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 is not taxed, and you can withdraw it tax-free to pay for medical expenses. The account stays in your name and belongs to you — if you change jobs or insurance plans, the money remains yours.

HSAs are different from Flexible Spending Accounts (FSAs). With an HSA, unused money rolls over year to year and grows. With an FSA, you typically lose what you don't spend in a calendar year. HSAs also let you invest the balance once it reaches a certain amount, usually $1,000 or $2,500 depending on your bank.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan (HDHP), which has a lower monthly premium but higher out-of-pocket costs.
  • Contributions reduce your taxable income, and withdrawals for medical costs are tax-free, making HSAs a way to lower your overall tax bill.
  • You can use HSA funds for doctor visits, prescriptions, dental work, vision care, and some medical equipment, but not for insurance premiums or over-the-counter items without a prescription.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as regular income.
  • The account is portable — it moves with you if you change employers or insurance plans, and unused balances never expire.

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 a high-deductible plan as one with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. Your 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 at the same time, with limited exceptions for accident, disability, dental, vision, and long-term care insurance. You also cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare.

There are no income limits to open an HSA, but there are contribution limits. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year. Your employer may contribute on your behalf, and those contributions count toward your limit.

How Much You Can Contribute and When

You decide how much to contribute each year, up to the annual limit set by the IRS. You can contribute through payroll deductions (which is the most common route), or you can deposit money directly into your HSA account. Payroll contributions are deducted before taxes are calculated, so they lower your taxable income automatically.

If you open an HSA partway through the year, you can still contribute the full annual amount for that year, but only if you remain enrolled in a high-deductible plan through December 31. If you drop the coverage before year-end, you may owe taxes and penalties on contributions made after you lost coverage.

You have until the tax filing important date (usually April 15) of the following year to make contributions for the previous year. For example, you can contribute to your 2024 HSA until April 15, 2025.

What Medical Expenses You Can Pay With HSA Money

HSA funds can pay for most medical costs: doctor visits, hospital stays, surgery, prescription medications, dental work, vision care, hearing aids, and some medical equipment like blood pressure monitors or glucose meters. You can also use HSA money for mental health treatment, physical therapy, and chiropractic care if a doctor prescribes it.

You cannot use HSA funds for health insurance premiums, except for COBRA continuation coverage, Medicare premiums (after age 65), or long-term care insurance premiums. Over-the-counter items like pain relievers, cold medicine, or bandages are not covered unless you have a prescription from a doctor. Cosmetic procedures are not covered unless they are medically necessary — for example, reconstructive surgery after an injury.

Keep receipts and documentation for all HSA withdrawals. The IRS can audit your account and ask you to prove that withdrawals were for medical costs. If you cannot show proof, the withdrawal is treated as a non-medical withdrawal and is subject to income tax plus a 20% penalty.

How HSAs Reduce Your Taxes

An HSA creates a triple tax advantage. First, contributions are deducted before income tax, so you pay less federal income tax. Second, the money in your account grows tax-free — any interest or investment gains are not taxed. Third, withdrawals for medical costs are not taxed.

If you contribute $4,000 to an HSA in a year and you are in the 22% federal tax bracket, you save $880 in federal taxes. If your state has income tax, you save that too. Over time, if you do not withdraw the money, it compounds tax-free, which means you can build a significant medical fund for retirement.

After age 65, you can withdraw HSA money for any reason without the 20% penalty. Non-medical withdrawals are taxed as regular income, but the penalty goes away. This makes an HSA a retirement savings tool if you do not spend the balance on medical costs while you are working.

What Happens to Your HSA If You Change Jobs or Insurance

Your HSA is yours to keep. If you leave your job, the account does not close and the money does not disappear. You can roll it over to a new HSA at a different bank, or you can keep it where it is. Some people keep multiple HSAs open if they have moved accounts over time, though you can consolidate them into one account.

If you switch to a plan that is not a high-deductible plan, you can no longer make new contributions to your HSA. However, you can still withdraw money from the account for medical costs without penalty. If you switch back to a high-deductible plan later, you can resume contributions.

If you become enrolled in Medicare, you can no longer contribute to an HSA. You can still withdraw money for medical costs, and after age 65 you can withdraw for any reason. Some people delay Medicare enrollment specifically to keep contributing to an HSA, though this is a complex decision that depends on your health and income.

HSA Accounts at Different Banks and Investment Options

Your employer may offer an HSA through a specific bank or provider, or you may be able to choose. Common HSA providers include Fidelity, HealthEquity, Lively, and Optum Bank. Each charges different fees and offers different investment options. Some charge monthly maintenance fees, some charge per transaction, and some charge nothing if you keep a minimum balance.

When your HSA balance reaches a certain threshold (often $1,000 to $2,500), you can invest the money in mutual funds, stocks, or bonds. This lets your balance grow faster than it would in a savings account. However, investments carry risk — the value can go down as well as up. Some people keep a portion in cash for near-term medical costs and invest the rest for long-term growth.

If you are unhappy with your HSA provider, you can transfer your balance to a different bank. This is called a trustee-to-trustee transfer and does not count as a withdrawal. The process usually takes one to two weeks.

Frequently Asked Questions

Can I use my HSA to pay my health insurance premium?

No, not for regular health insurance premiums. You can use HSA funds for COBRA continuation coverage, Medicare premiums (after age 65), and long-term care insurance premiums. Using HSA money for your regular monthly health insurance premium is not allowed and will be treated as a non-medical withdrawal subject to taxes and penalties.

What happens if I withdraw money from my HSA for something that is not medical?

Non-medical withdrawals before age 65 are subject to income tax plus a 20% penalty. For example, if you withdraw $1,000 for a non-medical reason and you are in the 22% tax bracket, you owe $220 in income tax plus $200 in penalty, for a total of $420. After age 65, the penalty goes away but income tax still applies.

Can I use my HSA to pay for my spouse's medical costs?

Yes, as long as your spouse is not covered by their own health insurance plan. If your spouse has their own health coverage, they cannot be a dependent on your tax return, and HSA rules generally do not allow you to pay their costs. If your spouse is uninsured or covered under your family plan, HSA funds can pay for their medical costs.

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

No, HSA money does not expire. Unlike Flexible Spending Accounts, unused HSA balances roll over to the next year indefinitely. You can let the money sit and grow for years, then use it whenever you need it. This makes HSAs a long-term savings tool as well as a way to pay current medical costs.

Can I open an HSA if my employer does not offer one?

Yes. You can open an individual HSA at most banks as long as you are enrolled in a high-deductible health plan. You may purchase a high-deductible plan through your state's health insurance marketplace or directly from an insurance company. Individual HSAs work the same way as employer-sponsored ones, though you are responsible for making contributions and managing the account yourself.