What a health savings account actually does
A Health Savings Account (HSA) is a bank account where you set aside money specifically to pay for medical expenses — and the money you put in gets tax advantages that a regular savings account does not. You contribute pre-tax dollars (money taken out before income tax is calculated), the money grows without being taxed, and when you withdraw it to pay for may have access to medical costs, you pay no tax on that withdrawal either.
The catch is that you can only open an HSA if you are enrolled in a specific type of health insurance called a High Deductible Health Plan (HDHP). An HDHP has a higher deductible — the amount you pay out of pocket before insurance kicks in — but lower monthly premiums. The HSA is designed to help you cover those out-of-pocket costs without the tax penalty you would normally pay.
Think of it this way: if you pay for a doctor visit with money from a regular savings account, that money came from your after-tax income. If you pay for the same visit with HSA money, it came from pre-tax income, so you keep more of what you earn.
Key Takeaways
- You can only open an HSA if your health insurance is a High Deductible Health Plan, which you choose during open enrollment or when you first get coverage.
- Money you contribute to an HSA is not taxed when you put it in, not taxed while it sits there, and not taxed when you withdraw it for medical expenses.
- You can use HSA money to pay for doctor visits, prescriptions, dental work, vision care, and many other medical costs — but not for insurance premiums or over-the-counter items without a prescription.
- Any HSA money you do not spend in a year rolls over to the next year, so it works like a long-term savings account, not a use-it-or-lose-it fund.
- You open an HSA through a bank or financial institution, not through your employer or insurance company, though your employer may offer one as an option.
Who can open an HSA and when
You are only allowed to open an HSA during the same window when you choose your health insurance — usually your employer's open enrollment period in the fall, or the federal open enrollment period (typically November through January) if you buy insurance on your own. Some life events, like losing your job or getting married, also let you open an HSA outside those windows.
You must be enrolled in an HDHP on the first day of the month you want to open the account. If you switch to a regular health plan mid-year, you can no longer contribute to your HSA for the rest of that year, though you can still withdraw money that is already in it.
You cannot have an HSA if you are claimed as a dependent on someone else's tax return, if you are enrolled in Medicare, or if you have other health coverage besides the HDHP (with limited exceptions for specific plans like dental-only or vision-only coverage).
How much you can contribute and where the money goes
The IRS sets a yearly limit on how much you can put into an HSA. The limit changes each year and depends on whether your HDHP covers just you or your whole family. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage, but these numbers shift annually, so check the IRS website or your bank before you contribute.
You can contribute money in several ways. If your employer offers an HSA, they may let you contribute directly through payroll deduction — money comes out of your paycheck before taxes are calculated, which is the most tax-efficient method. You can also contribute on your own by writing a check or transferring money from another bank account, though you will need to claim the deduction on your tax return yourself.
Once the money is in your HSA, it sits in an account at a bank or financial institution. Some HSAs work like savings accounts and earn a small amount of interest. Others let you invest the money in stocks or mutual funds, similar to a retirement account, so it can grow faster over time — but that also means it can lose value. You choose which type when you open the account.
What you can and cannot pay for with HSA money
You can use HSA funds to pay for a wide range of medical costs: doctor visits, hospital stays, prescription medications, dental work, vision care including glasses and contacts, mental health treatment, physical therapy, and many other services. The IRS maintains a detailed list, but the basic rule is that if it is a medical service or product prescribed or recommended by a doctor, it usually qualifies.
Things you cannot pay for with HSA money include health insurance premiums (with a few exceptions like COBRA continuation coverage or long-term care insurance), over-the-counter medications without a prescription, cosmetic procedures, gym memberships, and vitamins or supplements unless they treat a specific medical condition and are prescribed by a doctor.
If you are unsure whether something qualifies, ask your HSA provider before you withdraw the money. If you withdraw money for something that does not may have access to, you owe income tax on that amount plus a 20 percent penalty — so it is worth checking first.
How to use your HSA when you need medical care
When you have a medical expense, you have choices about how to pay for it. You can use a debit card linked to your HSA account if your provider offers one. You can write a check from the HSA account. Or you can pay with your regular money and then reimburse yourself from the HSA later — there is no time limit on reimbursement, so you could pay out of pocket now and withdraw from the HSA months or years later.
Many people choose to pay out of pocket and let the HSA grow like a retirement account, then reimburse themselves later in life when they have larger medical bills. This strategy lets the money compound over time. Others use the HSA when ready to cover current medical costs and reduce their taxable income right away.
Keep receipts and records of any medical expenses you pay for, whether you reimburse yourself when ready or later. If the IRS ever questions a withdrawal, you will need to show proof that it was a may have access to medical expense.
What happens to unused HSA money
Unlike a Flexible Spending Account (FSA) — a different type of account offered by some employers — an HSA does not have a "use it or lose it" rule. Any money you do not spend in a year rolls over to the next year and stays in the account indefinitely. This makes an HSA much more flexible and valuable as a long-term savings tool.
If you leave your job, your HSA stays with you. The account is yours, not your employer's. You can take it to a new job, keep it if you become self-employed, or keep it even after you retire. Some people use an HSA as a supplemental retirement account because the money can grow tax-free for decades.
If you switch away from an HDHP to a different health plan, you can no longer contribute new money to the HSA, but you can still withdraw money that is already there for medical expenses. The account does not close.
HSA versus other ways to save for medical costs
An HSA has tax advantages that a regular savings account does not: contributions are tax-deductible, growth is tax-free, and withdrawals for medical expenses are tax-free. An FSA, offered by some employers, also lets you set aside pre-tax money for medical costs, but FSA money does not roll over (with rare exceptions), so you have to spend it or lose it each year.
A regular savings account has no tax advantages for medical expenses, but it has no restrictions either — you can withdraw the money anytime for any reason. An HSA restricts withdrawals to medical expenses, and non-medical withdrawals are taxed as income plus a 20 percent penalty.
If your employer offers both an FSA and an HSA, you have to choose one or the other — you cannot have both in the same year. Many people choose the HSA because the money does not expire and it offers more flexibility over time.
Frequently Asked Questions
Can I open an HSA if my employer does not offer one?
Yes. You can open an HSA on your own through a bank or financial institution as long as you are enrolled in an HDHP. You will need to find an HDHP through the federal marketplace or your state's insurance exchange during open enrollment, then open the HSA separately. Your contributions will not be deducted from your paycheck, so you will claim the deduction on your tax return.
What happens to my HSA if I turn 65 or enroll in Medicare?
Once you enroll in Medicare, you can no longer contribute new money to an HSA. You can still withdraw money for medical expenses without penalty. After age 65, you can withdraw HSA money for any reason — if it is not for a medical expense, you owe income tax on the withdrawal but not the 20 percent penalty. This makes an HSA a useful retirement savings tool.
Can I use HSA money to pay for my spouse's medical expenses?
Yes, as long as your spouse is your tax dependent. You can also use it for any family member you claim as a dependent. Keep receipts showing whose expense it was in case you need to prove it later.
What if I withdraw money from my HSA for something that is not a medical expense?
You will owe income tax on that amount plus a 20 percent penalty. For example, if you withdraw $500 for a non-medical expense and you are in the 22 percent tax bracket, you would owe $110 in taxes plus $100 in penalties, for a total of $210. This is why it is important to check whether an expense qualifies before you withdraw.
Can I move my HSA to a different bank?
Yes. You can transfer your HSA to a different financial institution at any time. The process is called a trustee-to-trustee transfer, and your new bank can walk you through it. You do not pay taxes or penalties for moving the account itself, only if you withdraw money for non-medical reasons.