A health savings account holds money you set aside for medical costs, and the money you don't spend stays in the account to grow

A health savings account (HSA) is a bank account attached to a specific type of health insurance plan. You put pre-tax money into it, spend that money on medical bills, and whatever you don't spend in a given year rolls forward to the next year. The account earns interest or investment returns, so the balance can grow over time. Unlike a flexible spending account (FSA), which forces you to use the money or lose it each year, an HSA is yours to keep and use whenever you need it.

The mechanics are straightforward: your employer or you fund the account, the money sits there until you need it, you pay medical bills from it, and you keep the receipt. At tax time, you report what you spent and get a tax deduction. The account itself is portable—if you change jobs or retire, the money comes with you.

Key Takeaways

  • You can only open an HSA if you have a high-deductible health plan (HDHP), which means your deductible is at least $1,600 for individual coverage or $3,200 for family coverage in 2024.
  • Money goes into the account pre-tax, either through payroll deduction if your employer offers it or through direct deposit if you open one on your own, and you can contribute up to $4,150 for individual coverage or $8,300 for family coverage in 2024.
  • You can spend HSA money on any may have access to medical expense—copays, deductibles, prescriptions, dental work, vision care, and some medical equipment—but not on insurance premiums or over-the-counter drugs without a prescription.
  • Money you don't spend stays in the account and earns interest; there is no "use it or lose it" important date, and you can withdraw it tax-free at any age once you turn 65 if you use it for any reason.
  • If you withdraw money for a non-medical expense before age 65, you pay income tax on it plus a 20 percent penalty, so the account works best when you plan to save rather than spend everything each year.

Who can open an HSA and what the insurance requirement is

You must be enrolled in a high-deductible health plan (HDHP) to open or contribute to an HSA. The IRS sets the minimum deductible each year. For 2024, an HDHP must have a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. Your plan also cannot cover any medical costs before you hit that deductible—no preventive care exceptions, no copays for office visits—though the law does allow free preventive screenings like mammograms and colonoscopies.

You cannot have an HSA if you are covered by Medicare, enrolled in a non-HDHP plan at the same time, or claimed as a dependent on someone else's tax return. If your employer offers an HDHP, you can open an HSA through them. If not, you can open one at a bank, credit union, or investment firm that offers HSAs—Fidelity, Lively, HealthEquity, and Optum are common providers. You do not need your employer's permission to open one on your own as long as you have an HDHP.

How money gets into the account and contribution limits

If your employer offers an HSA, the simplest route is payroll deduction. You tell your HR department how much to contribute each pay period, and that amount comes out of your gross pay before taxes are calculated. This saves you income tax, Social Security tax, and Medicare tax on the contribution. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year.

If you open an HSA on your own, you fund it by transferring money from your bank account. You still get the tax deduction when you file your taxes—you report the contribution on Form 8889 and deduct it from your income. The contribution important date is the tax filing important date the following year, so you can contribute for 2024 until April 15, 2025. If you change jobs mid-year, you can contribute to multiple HSAs as long as the total across all accounts does not exceed the annual limit.

What you can and cannot spend HSA money on

You can spend HSA money on any may have access to medical expense—the IRS publishes a long list, but the common ones are copays, coinsurance, deductibles, prescription drugs, dental work, vision care, hearing aids, crutches, and some medical equipment like blood pressure monitors. You can also use it for mental health treatment, physical therapy, and acupuncture if your plan covers them. The key rule is that the expense must be for diagnosis, treatment, or prevention of a medical condition.

You cannot use HSA money for insurance premiums (with one exception: COBRA continuation coverage), over-the-counter drugs without a prescription, cosmetic procedures, gym memberships, or vitamins. If you use the money for a non-may have access to expense, you owe income tax on that amount plus a 20 percent penalty. Keep receipts for everything you buy with HSA money—the IRS does not require you to submit them when you file taxes, but you need them if you are audited.

How the account grows and what happens to unspent money

Unlike an FSA, which has a "use it or lose it" rule, an HSA is yours to keep. Any money you do not spend in a given year stays in the account. Most HSAs earn interest on the balance, similar to a savings account. Some providers also let you invest the money in mutual funds or stocks, which means the balance can grow faster if you do not need to spend it right away. The growth is tax-free as long as you use the money for may have access to medical expenses.

This is why HSAs work well as a long-term savings tool. If you are healthy and do not have major medical expenses, you can let the balance build year after year. At age 65, the rules change: you can withdraw money for any reason without penalty, though you will owe income tax on non-medical withdrawals. Many people use HSAs as a retirement savings account because the tax advantages are so strong—you get a deduction going in, tax-free growth, and tax-free withdrawal for medical expenses.

What happens if you withdraw money early or for non-medical reasons

If you withdraw HSA money before age 65 and use it for something other than a may have access to medical expense, you owe income tax on the amount withdrawn plus a 20 percent penalty. For example, if you withdraw $1,000 for a non-medical reason 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. That means you only keep $580 of the $1,000 you withdrew. This penalty is steep, so HSAs are not meant to be emergency savings accounts you can raid for any reason.

The exception is after age 65. Once you turn 65, you can withdraw money for any reason without the 20 percent penalty. You will still owe income tax on non-medical withdrawals, but the penalty goes away. This is why many people treat HSAs as a retirement account—you get years of tax-free growth, and at 65 it becomes a regular taxable account with no penalty.

How HSA money moves when you change jobs or insurance

The HSA belongs to you, not your employer. If you leave your job, the money stays in your account. You can keep the account open at the same provider, or you can roll it over to a new HSA at a different bank or investment firm. The rollover process is straightforward: you request a transfer from the old provider to the new one, and the money moves directly between accounts. You can do one rollover per year without tax consequences.

If you change health insurance but stay with an HDHP, you can keep contributing to the same HSA. If you switch to a non-HDHP plan, you can no longer contribute new money, but the money already in the account stays there and you can still spend it on may have access to medical expenses. If you lose HDHP coverage and do not regain it within 30 days, you cannot contribute for the rest of that year, but again, the existing balance is yours to use.

Frequently Asked Questions

Can I use my HSA debit card to buy anything, or only medical expenses?

Most HSA providers issue a debit card that works only at pharmacies, medical offices, and other merchants coded as healthcare providers. If you try to use it at a grocery store or gas station, it will be declined. Some cards let you use them anywhere, but you are responsible for making sure the purchase is a may have access to expense—the card does not police it. Keep receipts to prove the expense was medical if you are audited.

What if I do not spend all my HSA money in a year?

The money rolls forward to the next year with no limit on how much you can accumulate. There is no important date to spend it. This is the main advantage over an FSA. You can let the balance grow for years and use it whenever you need to pay a medical bill, even decades later.

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

Yes, as long as your spouse is not covered by their own health insurance plan that would disqualify them from HSA coverage. You can also use HSA money for any dependent listed on your tax return. The expense just has to be a may have access to medical expense.

What happens to my HSA if I die?

The account becomes part of your estate. If your spouse is the beneficiary, they can continue to use the account as their own HSA and withdraw money for their may have access to medical expenses tax-free. If a non-spouse inherits it, they owe income tax on the entire balance, though not the 20 percent penalty.

Do I have to file anything with the IRS to open an HSA?

No. You open the account at a bank or through your employer, and that is it. At tax time, if you contributed money yourself rather than through payroll, you report it on Form 8889 when you file your return. If your employer contributed, they report it on your W-2 and you do not need to do anything extra.