocks, or other investment options. This means your HSA can grow beyond the contributions you make, similar to a retirement account. The growth is tax-free, and you can withdraw it tax-free for medical expenses at any time.

Not all HSA providers offer investment options — some hold funds in cash only. If investment is important to you, compare HSA providers before opening an account. Employers sometimes partner with specific HSA providers, which may limit your choices, but you can often roll over your HSA to a different provider that offers investments.

Investment risk is yours to manage. If you invest HSA funds and the market declines, your account balance could decrease. Many people use a strategy of keeping a year or two of expected medical expenses in cash and investing the remainder for long-term growth, treating the HSA as a supplemental retirement savings tool after they have covered immediate medical needs.

How an HSA differs from a Flexible Spending Account and other savings options

An HSA and an FSA are both tax-advantaged accounts for medical expenses, but they work differently. An FSA is "use it or lose it" — money you do not spend by the end of the year is forfeited (though employers can allow a small carryover or grace period). An HSA rolls over year to year, so unused money stays in your account indefinitely. An FSA does not require a high-deductible health plan; you can have an FSA with any type of health insurance. However, you cannot have both an HSA and an FSA in the same year.

A Health Reimbursement Arrangement (HRA) is another employer-funded option that works similarly to an FSA but is owned and controlled by the employer, not you. Money in an HRA may or may not roll over depending on the plan, and you cannot take it with you if you leave your job.

A regular savings account offers no tax advantage — you pay income tax on interest earned and cannot deduct contributions. However, you can withdraw money anytime for any reason without penalty. An HSA is most valuable if you expect to have medical expenses and want to reduce your tax burden; a regular savings account is more flexible if you need access to funds for non-medical purposes.

Frequently Asked Questions

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

Yes, if they are covered under your health insurance plan or are your tax dependents. You can use HSA funds to pay for may have access to medical expenses for anyone you claim as a dependent on your tax return, even if they are not on your health plan. Keep records showing the relationship and the medical expense.

What happens to my HSA if I change jobs or leave my employer?

Your HSA stays with you — it is your account, not your employer's. You can continue to use the money for medical expenses and keep it invested. You can also roll it over to a new HSA provider if you want different investment options or lower fees. If your new employer offers an HSA, you can merge the accounts or keep them separate.

Can I withdraw money from my HSA to pay my health insurance premium?

You can use HSA funds to pay premiums for COBRA continuation coverage, Medicare (once you turn 65), or long-term care insurance. You cannot use HSA funds to pay premiums for your employer's health plan or individual market insurance while you are working, with the exception of COBRA. After age 65, you can use HSA funds for Medicare Part B and Part D premiums.

What if I do not have any medical expenses in a year — can I just leave the money in my HSA?

Yes. Unlike an FSA, there is no requirement to spend HSA money each year. You can let it accumulate and grow through investment, then use it for medical expenses in future years or after you retire. This makes an HSA useful as a long-term savings tool for healthcare costs.

Do I have to report my HSA on my tax return?

If you contribute through payroll deduction, your employer reports the contribution and it does not appear on your tax return. If you contribute money directly from your bank account, you report the contribution on Form 8889 when you file your taxes. Withdrawals for may have access to medical expenses do not need to be reported; only non-medical withdrawals are reported as taxable income.