What a Medical Savings Account Is

A Medical Savings Account (MSA) is a bank account that lets you set aside money specifically to pay for medical expenses, and the money you put in is not taxed by the federal government. You own the account and the money in it — it does not disappear at the end of the year like some other medical benefits do. The account stays with you even if you change jobs or move to a different health insurance plan.

There are two types of MSAs: Archer MSAs (which have been around longer but are rarely opened now) and Health Savings Accounts, or HSAs (which are far more common and easier to open). This guide focuses on HSAs because they are what most people encounter when they start a job or shop for health insurance.

The basic idea is straightforward: you put pre-tax money into the account, use it to pay medical bills, and never pay income tax on that money. If you do not use the money in a given year, it rolls over to the next year — you do not lose it.

Key Takeaways

  • An HSA is a savings account for medical expenses where the money you deposit is not taxed by the federal government, and unused money carries over year to year.
  • To open an HSA, you must be enrolled in a high-deductible health insurance plan, which is a specific type of plan with lower monthly premiums and higher out-of-pocket costs.
  • You can use HSA money to pay for doctor visits, prescriptions, dental work, vision care, and many other medical expenses, but not for insurance premiums or over-the-counter items without a prescription.
  • Money in an HSA can be invested in stocks, bonds, or mutual funds, so it can grow over time if you do not spend it right away.
  • If you withdraw money for non-medical expenses before age 65, you pay income tax on it plus a 20 percent penalty, but after 65 you can withdraw for any reason and only pay income tax.

Who Can Open an HSA and What You Need

To open an HSA, you must be enrolled in what is called a high-deductible health plan (HDHP). This is a specific type of health insurance where you pay a lower monthly premium but agree to pay more out of your own pocket before the insurance company starts helping with bills. The IRS sets the minimum deductible amount each year — it changes annually and is higher for families than for individuals.

You cannot have an HSA if you are covered by Medicare, enrolled in a non-HDHP plan (like a traditional PPO or HMO with a low deductible), or claimed as a dependent on someone else's tax return. You also cannot have an HSA if you have other medical coverage that is not an HDHP, with a few narrow exceptions.

To open an account, you will need a Social Security number, a government-issued ID, and proof of your HDHP enrollment (usually a letter from your insurance company or your employer). You can open an HSA through a bank, credit union, or investment company — many employers offer HSAs through payroll, which makes it easier because the money comes out before taxes.

How Money Goes Into Your HSA

You can contribute money to an HSA in three ways: through payroll deduction at work, by depositing money yourself, or by rolling over money from another HSA you already own.

If your employer offers an HSA, the easiest route is payroll deduction. Your employer takes the money out of your paycheck before taxes are calculated, so you never pay federal income tax on it. You decide how much to contribute each year, and your employer sends it to the HSA provider (usually a bank or investment company). The IRS sets a maximum contribution limit each year — it is higher if you have family coverage than if you cover only yourself.

If your employer does not offer an HSA, you can open one on your own and deposit money yourself. You will pay income tax on the money when you earn it, but you can deduct the contribution on your tax return, which gives you the same tax benefit. You can contribute any amount up to the annual limit set by the IRS.

What You Can Pay For With HSA Money

You can use your HSA to pay for a wide range of medical expenses. The IRS publishes a list of what counts, but the basic rule is: if it is a diagnosis, treatment, or prevention of a disease or condition, it usually qualifies.

Common expenses include doctor visits, hospital stays, surgery, prescription medications, dental work, vision care (including glasses and contacts), hearing aids, mental health counseling, and physical therapy. You can also use HSA money to pay for over-the-counter items like pain relievers or allergy medicine, but only if you have a prescription from a doctor for that specific item.

You cannot use HSA money for health insurance premiums (with three exceptions: COBRA coverage, Medicare premiums, and long-term care insurance). You also cannot use it for cosmetic procedures, gym memberships, or vitamins unless a doctor prescribes them for a specific medical condition.

How to Spend Your HSA Money

Most HSAs come with a debit card that works like a regular bank card. You can swipe it at the doctor's office, pharmacy, or hospital to pay for medical expenses directly. Some providers also let you pay by check or bank transfer.

