A Medical Savings Account Lets You Set Aside Pre-Tax Money for Healthcare Costs

A Medical Savings Account (MSA) is a tax-advantaged savings account paired with a high-deductible health insurance plan. Money you put into an MSA is not subject to federal income tax, and you can withdraw it tax-free to pay for may have access to medical expenses. The account belongs to you — the money does not disappear at the end of the year, and you can carry the balance forward indefinitely.

MSAs come in two forms: Archer MSAs and Health Savings Accounts (HSAs). Archer MSAs are older and rarely available to new enrollees; most people who have access to an MSA-type account today have an HSA instead. Both work on the same principle: you contribute money, reduce your taxable income, and spend the account on medical care without paying tax on the withdrawal.

The trade-off is that you must be enrolled in a high-deductible health plan (HDHP) to open or contribute to an MSA. A high deductible means you pay more out of pocket before your insurance kicks in, but your premiums are typically lower. The MSA helps offset that higher out-of-pocket cost by letting you save money tax-free.

Key Takeaways

  • An MSA is a savings account for medical expenses that reduces your taxable income when you contribute and avoids tax when you withdraw for may have access to care.
  • You must be enrolled in a high-deductible health plan to open or contribute to an MSA; the account and the insurance plan work together.
  • Money in an MSA rolls over year to year and belongs to you, unlike a flexible spending account (FSA) where unused funds are forfeited.
  • You can withdraw MSA funds for a wide range of medical expenses: doctor visits, prescriptions, dental work, vision care, and medical equipment.
  • If you withdraw money for non-medical expenses before age 65, you pay income tax plus a 20 percent penalty; after 65, you pay only income tax.

How Money Flows Into and Out of an MSA

You contribute to an MSA through payroll deduction if your employer offers one, or you can make deposits directly to the account if you are self-employed or your employer does not sponsor a plan. The money you contribute is deducted from your gross pay before federal income tax is calculated, which lowers your taxable income for the year.

There are annual contribution limits set by the IRS. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage under an HDHP. These limits change each year. If you contribute through payroll, your employer may also contribute on your behalf, and that money counts toward your limit.

When you need to pay for a medical expense, you withdraw from the account. You can use a debit card linked to the MSA, write a check, or request a transfer. There is no paperwork required at the time of withdrawal — you simply spend the money. You keep receipts for your records in case the IRS asks for proof that the withdrawal was for a may have access to expense.

What Counts as a may have access to Medical Expense

may have access to expenses include most healthcare costs: doctor visits, hospital stays, surgery, prescription medications, dental work, vision care, hearing aids, and medical equipment like crutches or wheelchairs. Mental health treatment, physical therapy, and preventive care (like vaccinations and screenings) also count.

Some expenses do not count. Over-the-counter medications are generally not covered unless you have a prescription. Cosmetic procedures, gym memberships, and vitamins are not may have access to expenses. Long-term care insurance premiums are not covered, though some long-term care expenses may be. If you are unsure whether a specific expense qualifies, the IRS publishes a detailed list, and your MSA provider can also answer questions.

You do not have to spend the money in the year you contribute it. Unlike a flexible spending account (FSA), which has a "use it or lose it" rule, MSA money rolls over. You can let your balance grow year after year and spend it whenever you choose, even years later.

The Difference Between an MSA and an HSA

Most people today have access to an HSA rather than an Archer MSA. HSAs have higher contribution limits, are available to more people, and are easier to open. Archer MSAs were created in the 1990s and are being phased out; you can only open a new Archer MSA if you were self-employed and had one before 2008, or if you work for a small employer (50 or fewer employees) that offers one.

Both accounts work the same way: you contribute pre-tax money, carry the balance forward, and withdraw tax-free for medical expenses. The main practical difference is that HSAs are far more common and have higher limits. If you are shopping for an MSA-type account, you are almost certainly looking at an HSA.

What Happens If You Withdraw Money for Non-Medical Expenses

If you withdraw money from an MSA for something that is not a may have access to medical expense, you owe income tax on that withdrawal plus a 20 percent penalty. 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 in taxes on that $1,000.

The penalty does not apply after you turn 65. At that point, you can withdraw money for any reason and pay only income tax — the same as you would with a traditional IRA. This makes an MSA a useful retirement savings tool if you do not spend all the money on medical care during your working years.

How an MSA Affects Your Taxes

When you contribute to an MSA through payroll, your employer withholds less federal income tax because the contribution reduces your gross income. If you contribute on your own (as a self-employed person), you deduct the contribution on your tax return, which lowers your taxable income.

At the end of the year, your MSA provider sends you a statement showing how much you contributed and how much you withdrew. You do not report this on your tax return unless you made a non-may have access to withdrawal. If you did, you report the withdrawal as income and add the 20 percent penalty.

The money you withdraw for may have access to medical expenses is never taxed, so there is no tax form to file for those withdrawals. Keep your receipts for your records, but you do not send them to the IRS unless you are audited.

Frequently Asked Questions

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

No, you cannot use MSA money to pay the premium for your high-deductible health plan. You can use it to pay premiums for other insurance (like dental or vision coverage) or for COBRA continuation coverage if you lose your job, but not for the HDHP itself.

What happens to my MSA if I change jobs or leave my employer's plan?

The account stays with you. If your employer sponsored the MSA, the money remains in the account and you can continue to use it for medical expenses. You can also roll it over to a new MSA if your new employer offers one, or to an HSA if you enroll in an HSA-may be able to access plan.

Can I have both an MSA and an FSA at the same time?

No. If you have an MSA, you cannot contribute to a flexible spending account (FSA) or a health reimbursement arrangement (HRA) in the same year. You can have one or the other, but not both.

Do I have to spend my MSA money by a certain date each year?

No. Unlike an FSA, which has a use-it-or-lose-it deadline, an MSA has no deadline. Money you do not spend in one year carries over to the next year and stays in the account indefinitely. You can let it accumulate and spend it whenever you need medical care.

What if I do not have medical expenses and my MSA balance keeps growing?

That is one of the advantages of an MSA. The money is yours to keep. After age 65, you can withdraw it for any reason and pay only income tax, making it function like a retirement account. Before 65, you can leave it invested and growing, and use it whenever you have a medical expense.