An HSA is a tax-advantaged savings account tied to a high-deductible health plan

A Health Savings Account (HSA) is a savings account you own and control that lets you set aside pre-tax money for medical expenses. Unlike a flexible spending account (FSA), which you lose if you don't spend the money by year-end, an HSA rolls over year to year and grows like an investment account. The money stays yours whether you use it this year, next year, or in retirement.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) — a health insurance plan with a higher deductible than standard plans but lower monthly premiums. You cannot have an HSA if you're on Medicare, covered by a spouse's non-HDHP plan, or claimed as a dependent on someone else's taxes. The IRS sets the income limits and contribution caps each year, and these vary by whether you cover yourself alone or your family.

The real advantage is the triple tax benefit: your contributions reduce your taxable income, the money grows tax-free, and withdrawals for may have access to medical expenses are tax-free. No other account offers all three.

Key Takeaways

  • You contribute pre-tax money to an HSA, which lowers your taxable income for the year, and withdrawals for medical expenses are never taxed.
  • Unlike an FSA, HSA money rolls over indefinitely — there is no "use it or lose it" important date, and the account is yours to keep even if you change jobs or insurance.
  • You must be enrolled in a high-deductible health plan to open or contribute to an HSA, and you cannot have both an HSA and a non-HDHP plan at the same time.
  • After age 65, you can withdraw HSA money for any reason without penalty, though non-medical withdrawals are taxed as income.
  • may have access to medical expenses include deductibles, copays, prescriptions, dental work, vision care, and some medical equipment, but not health insurance premiums (with narrow exceptions).

How money flows in and out of an HSA

You can contribute to an HSA in three ways: through payroll deduction (the most common), by depositing money directly to the account yourself, or by rolling over unused FSA or HSA funds from a previous job. If your employer offers an HSA, payroll deduction is usually the simplest because the contribution comes out before taxes are calculated, reducing your taxable income automatically.

The IRS sets annual contribution limits. For 2024, the limit is $4,150 for self-only coverage and $8,300 for family coverage. If you're 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). You can contribute up to the important date for filing your tax return the following year — usually April 15 — and claim the deduction on your tax form even if you didn't contribute through payroll.

Withdrawals work differently depending on what you're paying for. You can withdraw money tax-free for any may have access to medical expense: deductibles, copays, coinsurance, prescriptions, dental care, vision care, mental health treatment, and certain medical equipment like blood glucose monitors or hearing aids. You cannot use HSA funds for health insurance premiums, with two exceptions: COBRA continuation coverage and premiums while you're receiving unemployment benefits.

If you withdraw money for something that's not a may have access to medical expense before age 65, you pay income tax on that amount plus a 20% penalty. After 65, the penalty goes away — you can withdraw for any reason, but non-medical withdrawals are taxed as ordinary income.

Where your HSA money is held and how it grows

An HSA is held by a custodian — usually a bank, credit union, or insurance company — and you control how the money is invested. Some HSAs function like savings accounts with a low interest rate. Others let you invest the balance in mutual funds, stocks, or bonds, similar to a brokerage account. The investment options depend on which custodian holds your account.

If your employer offers an HSA through payroll, they typically choose the custodian, and you may have limited investment choices. If you open an HSA on your own (because you're self-employed or your employer doesn't offer one), you can shop around for a custodian that offers the investment options you want. Some custodians charge monthly fees, annual fees, or per-transaction fees; others are free.

Any interest or investment gains in your HSA are tax-free, as long as the money is used for may have access to medical expenses eventually. This is why an HSA can function as a retirement savings tool: you can let the money grow for decades and withdraw it tax-free in retirement if you use it for medical expenses.

What happens to your HSA when you change jobs or insurance

Your HSA belongs to you, not your employer. If you leave your job, the account stays open and the money stays in it. You can continue to use it for may have access to medical expenses, and you can continue to contribute to it as long as you remain enrolled in an HDHP — even if it's a different plan with a different employer.

If you switch to a non-HDHP plan (such as a standard PPO or HMO), you can no longer contribute new money to the HSA, but the money already in the account remains yours and can still be withdrawn tax-free for may have access to medical expenses. You straightforward cannot add to it while you're not on an HDHP.

If you're laid off and lose health insurance, you have a grace period: you can continue to contribute to your HSA for two months after coverage ends, as long as you were enrolled in an HDHP when you lost coverage. After that, contributions stop until you enroll in another HDHP.

HSA vs. FSA: the key differences

Both accounts let you set aside pre-tax money for medical expenses, but they work very differently. An FSA has a "use it or lose it" rule: money you don't spend by December 31 (or by March 15 of the following year if your employer offers a grace period) is forfeited. An HSA has no important date — money rolls over indefinitely and is yours to keep.

An FSA does not require enrollment in an HDHP; you can have an FSA with any health plan. An HSA requires an HDHP. An FSA is typically offered only through an employer; an HSA can be opened on your own. An FSA contribution limit for 2024 is $3,300 per year; an HSA limit is higher. You cannot have both an HSA and an FSA in the same year, but you can have an FSA for dependent care (childcare) while also having an HSA for medical expenses.

If you have access to an HSA through an HDHP, it is usually the better choice because the money is yours to keep and can grow over time. An FSA makes sense if your employer offers it and you have predictable medical expenses you know you'll spend each year.

Common mistakes and how to avoid them

One frequent mistake is treating an HSA like a checking account and withdrawing money for non-medical expenses without realizing the tax and penalty consequences. Keep records of what you spend HSA money on. The IRS can ask for proof that withdrawals were for may have access to expenses, and if you cannot document them, you may owe taxes and penalties years later.

Another mistake is not realizing you cannot have an HSA and a non-HDHP plan at the same time. If you're covered under a spouse's standard health plan, you cannot open your own HSA, even if you also have an HDHP through your employer. Check your household's coverage before opening an account.

A third mistake is leaving money in a low-interest savings option when you could be investing it. If you don't plan to use the HSA money this year, ask your custodian about investment options. Even a small amount invested over decades can grow significantly.

Finally, some people forget to keep receipts for HSA withdrawals. You don't have to submit receipts when you withdraw, but the IRS can ask for them later. Save your receipts, explanation of benefits statements, and pharmacy records for at least three years.

Frequently Asked Questions

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

Yes. HSA funds can be used for may have access to medical expenses of you, your spouse, and any dependent you claim on your taxes, regardless of whether they're covered under your health plan. Keep records showing the relationship and the medical expense.

What happens to my HSA if I turn 65?

Your HSA remains yours and continues to grow tax-free. After 65, you can withdraw money for any reason without the 20% penalty, though non-medical withdrawals are taxed as income. Medicare premiums, long-term care insurance, and dental and vision care are all may have access to expenses you can pay for tax-free.

Can I withdraw money from my HSA to pay my health insurance deductible?

Yes. Deductibles are may have access to medical expenses. You can use HSA funds to pay your deductible, copays, and coinsurance. You cannot use HSA funds to pay your monthly health insurance premium, with the exception of COBRA continuation coverage or premiums while receiving unemployment benefits.

What if I contribute too much to my HSA by mistake?

If you over-contribute, you must withdraw the excess amount plus any earnings on it by the tax important date. The excess is taxed as income, and you pay a 6% penalty on the over-contribution for each year it remains in the account. Contact your HSA custodian when ready if you realize you've over-contributed.

Can I open an HSA if I'm self-employed?

Yes, as long as you purchase an HDHP for yourself (not through an employer). You can open an HSA with any custodian that offers them and contribute up to the annual limit. You deduct your contributions on your tax return as an above-the-line deduction.