What a medical savings account is and who can open one

A medical savings account is a bank account paired with a specific type of health insurance plan that lets you set aside pre-tax money to pay for medical expenses. The money you put in is not taxed as income, and when you use it to pay for doctor visits, prescriptions, or other may have access to medical costs, you do not pay taxes on that withdrawal either. This means your money goes further than it would in a regular savings account.

There are three types of medical savings accounts, and which one you can open depends on your health insurance situation. A Health Savings Account (HSA) is the most common and is available to anyone with a high-deductible health plan. A Flexible Spending Account (FSA) is offered through your employer's benefits package. A Dependent Care FSA covers childcare and adult dependent care expenses specifically, also through an employer. This guide focuses on HSAs because they are the most accessible — you do not need an employer to offer one.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) and have no other health coverage except what the IRS allows. You cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare. If you meet these requirements, you can open an HSA at a bank, credit union, or through your health insurance company.

Key Takeaways

  • An HSA is a tax-advantaged savings account for medical expenses that requires enrollment in a high-deductible health plan.
  • You can open an HSA at most banks, credit unions, and through your health insurance company without needing an employer to sponsor one.
  • The money you contribute is not taxed, the growth is not taxed, and withdrawals for may have access to medical expenses are not taxed.
  • You will need proof of your high-deductible health plan enrollment and a valid Social Security number or tax ID to open an account.
  • Unlike FSAs, HSA money rolls over year to year, so unused funds stay in your account indefinitely.

Checking whether you have a high-deductible health plan

Before you open an HSA, you need to confirm that your current health insurance is actually a high-deductible plan. The IRS sets the minimum deductible amount each year, and it changes annually. For 2024, a high-deductible plan for individual coverage has a deductible of at least $1,600, and for family coverage at least $3,200. Your insurance company will tell you your deductible amount on your insurance card, in your plan documents, or on the insurer's website.

If you are not sure whether your plan qualifies, contact your health insurance company directly and ask: "Is my plan an HSA-may be able to access high-deductible health plan?" They can answer in one call. If your plan does not may have access to now but you are shopping for new coverage, you can search for HDHP options on your state's health insurance marketplace or through your employer's benefits package.

One important rule: you cannot have other health coverage at the same time as your HDHP, with a few exceptions. You can have dental, vision, and accident insurance alongside an HDHP. You cannot have a spouse's health plan, a parent's plan, or Medicare. If you are unsure whether your other coverage disqualifies you, ask your HSA provider before you open the account.

Gathering documents and choosing where to open your account

To open an HSA, you will need a valid Social Security number or Individual Taxpayer Identification Number (ITIN), proof of your HDHP enrollment, and a government-issued ID. Your proof of enrollment can be your insurance card, a letter from your insurance company, or a screenshot of your coverage from the insurer's website. Have these ready before you start the process.

You have three main options for where to open an HSA: your health insurance company, a bank, or a credit union. Many health insurers offer HSAs directly and will set one up for you when you enroll in their HDHP. Banks and credit unions often offer HSAs with different fee structures and investment options. Compare what each charges in monthly fees, what minimum balance they require, and whether they let you invest your HSA money in stocks or mutual funds (some only offer savings accounts). If you plan to use the account only for near-term medical expenses, a straightforward savings account is fine. If you want to save for retirement medical costs, an HSA with investment options may make sense.

Once you have chosen a provider, you can open the account online, by phone, or in person. The process is similar to opening any savings account and usually takes 10 to 15 minutes.

Completing the process and funding your account

When you explore, the provider will ask for your personal information, your Social Security number, and proof that you have an HDHP. Some providers verify your HDHP enrollment automatically by checking with your insurance company. Others ask you to upload your insurance card or a letter from your insurer. Have that document ready so you do not have to delay the process.

After your account is approved, you can fund it in several ways. You can transfer money from your bank account, set up automatic monthly transfers, or deposit a check. If you are self-employed or have income outside an employer's payroll, you can contribute directly. If you have an employer, your employer may offer to deduct HSA contributions from your paycheck before taxes are taken out — this is the most tax-efficient way to fund an HSA, so ask your employer's benefits department whether they offer this option.