You can also pay the bill yourself and then withdraw money from your HSA to reimburse yourself. This is useful if you want to keep receipts and documentation, or if you want to let the money in your HSA grow by investing it (see below) and only withdraw what you need.

Keep your receipts and medical bills. If the IRS ever questions your withdrawals, you need to show that the money went to may have access to medical expenses. You do not have to submit receipts when you withdraw, but you must be able to produce them if asked.

Investing HSA Money and Letting It Grow

Unlike a regular savings account that earns a small amount of interest, an HSA can be invested in stocks, bonds, mutual funds, or other investments. This means your money can grow over time if you do not spend it right away.

Not all HSA providers offer investment options — some only let you keep money in a savings account. If investment is important to you, shop for an HSA provider that offers it. Be aware that investing carries risk: the value of your account can go down as well as up, depending on how the market performs.

Many people use an HSA as a long-term retirement savings tool. They pay medical expenses out of pocket when they can afford to, and let the HSA money grow. After age 65, you can withdraw money for any reason without penalty — you only pay income tax on non-medical withdrawals, just like a traditional retirement account.

What Happens If You Withdraw Money for Non-Medical Reasons

If you withdraw money from your HSA and it is not for a may have access to medical expense, you will owe income tax on that money plus a 20 percent penalty. This penalty applies only if you are under age 65. 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.

After you turn 65, the penalty goes away. You can withdraw money for any reason, and you only pay income tax on non-medical withdrawals — the same as you would with a traditional IRA or 401(k). This is why some people view an HSA as a retirement account first and a medical account second.

If you leave your HDHP and switch to a different type of health insurance, you can no longer contribute new money to your HSA, but you can keep the account and continue to withdraw money from it for medical expenses without penalty.

HSA Versus Other Ways to Save for Medical Costs

An HSA is different from a Flexible Spending Account (FSA), which some employers offer. An FSA also lets you set aside pre-tax money for medical expenses, but any money you do not spend by the end of the year is forfeited — it does not roll over. An HSA is better if you want to save money long-term, because it rolls over indefinitely.

An HSA is also different from a regular savings account. With a regular savings account, you pay income tax on the money when you earn it, and you pay tax on any interest it earns. With an HSA, you pay no tax on the money going in, no tax on the money coming out (if used for medical expenses), and no tax on any growth or interest.

The trade-off is that to have an HSA, you must be enrolled in a high-deductible health plan, which means you pay more out of pocket for medical care before insurance kicks in. Whether this trade-off makes sense depends on how much medical care you expect to need and how much you can afford to save.

Frequently Asked Questions

Can I have an HSA if I am married and my spouse has a different health insurance plan?

It depends on your spouse's plan. If your spouse has an HDHP, you can both have HSAs. If your spouse has a non-HDHP plan and you are covered under it, you cannot have an HSA. If you have separate insurance (you are on an HDHP and your spouse is on a different plan), you can have an HSA, but your spouse cannot.

What happens to my HSA if I lose my job?

Your HSA stays with you. You own it, not your employer. If you lose your job and your HDHP coverage ends, you can no longer contribute new money to the HSA, but you can keep the account and withdraw money from it for medical expenses without penalty. If you get a new job with an HDHP, you can start contributing again.

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

Yes. You can use your HSA to pay for medical expenses of your spouse and any dependent children, even if they are not on your health insurance plan. You do not need to be the one receiving the medical care — the expense just needs to be for a may have access to medical service.

What if I contribute too much money to my HSA by accident?

You can withdraw the excess contribution and the earnings on it before the tax filing important date (usually April 15). You will owe income tax on the earnings, but not on the contribution itself. If you do not withdraw the excess by the important date, you will owe a 6 percent penalty tax on the overage each year it stays in the account.

Can I transfer money from my HSA to another person's HSA?

No. HSA money belongs to the account owner and cannot be transferred or gifted to another person. When you die, your HSA passes to your estate or beneficiary according to your will, but the money is no longer tax-free for non-medical expenses after your death.