A Health Savings Account is a tax-advantaged bank account you own, separate from your health insurance

A Health Savings Account (HSA) is a savings account designed specifically for medical expenses. You contribute money to it before taxes are taken out of your paycheck, which lowers your taxable income for the year. The money sits in the account earning interest, and you withdraw it to pay for may have access to medical costs — doctor visits, prescriptions, dental work, vision care, and certain medical equipment.

The account belongs to you, not your employer or insurance company. If you change jobs or leave your employer, the account and the money in it stay with you. You can carry unused money forward year to year; there is no "use it or lose it" deadline like some workplace benefits have.

HSAs are only available to people 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. You cannot have an HSA if you are on Medicare, covered by a spouse's non-HDHP plan, or claimed as a dependent on someone else's tax return.

Key Takeaways

  • You contribute pre-tax money to an HSA, which reduces your taxable income and the amount of federal income tax you owe that year.
  • Money in an HSA can be invested in stocks, bonds, or mutual funds and grows tax-free as long as you use withdrawals for may have access to medical expenses.
  • HSAs are portable — they stay with you if you change jobs, and unused money rolls over to the next year indefinitely.
  • You must be enrolled in a High Deductible Health Plan to open and contribute to an HSA; Medicare beneficiaries and dependents cannot have one.
  • Withdrawals for non-medical expenses are taxed as income and subject to a 20 percent penalty, except after age 65 when the penalty drops but income tax still applies.

How much you can contribute each year

The IRS sets annual contribution limits, and they 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. These limits apply to all your HSA contributions combined — if you have more than one HSA, the total across all accounts cannot exceed the limit.

If you are age 55 or older, you can contribute an additional $1,000 per year as a "catch-up" contribution. This extra amount is only available to you once you turn 55 and continues through the year you turn 65, at which point you can no longer contribute to an HSA (though you can still withdraw from it).

Your employer may also contribute to your HSA on your behalf. Employer contributions count toward the annual limit, so if your employer puts in $2,000, you can only add $2,150 more (for individual coverage in 2024) without exceeding the limit.

What medical expenses you can pay for with HSA money

The IRS maintains a list of may have access to medical expenses — costs you can pay for with HSA funds without penalty. These include doctor and dentist visits, prescription medications, eyeglasses and contact lenses, hearing aids, mental health counseling, physical therapy, and certain medical equipment like blood pressure monitors or glucose meters.

You can also use HSA money for health insurance premiums in specific situations: if you are receiving unemployment benefits, if you are retired and over 65 and paying for Medicare premiums, or if you are paying for long-term care insurance. You cannot use HSA funds to pay premiums for your current employer's health plan or for supplemental insurance like accident or disability coverage.

Over-the-counter items like pain relievers, cold medicine, and antacids are generally not covered unless you have a prescription from a doctor. Cosmetic procedures, gym memberships, and vitamins are not covered. If you are unsure whether a specific expense qualifies, the IRS publishes a detailed list on its website, and your HSA provider can also answer questions about specific items.

How the tax advantages work

An HSA offers three tax benefits. First, money you contribute is deducted from your gross income, so you pay no federal income tax on it. If you contribute $3,000 to an HSA and earn $50,000 that year, you only pay income tax on $47,000. Second, any interest or investment gains in the account are not taxed as long as the money stays in the account. Third, withdrawals for may have access to medical expenses are not taxed at all.

This is different from a regular savings account or a Flexible Spending Account (FSA). With an FSA, unused money is forfeited at the end of the year. With an HSA, money rolls over indefinitely, so you can accumulate savings over time and invest them for growth.

If you withdraw money for a non-medical expense before age 65, you owe income tax on the amount withdrawn plus a 20 percent penalty. After age 65, the 20 percent penalty no longer applies, but you still owe income tax on non-medical withdrawals — at that point, an HSA functions like a traditional retirement account.

How to open and fund an HSA

You open an HSA through a bank, credit union, or investment company that offers them. Many employers offer HSA accounts through payroll, which makes funding automatic — money is deducted from your paycheck before taxes and deposited into the account. If your employer does not offer one, you can open an HSA on your own through a financial institution.

You must enroll in an HDHP first. Your health insurance provider or employer will tell you whether your plan qualifies as an HDHP. Once you are enrolled, you have until April 15 of the following year to open an HSA and make contributions for the previous year, though most people contribute during the year through payroll deductions.

When you open an HSA, you choose how the money is held — in a savings account earning interest, or invested in mutual funds, stocks, or bonds. Some HSA providers require a minimum balance (often $1,000 to $2,500) before you can invest; below that, money sits in a savings account. You can change your investment choices at any time.

How to use HSA money to pay for medical expenses

When you incur a medical expense, you have several options for paying. You can use an HSA debit card issued by your provider to pay at the time of service, similar to a regular debit card. You can also pay out of pocket with your own money and then request reimbursement from your HSA provider later — you do not have to pay with HSA funds immediately.

If you request reimbursement, you submit a claim to your HSA provider with a receipt or invoice showing the expense and the date. Reimbursement typically takes one to two weeks. Keeping receipts is important because the IRS can audit HSA accounts, and you need documentation to prove that withdrawals were for may have access to expenses.

Some people use HSAs as long-term savings accounts and pay medical expenses out of pocket, letting the HSA balance grow and invest over time. This is a valid strategy — there is no requirement to spend down your HSA each year. You can withdraw money whenever you need it, even years after the expense occurred, as long as you have documentation.

HSA vs. FSA and other savings accounts

An HSA is often compared to a Flexible Spending Account (FSA), another workplace benefit for medical expenses. The key differences: FSA money must be spent each year or forfeited (with a small carryover option in some plans), while HSA money rolls over indefinitely. FSAs are not portable — if you leave your job, you lose the account. HSAs are portable and belong to you. FSAs do not require an HDHP, but HSAs do.

A regular savings account offers no tax advantages for medical expenses. A Health Reimbursement Arrangement (HRA) is employer-funded and employer-owned, so you cannot take it with you if you leave. An HSA is the only account that combines portability, tax-free growth, and no annual spending requirement.

If your employer offers both an FSA and an HSA, you can only use one in the same year — the IRS does not allow both. Most people choose an HSA if they have access because of the portability and the ability to carry money forward.

Frequently Asked Questions

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

Yes. HSA funds can be used for may have access to medical expenses of you, your spouse, and any dependent you claim on your tax return, regardless of whether they are covered under your health insurance plan. You do not need to be on the same insurance plan.

What happens to my HSA if I leave my job?

Your HSA stays with you. The account is yours, not your employer's. You can keep the account open, continue to withdraw money for medical expenses, and even continue to contribute if you remain enrolled in an HDHP through another source (like a spouse's plan or individual coverage). You cannot contribute if you switch to a non-HDHP plan.

Can I withdraw money from my HSA before age 65 for non-medical reasons?

Yes, but you will owe income tax on the withdrawal plus a 20 percent penalty. For example, if you withdraw $1,000 for a non-medical expense and are in the 22 percent tax bracket, you owe $220 in income tax plus $200 in penalty, totaling $420. After age 65, the penalty goes away but income tax still applies.

Do I have to use my HSA every year?

No. There is no requirement to spend HSA money each year. You can let it accumulate and invest it for growth over time. Many people use HSAs as retirement savings vehicles, paying medical expenses out of pocket and letting the HSA balance grow tax-free for decades.

What if I lose my HDHP coverage — can I keep my HSA?

You can keep the account and withdraw money from it for medical expenses, but you cannot make new contributions once you are no longer enrolled in an HDHP. If you switch back to an HDHP later, you can resume contributions. The money already in the account stays there indefinitely.