There is a limit to how much you can contribute each year. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. These limits change each year. You can contribute up to the limit at any time during the year, and you have until the tax filing important date (usually April 15) to make contributions that count toward the previous year's limit.

Using your HSA to pay for medical expenses

Once your account is funded, you can use the money to pay for may have access to medical expenses. These include doctor visits, hospital stays, prescription medications, dental work, vision care, mental health treatment, and medical equipment like wheelchairs or hearing aids. The IRS publishes a full list of what counts, but the basic rule is: if it is a medical expense your insurance would normally cover, your HSA can pay for it.

You can pay for medical expenses in three ways. You can use a debit card linked to your HSA if your provider issues one. You can write a check from your HSA account. Or you can pay out of pocket and then reimburse yourself from your HSA later — there is no time limit on reimbursement, so you can save receipts and reimburse yourself months or years later if you want to let the money grow.

Keep your receipts and medical bills. If the IRS ever audits your HSA, you will need to show that the money you withdrew was spent on may have access to expenses. You do not have to submit receipts when you withdraw the money, but you must be able to produce them if asked.

What happens to unused money and how HSAs differ from FSAs

Unlike a Flexible Spending Account (FSA), which requires you to use the money within the calendar year or lose it, an HSA lets you keep unused money indefinitely. If you contribute $3,000 and spend only $1,500 on medical expenses in a year, the remaining $1,500 stays in your account and earns interest or investment returns. This makes an HSA a powerful long-term savings tool for medical expenses in retirement.

If you leave your job, your HSA stays with you. You own the account, not your employer. You can take it to a new job, keep it if you become self-employed, or keep it even if you are not working. The only time you lose access is if you no longer have an HDHP — at that point, you can still withdraw money for may have access to medical expenses, but you cannot make new contributions.

After age 65, you can withdraw money from your HSA for any reason without penalty, though non-medical withdrawals are taxed as income. This makes an HSA function like a retirement account if you do not spend all the medical money during your working years.

Common mistakes to avoid when setting up your HSA

The most common mistake is opening an HSA without confirming that your health plan actually qualifies. If your plan does not meet the HDHP requirements, the IRS will penalize you for improper contributions. Before you open the account, call your insurance company and confirm in writing that your plan is HSA-may be able to access.

Another mistake is spending HSA money on non-may have access to expenses. If you withdraw money for something that is not a medical expense — groceries, gym memberships, over-the-counter vitamins without a prescription — you will owe income tax on that withdrawal plus a 20% penalty. The rules are strict, so when in doubt, check the IRS list of may have access to expenses or ask your HSA provider.

A third mistake is not keeping receipts. You are not required to submit them when you withdraw money, but if you cannot produce them later, the IRS may disallow the withdrawal and assess taxes and penalties. Keep receipts for at least three years.

Frequently Asked Questions

Can I have an HSA if I am self-employed?

Yes. You can open an HSA as long as you have a high-deductible health plan, whether you bought it through the marketplace, a professional association, or a spouse's employer plan. You can contribute up to the annual limit and deduct the contributions on your tax return.

What if I change jobs or lose my health insurance?

Your HSA stays with you. The account is yours, not your employer's. If you lose your HDHP coverage, you can no longer make new contributions, but you can still withdraw money for may have access to medical expenses without penalty. If you get a new HDHP at a new job, you can resume contributions.

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

Yes, as long as they are claimed as dependents on your tax return or are your spouse. You can use your HSA to pay for anyone in your household's may have access to medical expenses, even if they are not on your health plan.

What is the difference between an HSA and an FSA?

An FSA is offered by employers, requires you to use the money within the year or lose it, and the money belongs to your employer. An HSA is portable, lets you keep unused money forever, and you own the account. FSAs are useful if you have predictable medical expenses each year. HSAs are better for long-term savings.

Do I have to invest my HSA money, or can I just keep it in savings?

You can do either. Some HSA providers offer only savings accounts. Others let you invest in stocks, bonds, or mutual funds. If you do not plan to use the money soon, investing may help it grow faster. If you need it for near-term expenses, a savings account is simpler and safer.