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

A Health Savings Account (HSA) is a savings account you can open if you are enrolled in a high-deductible health plan (HDHP). The money you put into it is not taxed, the money that grows inside it is not taxed, and when you withdraw it to pay for medical expenses, that withdrawal is not taxed either. This triple tax advantage is what makes an HSA different from a regular savings account.

You own the account — not your employer, not your insurance company. Any money left in the account at the end of the year stays there and keeps growing. Unlike a Flexible Spending Account (FSA), which forces you to spend the money or lose it, an HSA rolls over indefinitely. After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

To open an HSA, you must be covered by an HDHP and cannot be claimed as a dependent on someone else's tax return. You also cannot be enrolled in Medicare or have other health coverage that is not an HDHP (with limited exceptions for specific plans like dental or vision coverage). The account is offered through banks, insurance companies, and financial institutions — your HDHP provider can tell you which HSAs are available to you.

Key Takeaways

  • Money you deposit into an HSA is not taxed, grows tax-free, and can be withdrawn tax-free for medical expenses.
  • You must be enrolled in a high-deductible health plan to open an HSA, and you own the account even if your employer offers it.
  • Unlike FSAs, HSA money does not disappear at the end of the year — it accumulates and can be invested like a retirement account.
  • You can use HSA funds to pay for a wide range of medical, dental, vision, and mental health services, as well as certain over-the-counter items.
  • After age 65, you can withdraw HSA money for any reason, though non-medical withdrawals are taxed as regular income.

What counts as a medical expense you can pay with HSA funds

The IRS maintains a list of what qualifies as a medical expense for HSA purposes. Common examples include copays, coinsurance, deductibles, prescription medications, and out-of-pocket costs for doctor visits, hospital stays, and surgery. Dental work (fillings, cleanings, root canals, orthodontia), vision care (eye exams, glasses, contact lenses), and hearing aids all count. Mental health and substance abuse treatment, including therapy and counseling, are covered.

Over-the-counter items are allowed only if you have a prescription or a doctor's letter stating medical necessity — you cannot simply buy pain relievers or cold medicine without documentation. Insulin is an exception and can be purchased without a prescription. Medical equipment like crutches, wheelchairs, blood pressure monitors, and glucose meters qualifies. Long-term care insurance premiums and certain amounts of long-term care services also count, though the rules are specific and vary by age.

Expenses that do not count include cosmetic procedures (unless medically necessary after injury or illness), general wellness programs, gym memberships, vitamins and supplements (unless prescribed), and most over-the-counter drugs without a prescription. Expenses paid by insurance do not may have access to — you can only use HSA funds for costs you actually pay out of pocket.

How much you can contribute each year

The IRS sets annual contribution limits, and they change each year. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. These limits apply to all HSA contributions combined — if you have multiple HSAs, 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 (called a catch-up contribution).

Your employer may contribute to your HSA, and that counts toward your limit. If your employer contributes $2,000 and you contribute $1,500, you have reached $3,500 of your $4,150 individual limit. You can contribute the remaining $650 yourself. Contributions must be made by the tax filing deadline (usually April 15 of the following year) to count toward that year's limit.

If you enroll in an HDHP mid-year, your contribution limit is reduced proportionally. If you leave your HDHP or lose coverage, you cannot make further contributions for that year, though you can still withdraw money from the account for medical expenses.

How to use HSA funds when you need them

Most HSAs come with a debit card that works like a regular bank card at pharmacies, doctors' offices, and hospitals. You can swipe it at the point of service and the funds come directly from your HSA. Some providers also allow you to pay out of pocket and then request reimbursement by submitting receipts and documentation to the HSA administrator.

Keep all receipts and medical bills. The IRS does not require you to submit them when you withdraw money, but you must be able to prove that withdrawals were for may have access to medical expenses if you are ever audited. Many HSA providers offer online portals where you can upload receipts and track your spending.

