A health care savings account lets you set aside pre-tax money specifically for medical expenses

A Health Savings Account (HSA) is a savings account tied to a special type of health insurance plan. The money you put in is not taxed by the federal government, and you can withdraw it tax-free to pay for doctor visits, prescriptions, dental work, and other medical costs. Think of it as a dedicated medical fund that grows over time and follows you from job to job.

The catch is that you can only open an HSA if you have a High Deductible Health Plan (HDHP) — a type of insurance where you pay more out of pocket before your insurance kicks in, but your monthly premiums are lower. The trade-off is that HSAs let you save money on taxes while you build a cushion for medical bills.

Unlike a Flexible Spending Account (FSA), which is another tax-advantaged account some employers offer, an HSA is yours to keep. If you leave your job, the account stays with you. Money you do not spend in one year rolls over to the next year, so there is no "use it or lose it" pressure.

Key Takeaways

  • You can only open an HSA if you are enrolled in a High Deductible Health Plan, which your employer or the health insurance marketplace offers.
  • Money you contribute reduces your taxable income, and withdrawals for medical expenses are not taxed, giving you a double tax advantage.
  • Unlike FSAs, HSA funds roll over year to year and belong to you even if you change jobs.
  • You can invest HSA funds in stocks or bonds once your account reaches a certain balance, turning it into a long-term retirement tool.
  • Withdrawals for non-medical expenses are taxed as income plus a 20 percent penalty if you are under 65.

Who can open an HSA and what the requirements are

To open an HSA, you must be enrolled in a High Deductible Health Plan. For 2024, the IRS defines an HDHP as a plan with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. Your employer may offer an HDHP as one of their health plan choices, or you can find one through the health insurance marketplace in your state.

You cannot have other health coverage at the same time — no spouse's plan, no parent's plan, no separate accident or vision plan — with a few exceptions. Medicare coverage disqualifies you, as does being claimed as a dependent on someone else's taxes. If you are married and both spouses have HSA-may be able to access plans, you can each open your own account.

You do not need to work for a large employer to get an HSA. Self-employed people and people with individual health plans can open one as long as the plan meets the HDHP definition. Some banks, credit unions, and insurance companies administer HSAs, so you may have choices about where to keep your account.

How much you can contribute and where the money comes from

The IRS sets a limit on how much you can contribute each year. For 2024, the limit is $4,150 for individual coverage or $8,300 for family coverage. These limits change slightly each year. You can contribute the full amount even if you enroll partway through the year, though some employers prorate the limit if you start coverage later.

You can fund an HSA three ways. If your employer offers one, they may contribute money directly from your paycheck before taxes are taken out — this is the most common route and saves you the most in taxes. You can also contribute on your own by sending money to the HSA administrator, though you will need to claim the deduction on your tax return. A third option is to roll over money from another HSA if you are switching accounts.

If you contribute more than the annual limit, the excess is taxed and you may owe a penalty. The HSA administrator should track your contributions and alert you if you are approaching the limit, but the responsibility is ultimately yours.

What you can spend HSA money on

HSA funds cover a broad range of medical expenses: doctor and dentist visits, prescriptions, glasses and contacts, hearing aids, mental health counseling, and hospital stays. You can also use the money for over-the-counter items like pain relievers and allergy medicine, though you will need to keep receipts to prove they were for medical reasons if the IRS ever asks.

Some expenses are less obvious. You can use HSA money for acupuncture, chiropractic care, and physical therapy if a doctor recommends them. You can pay for long-term care insurance premiums up to a certain amount. You cannot use HSA funds for cosmetic surgery, gym memberships, or most vitamins unless a doctor prescribes them for a specific condition.

The IRS publishes a detailed list of what counts as a medical expense. When in doubt, keep your receipt and the explanation of what the expense was for. You do not have to submit receipts to your HSA administrator when you withdraw money, but you should keep them in case you are audited.

How HSAs work as a long-term savings tool

Unlike an FSA, which is meant for near-term medical costs, an HSA can become a retirement account. Once your HSA balance reaches a certain amount — often $1,000 to $2,500, depending on the administrator — you can invest the money in mutual funds, stocks, or bonds instead of leaving it in a cash account earning minimal interest.

This means you can let your HSA grow for decades. If you are young and healthy, you might contribute the maximum each year and invest most of it, using other money to pay for current medical expenses. By the time you reach 65, you could have a substantial balance. After 65, you can withdraw HSA money for any reason without penalty — though non-medical withdrawals are still taxed as income.

This strategy only works if you can afford to pay medical bills out of pocket while your HSA grows. It requires discipline and a financial cushion. But for people with stable income and good health, an HSA can become a powerful tool for building wealth while reducing taxes.

What happens if you withdraw money for non-medical reasons

If you take money out of your HSA for something other than a may have access to medical expense, you owe income tax on that amount plus a 20 percent penalty — unless you are 65 or older. For example, if you withdraw $500 for a vacation and you are in the 22 percent tax bracket, you would owe $110 in taxes plus $100 in penalty, for a total of $210 out of that $500.

The penalty does not explore after age 65, though you still owe income tax on non-medical withdrawals. This is why some people view an HSA as a retirement account: once you turn 65, you can use the money for anything without penalty, just like a traditional IRA.

You do not have to spend your HSA money in the year you earn it. There is no important date. You can accumulate medical receipts from past years and reimburse yourself from your HSA at any point in the future, even decades later, as long as you have the receipts to prove the expenses were medical.

HSAs versus FSAs and other savings options

An FSA is similar to an HSA but with key differences. An FSA is usually offered through your employer, the money does not roll over (you lose what you do not spend each year), and you cannot take it with you if you leave your job. An FSA also has a lower annual limit — usually $3,200. However, an FSA does not require you to be on a High Deductible Health Plan, so it may be your only tax-advantaged option if your employer does not offer an HDHP.

A Dependent Care FSA is separate and covers child care or elder care expenses, not medical costs. Some employers offer both an HSA and a Dependent Care FSA, and you can use both in the same year.

If you do not have access to an HSA or FSA, you can deduct medical expenses on your tax return, but only if your total medical expenses exceed 7.5 percent of your adjusted gross income. For most people, this threshold is too high to benefit from. An HSA or FSA is almost always better if you have the option.

Frequently Asked Questions

Can I have an HSA if I am on my spouse's health insurance?

No, not if your spouse's plan is not an HDHP. You can only have one HSA-may be able to access plan at a time. However, if both you and your spouse are on separate HDHP plans, you can each open your own HSA and contribute up to the family limit combined.

What happens to my HSA if I lose my job?

Your HSA stays with you. The account is yours, not your employer's. You can keep the money invested, continue to use it for medical expenses, and even continue to contribute if you have another HDHP through a spouse's plan or the marketplace. You just cannot contribute more than the annual limit across all your accounts.

Can I use my HSA to pay for my health insurance premiums?

You can use HSA funds to pay premiums for COBRA coverage (continuation coverage after job loss) and long-term care insurance. You cannot use it for regular monthly health insurance premiums unless you are receiving unemployment benefits. Check with your HSA administrator about your specific situation.

Do I have to use my HSA every year or lose the money?

No. Unlike an FSA, HSA money rolls over indefinitely. You can let it accumulate year after year. There is no important date to spend it, and you can withdraw it at any time for may have access to medical expenses, even if the expense happened years ago.

What if my employer contributes to my HSA but I leave mid-year?

You keep the money your employer contributed. However, if your employer made contributions based on you staying the full year, some plans require you to repay a portion if you leave early. Check your employer's HSA plan document to see if this applies to you.