A Health Savings Account Lets You Set Aside Pre-Tax Money for Medical Costs
A Health Savings Account (HSA) is a savings account tied to a high-deductible health insurance plan. Money you put into it reduces your taxable income, grows tax-free, and you withdraw it tax-free when you pay for medical expenses. Unlike a flexible spending account (FSA), the money rolls over year to year — you do not lose what you do not spend.
The account belongs to you, not your employer. If you change jobs or retire, you keep the account and the money in it. You can invest the balance in stocks, bonds, or mutual funds, the same way you would with a brokerage account. After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.
Key Takeaways
- An HSA requires enrollment in a high-deductible health plan (HDHP), which has a lower monthly premium but higher out-of-pocket costs before insurance kicks in.
- You contribute pre-tax dollars through payroll deduction or directly to the account, reducing the income you owe taxes on.
- Withdrawals for may have access to medical expenses — copays, deductibles, prescriptions, dental work, vision care — are never taxed.
- Money you do not spend stays in the account and earns interest or investment returns, unlike FSA funds which expire at year-end.
- After age 65, you can withdraw money for any reason without the 20 percent penalty that applies to non-medical withdrawals before that age.
Who Can Open an HSA and What the Income Limits Are
You must be enrolled in a high-deductible health plan to open an HSA. 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. The plan's out-of-pocket maximum cannot exceed $8,050 for individual coverage or $16,100 for family coverage. These numbers change each year.
You cannot have other health coverage — not Medicare, not Medicaid, not a spouse's non-HDHP plan — while you hold an HSA. You also cannot claim yourself as a dependent on someone else's tax return. If you meet these conditions, you can open an HSA through your employer, a bank, a credit union, or an investment firm. There is no income limit to open one.
How Much You Can Contribute Each Year
The IRS sets annual contribution limits. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. These limits include contributions from your employer and your own deposits combined. If you are 55 or older, you can add an extra $1,000 per year (called a catch-up contribution).
You can contribute through payroll deduction, which reduces your gross income before taxes are calculated. You can also deposit money directly into the account yourself and deduct it on your tax return. Contributions must be made by the tax filing important date (usually April 15) to count toward that tax year.
What Counts as a may have access to Medical Expense
may have access to expenses include copays, coinsurance, deductibles, and out-of-pocket costs for doctor visits, hospital stays, and emergency care. Prescription medications, insulin, and over-the-counter drugs (with a prescription) count. Dental work, orthodontia, vision exams, glasses, and contact lenses are covered. Physical therapy, mental health counseling, and hearing aids also may have access to.
Some expenses do not count: cosmetic surgery (unless it repairs an injury or birth defect), gym memberships, vitamins without a medical condition diagnosis, and most over-the-counter items without a prescription. If you are unsure whether an expense qualifies, the IRS publishes a full list, and your HSA provider can usually tell you before you withdraw.
How HSAs Compare to FSAs and Other Savings Tools
| Feature | HSA | FSA | Regular Savings Account |
|---|---|---|---|
| Requires high-deductible plan | Yes | No | No |
| Money rolls over year to year | Yes | No (usually expires) | Yes |
| Pre-tax contributions | Yes | Yes | No |
| Can invest the balance | Yes | No (cash only) | Yes |
| Portable if you change jobs | Yes | No | Yes |
| Tax-free growth | Yes | No | No |
An FSA is an employer-sponsored account where you set aside pre-tax money for medical expenses, but most plans require you to spend the balance by year-end or lose it. An HSA has no use-it-or-lose-it rule. A regular savings account lets you save money, but contributions are made with after-tax dollars and interest is taxed as income.
The trade-off with an HSA is the high-deductible plan itself. Your monthly premium is lower, but you pay more out of pocket before insurance covers anything. An HSA makes sense if you are healthy, do not expect major medical costs, and can afford to cover the deductible if something unexpected happens.
How to Use Your HSA When You Need Medical Care
When you have a may have access to medical expense, you can pay for it out of pocket and then withdraw the money from your HSA to reimburse yourself. Many HSA providers issue a debit card linked to the account, so you can pay directly at the doctor's office or pharmacy. Some providers also let you submit receipts online and request a transfer to your bank account.
Keep receipts and documentation for every withdrawal. The IRS does not require you to submit them with your tax return, but you must be able to prove the expense was may have access to if you are audited. If you withdraw money for a non-may have access to expense before age 65, you owe income tax on the amount plus a 20 percent penalty.
What Happens to Your HSA When You Leave Your Job or Retire
Your HSA stays with you. You do not lose the account or the money when you change employers. You can roll it to a new HSA provider, keep it where it is, or consolidate multiple HSAs into one. If you lose your high-deductible coverage, you can no longer contribute to the account, but you can still withdraw money for may have access to medical expenses tax-free.
After age 65, you can withdraw money for any reason without the 20 percent penalty. Non-medical withdrawals are taxed as ordinary income, but the penalty goes away. This makes an HSA function like a traditional retirement account after 65, with the added benefit that medical withdrawals remain tax-free for life.
Frequently Asked Questions
Can I use my HSA to pay for my spouse's or child's medical expenses?
Yes. The account holder can withdraw money tax-free for may have access to medical expenses of themselves, their spouse, and their dependents — even if those family members are not covered by the same health plan. You must keep receipts showing the expenses were for may have access to care.
What happens if I withdraw money from my HSA for a non-medical expense?
Before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. After age 65, you owe income tax but no penalty. Keep documentation of what the money was used for in case you are audited and need to prove whether it was may have access to.
Can I have both an HSA and an FSA at the same time?
No, with one exception: you can have an HSA and a limited-purpose FSA that covers only dental and vision expenses. A general-purpose FSA disqualifies you from HSA contributions that year. Check with your employer about which combination, if any, is offered.
Do I have to use my HSA money within a certain time frame?
No. Unlike an FSA, there is no important date to spend HSA money. You can let it accumulate for years, invest it, and withdraw it whenever you have a may have access to expense. This makes it useful as a long-term medical savings tool, not just a way to pay this year's costs.