A medical savings account lets you set aside pre-tax money specifically for healthcare costs
A medical savings account is a tax-advantaged account where you deposit money before taxes are taken out of your paycheck, then withdraw it to pay for medical expenses. The money you put in reduces your taxable income for the year, and the withdrawals themselves are not taxed as long as you spend them on may have access to medical expenses. This means you pay for healthcare with dollars that would otherwise go to federal income tax and payroll taxes.
The most common type is a Health Savings Account (HSA), which is available only if you have a high-deductible health plan (HDHP). A smaller number of employers still offer Flexible Spending Accounts (FSAs), which work similarly but with different rules and limits. Both exist because healthcare costs are predictable enough that you can set money aside in advance, but unpredictable enough that most people cannot pay them all at once.
Key Takeaways
- Money you deposit into a medical savings account is not subject to federal income tax or payroll taxes, which reduces what you owe at tax time.
- You can only withdraw the money for may have access to medical expenses—copays, deductibles, prescriptions, dental work, and vision care are covered, but groceries and gym memberships are not.
- An HSA is portable and rolls over year to year, so unused money stays in the account; an FSA is tied to your employer and usually has a use-it-or-lose-it rule.
- You must have a high-deductible health plan to open an HSA, but an FSA is available through some employers regardless of your plan type.
- Withdrawals for non-medical expenses are taxed as income and subject to a penalty, except after age 65 when the penalty goes away.
How the money flows in and out
With an HSA, you decide how much to contribute each year—up to a limit set by the IRS that changes annually. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. Your employer can also contribute on your behalf, and those contributions count toward the same limit. The money comes out of your paycheck before taxes, so if you contribute $200 per month, your taxable income drops by $2,400 that year.
When you have a medical expense, you pay for it out of pocket and then request a reimbursement from the account, or you use a debit card linked to the account to pay directly. You keep receipts and documentation in case the IRS asks to verify that the expense was medical. Unlike an FSA, you do not have to spend the money by the end of the year—it stays in the account indefinitely, earning interest or investment returns depending on how the account is set up.
An FSA works the same way in terms of pre-tax deposits, but the contribution limit is lower (usually $3,200 per year) and the rules are stricter. Most FSAs require you to spend the money by the end of the plan year or lose it. Some employers offer a "grace period" of up to 2.5 months into the next year, or a carryover of up to $640, but this varies by plan.
What counts as a may have access to medical expense
may have access to expenses include copays and coinsurance, deductibles, prescription medications, dental work (fillings, crowns, orthodontics), vision care (glasses, contacts, exams), hearing aids, and mental health treatment. Physical therapy, lab tests, X-rays, and hospital stays all count. Over-the-counter medications like pain relievers and cold medicine count only if you have a prescription for them.
What does not count: health insurance premiums (with narrow exceptions), cosmetic procedures, gym memberships, vitamins without a medical condition diagnosis, and most wellness products. If you are unsure whether an expense qualifies, the IRS publishes a detailed list, and your account administrator can usually answer specific questions.
The difference between an HSA and an FSA
| Feature | HSA | FSA |
|---|---|---|
| Who can open one | Anyone with a high-deductible health plan | Employees of companies that offer it |
| Annual contribution limit | $4,150 (individual) / $8,300 (family) in 2024 | Usually $3,200, set by employer |
| Unused money | Rolls over indefinitely | Usually lost at year-end (use-it-or-lose-it) |
| Portability | Stays with you if you change jobs | Tied to employer; you lose it if you leave |
| Investment options | Often available; account can grow | Typically held in cash only |
| After age 65 | Can withdraw for any reason without penalty (but taxed as income if non-medical) | Plan ends when you leave the employer |
Why the tax savings matter
If you earn $60,000 per year and contribute $3,000 to an HSA, your taxable income drops to $57,000. Depending on your tax bracket and state taxes, that $3,000 might save you $800 to $1,200 in taxes. The money you withdraw for medical expenses is never taxed at all, so you are paying for healthcare with pre-tax dollars instead of after-tax dollars.
The savings are larger if you have high medical expenses. Someone with a chronic condition who spends $5,000 per year on copays, prescriptions, and specialist visits can fund an HSA with $5,000 and avoid taxes on that entire amount. Over time, if you do not spend all the money in your HSA, it can grow and function as a retirement account—after age 65, you can withdraw it for any reason, though non-medical withdrawals are taxed as income.
How to set up and manage an account
If your employer offers an HSA, you usually enroll during open enrollment or when you first become may be able to access. You choose a contribution amount, and it is deducted from your paycheck automatically. Your employer selects the account administrator—companies like Fidelity, HealthEquity, or Lively manage most HSAs—and you receive a debit card or online access to request reimbursements.
If your employer does not offer an HSA but you have a high-deductible plan, you can open one independently through a bank, brokerage, or HSA-specific provider. You fund it yourself and manage contributions and withdrawals on your own. Some people do both: they contribute through their employer's plan and also open an individual account for additional savings.
Keep records of all medical expenses and receipts. The IRS does not require you to submit them when you withdraw money, but you must be able to prove the expense was medical if audited. Many account administrators provide a portal where you can upload receipts and track spending.
Penalties and restrictions
If you withdraw money from an HSA for a non-medical expense before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. So a $1,000 non-medical withdrawal might cost you $200 in penalty plus $200 to $300 in income tax, depending on your bracket. After age 65, the penalty disappears, but you still owe income tax on non-medical withdrawals.
You cannot contribute to an HSA if you are covered by Medicare or claimed as a dependent on someone else's tax return. If you lose your high-deductible health plan, you can no longer contribute to an HSA, but the money already in the account stays there and you can still withdraw it for medical expenses.
Frequently Asked Questions
Can I use HSA money for my spouse's medical expenses?
Yes. As long as your spouse is not claimed as a dependent on another person's return, you can withdraw HSA funds to pay for their medical expenses. The money does not have to be used only for the person whose name is on the account.
What happens to my HSA if I change jobs?
The account stays with you. You own it, not your employer. You can transfer it to a new account administrator if your new employer uses a different one, or keep it where it is. You straightforward stop contributing through payroll and can contribute on your own if you want to continue funding it.
Can I use an HSA to pay for health insurance premiums?
Generally no, with two exceptions: you can use it to pay for COBRA continuation coverage or premiums while you are receiving unemployment benefits. You cannot use it for regular health insurance premiums, including Medicare premiums (with limited exceptions for Medicare Part B and Part D after age 65).
Is there a important date to spend FSA money before I lose it?
Yes. Most FSAs require you to spend the money by December 31 of the plan year. Some employers offer a grace period (usually until March 15 of the next year) or allow you to carry over up to $640 to the next year, but this varies by plan. Check your employer's FSA rules.
Can I invest HSA money like a retirement account?
Many HSA providers allow you to invest the balance in mutual funds or other securities, similar to a 401(k). The money grows tax-free, and you can withdraw it for medical expenses at any time. After age 65, you can withdraw it for any reason, though non-medical withdrawals are taxed as income.