A medical savings account lets you set aside pre-tax money to pay for may have access to health expenses out of pocket

A medical savings account is a tax-advantaged account that holds money you contribute before taxes are taken out of your paycheck. You use that money to pay for medical bills, prescriptions, dental work, vision care, and other health expenses that your insurance doesn't cover or that you choose to pay yourself. The money you put in reduces your taxable income for the year, and the money you withdraw for medical costs comes out tax-free.

The most common type is a Health Savings Account (HSA), which pairs with a high-deductible health insurance plan. A second type, the Flexible Spending Account (FSA), is offered through some employers and works similarly but with different rules about how much you can contribute and what happens to unused money. Both let you avoid paying income tax and payroll tax on money spent on medical care.

Key Takeaways

  • Money you contribute to a medical savings account is not taxed as income, and withdrawals for may have access to medical expenses are not taxed either.
  • A Health Savings Account requires you to have a high-deductible health insurance plan, while a Flexible Spending Account is employer-sponsored and has no insurance requirement.
  • You can use the money to pay for deductibles, copays, prescriptions, dental work, vision care, and other out-of-pocket health costs.
  • Unused money in an HSA rolls over to the next year and stays yours; unused money in an FSA is typically forfeited unless your employer offers a carryover option.

How contributions and withdrawals work

You contribute money to the account, usually through payroll deduction, and that amount is subtracted from your gross pay before federal income tax is calculated. For 2024, the contribution limits are set by the IRS: individuals can contribute up to $4,150 per year to an HSA, and families can contribute up to $8,300. FSA limits are lower—typically $3,300 per year for individuals—and are set by your employer.

When you have a medical expense, you pay for it out of pocket and then withdraw money from the account to reimburse yourself. Some accounts issue a debit card tied directly to the account, so you can pay at the doctor's office or pharmacy without handling the reimbursement yourself. You keep receipts as proof that the expense was medical and may have access to under IRS rules.

The difference between HSAs and FSAs

An HSA is portable: it stays with you even if you change jobs or leave your employer. You own the account and the money in it. An FSA is tied to your employer, so if you leave the job, the account closes. With an HSA, unused money carries over to the next year indefinitely—it is yours to keep. With an FSA, unused money is typically forfeited at the end of the year, though some employers offer a grace period or allow you to carry over up to $640 into the next year.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP), which the IRS defines as a plan with a deductible of at least $1,600 for individuals or $3,200 for families in 2024. An FSA has no insurance requirement—your employer straightforward offers it as a benefit. HSAs allow you to invest unused money in stocks, bonds, or mutual funds, similar to a retirement account. FSAs typically hold money in a cash account only.

What counts as a may have access to medical expense

may have access to expenses include deductibles and copays you owe to your insurance plan, prescription medications, dental work (fillings, crowns, orthodontics), vision care (glasses, contacts, exams), hearing aids, mental health counseling, and physical therapy. You can also use the money for over-the-counter items like pain relievers, allergy medicine, and first-aid supplies, though the rules changed in 2020 to require a prescription for some items.

Non-may have access to expenses—those you cannot pay for with the account—include cosmetic procedures, gym memberships, vitamins (unless prescribed by a doctor for a specific condition), and health insurance premiums (with limited exceptions). If you withdraw money for a non-may have access to expense, you owe income tax on that amount plus a 20 percent penalty with an HSA, or income tax only with an FSA.

How to set up and manage the account

If your employer offers an HSA, you can open one during your benefits enrollment period, usually once a year. You choose a bank or financial institution that administers HSAs—many major banks and investment firms offer them—and decide how much to contribute for the year. You can change your contribution amount only during open enrollment or if you have a may have access to life event like a job change or loss of insurance coverage.

For an FSA, your employer typically handles the setup during benefits enrollment. You decide how much to set aside for the year, knowing that you will lose any unused balance at year-end (unless your employer allows carryover). Both accounts require you to keep records of your medical expenses and receipts in case the IRS or your account administrator asks for proof that withdrawals were for may have access to expenses.

Tax benefits and long-term savings

The main benefit is the tax savings. If you are in the 22 percent federal tax bracket and contribute $3,000 to an HSA, you save about $660 in federal income tax alone. You also avoid payroll taxes (Social Security and Medicare), which adds another 7.65 percent in savings. Over time, if you do not withdraw all the money, an HSA can grow like a retirement account, and you can use it for medical expenses in retirement without penalty once you turn 65.

An FSA offers the same when ready tax savings but no long-term growth potential because unused money is forfeited. FSAs work best if you have predictable medical expenses each year—regular prescriptions, ongoing therapy, or planned dental work—and you can estimate how much you will spend.

Common mistakes to avoid

The biggest mistake with an FSA is overestimating how much you will spend and losing money at year-end. If you are unsure, contribute less rather than more. With an HSA, some people withdraw money unnecessarily instead of letting it grow, missing out on years of tax-free growth. Another common error is paying for non-may have access to expenses and not realizing the penalty until tax time.

Do not assume that because something is health-related, it qualifies for the account. Cosmetic dentistry, weight-loss programs, and gym memberships do not count, even though they relate to health. Keep receipts for at least three years in case you are audited. If you are unsure whether an expense qualifies, check the IRS Publication 502 or ask your account administrator before you withdraw the money.

Frequently Asked Questions

Can I use a medical savings account to pay for my health insurance premiums?

Generally no, but there are exceptions. You cannot use an HSA or FSA to pay for your regular health insurance premiums. However, you can use an HSA to pay for COBRA continuation coverage, long-term care insurance, or health insurance premiums while you are receiving unemployment benefits. Check with your account administrator about your specific situation.

What happens to my HSA if I change jobs?

Your HSA stays with you. The account is yours, not your employer's, so you keep the money and can continue to use it for medical expenses even after you leave the job. You can transfer it to a new HSA provider if you want, or keep it where it is. You can no longer make contributions once you are not enrolled in a high-deductible plan, but you can withdraw money for may have access to expenses anytime.

Can I use my medical savings account for my spouse's or children's medical expenses?

Yes. You can withdraw money to pay for medical expenses of your spouse and dependents, even if they are not covered by your health plan. The expense must be may have access to, and you must keep records showing it was for a family member's care.

What if I do not spend all the money in my FSA by the end of the year?

In most cases, unused FSA money is forfeited and goes back to your employer. Some employers offer a grace period (usually 2.5 months into the next year) to spend the remaining balance, or allow you to carry over up to $640. Check your employer's plan document to see if either option is available to you.

Can I invest the money in my medical savings account?

HSAs allow you to invest unused money in stocks, bonds, and mutual funds, similar to a retirement account. FSAs typically do not offer investment options—the money sits in a cash account. If you have a large HSA balance and do not plan to use it soon, investing can help it grow over time.