You can also leave money in your HSA and let it grow like an investment account. Many HSA providers allow you to invest the balance in mutual funds, stocks, or bonds. This is useful if you have enough income to cover medical expenses out of pocket and want to let your HSA grow for future healthcare costs or retirement.

The difference between an HSA and an FSA

Both HSAs and FSAs are tax-advantaged accounts for medical expenses, but they work differently. An FSA is typically offered through your employer and has a "use it or lose it" rule — any money left at the end of the year is forfeited (though employers can allow a small carryover or grace period). An HSA has no expiration; money rolls over indefinitely and belongs to you even if you change jobs or leave your employer.

An FSA does not require a high-deductible health plan — you can have an FSA with any health insurance. An HSA requires an HDHP. FSAs are usually administered by your employer, while HSAs are individual accounts you own and control. FSA contribution limits are typically lower than HSA limits, and FSAs cannot be invested — the money sits in an account earning no interest.

You cannot have both an HSA and an FSA in the same year, with one exception: a limited-purpose FSA that covers only dental and vision expenses is allowed alongside an HSA. Some people use an HSA for long-term savings and a limited-purpose FSA to cover predictable dental and vision costs.

What happens to your HSA if you change jobs or retire

Your HSA stays with you. Unlike health insurance or an FSA, which end when you leave your job, the HSA account is yours to keep. You can continue to use the money for medical expenses, and you can continue to invest it if your current HSA provider allows investing. You can also transfer the account to a different HSA provider if you want lower fees or better investment options — this is called a trustee-to-trustee transfer and does not trigger taxes or penalties.

If you leave your HDHP and enroll in a different type of health plan (like a PPO or HMO), you cannot make new contributions to your HSA, but you can still withdraw money for medical expenses. Once you turn 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as regular income.

If you die, your HSA passes to your beneficiary (usually your spouse or estate, depending on how you set it up). A spouse who inherits an HSA can treat it as their own. Other beneficiaries must pay income tax on the full balance, though they can still use the funds for the deceased person's medical expenses without additional tax.

Common mistakes to avoid with HSA withdrawals

The most common mistake is withdrawing money for non-may have access to expenses. If you withdraw HSA funds for something that does not count as a medical expense — like a gym membership or cosmetic procedure — you owe income tax on that amount plus a 20 percent penalty. Keep documentation of what you spent the money on so you can prove it was medical if needed.

Another mistake is not keeping receipts. While the IRS does not require you to submit receipts when you withdraw, you must have them if audited. If you cannot prove an expense was medical, the withdrawal is treated as taxable income plus the 20 percent penalty. Organize receipts by year and keep them for at least three years after the tax year in which you made the withdrawal.

A third mistake is confusing HSA rules with FSA rules or assuming all health-related purchases count. Over-the-counter medications without a prescription, cosmetic procedures, and general wellness expenses do not may have access to. When in doubt, check the IRS list of may have access to medical expenses or contact your HSA provider before withdrawing.

Frequently Asked Questions

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

Yes, as long as they are your tax dependent or spouse. You can use HSA funds to pay for medical expenses for anyone you claim on your tax return, even if they are not on your health plan. Keep receipts showing their name and the medical service provided.

What happens if I withdraw money from my HSA for a non-medical expense before age 65?

You owe income tax on the amount withdrawn plus a 20 percent penalty. After age 65, you can withdraw money for any reason without the penalty, though non-medical withdrawals are still taxed as regular income.

Can I invest the money in my HSA?

Many HSA providers allow you to invest your balance in mutual funds, stocks, or bonds, similar to a retirement account. Not all providers offer this option, so check with your HSA administrator. Any investment gains are tax-free as long as you use the money for medical expenses.

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

No. Unlike an FSA, HSA money does not expire. You can let it accumulate year after year and use it whenever you need it, even decades later. This makes it useful as a long-term savings tool for healthcare costs in retirement.

Can I have an HSA if my employer does not offer one?

Yes. You can open an individual HSA through a bank or financial institution as long as you are enrolled in a high-deductible health plan. You do not need your employer to offer an HSA to open one on your own.