An HSA is a tax-advantaged savings account you control, not an insurance plan

A Health Savings Account (HSA) is a separate bank account that holds money specifically for medical expenses. You put pre-tax dollars into it, the money grows tax-free, and you withdraw it tax-free when you pay for may have access to medical costs. Unlike insurance, which pools risk across many people, an HSA is your personal pot of money that you own and manage.

The account only exists if you're enrolled in a high-deductible health plan (HDHP) — a type of health insurance with a lower monthly premium but a higher deductible. The HDHP is the insurance; the HSA is the savings account that helps you cover costs before insurance kicks in. You can have one without the other, but you can't have an HSA without being on an HDHP.

Money in an HSA is yours to keep. If you don't spend it this year, it rolls over to next year. If you change jobs, you take the account with you. If you retire, the money stays in the account. This makes an HSA different from a Flexible Spending Account (FSA), where unspent money is typically forfeited at the end of the year.

Key Takeaways

  • You contribute pre-tax money to an HSA, which reduces your taxable income for the year.
  • The account grows tax-free, and withdrawals for may have access to medical expenses are never taxed.
  • You must be enrolled in a high-deductible health plan to open or contribute to an HSA.
  • Money you don't spend stays in the account and rolls over year to year — you never lose it.
  • You can invest HSA funds in stocks, bonds, or mutual funds, and any growth is tax-free.

How money gets into your HSA

You can contribute money to an HSA in three ways: through payroll deduction at work, by depositing money directly into the account yourself, or both.

If your employer offers an HSA, they usually set up payroll deduction, which means the contribution comes straight from your paycheck before taxes are calculated. This is the most common route and saves you the most in taxes because the money never counts as income. Your employer may also contribute money to your HSA as part of your benefits package — this is information programs and counts toward your annual contribution limit.

If you don't have access to an employer HSA or want to contribute more, you can open an HSA through a bank or financial institution and deposit money yourself. You'll report these contributions on your tax return (Form 8889) to get the tax deduction. Self-employed people and those without employer plans use this method.

The IRS sets annual contribution limits, which vary by whether you have individual or family coverage. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. These limits change each year. If you're 55 or older, you can contribute an extra $1,000 per year (called a catch-up contribution).

What you can spend HSA money on

HSA funds can pay for a long list of may have access to medical expenses — costs that the IRS recognizes as legitimate healthcare. The list includes deductibles, copays, coinsurance, prescription medications, dental work, vision care, mental health treatment, and medical equipment like wheelchairs or hearing aids. You can also use HSA money for over-the-counter items like pain relievers, allergy medicine, and bandages, but only if you have a prescription or doctor's note.

Some costs don't may have access to. Cosmetic procedures, gym memberships, vitamins without a medical reason, and health insurance premiums (with a few exceptions) cannot be paid with HSA funds. If you use HSA money for a non-may have access to expense, you owe income tax on that amount plus a 20% penalty — so it's worth checking before you withdraw.

You don't have to spend the money in the year you contribute it. You can let it sit and grow for years, then use it later. Many people treat an HSA as a long-term investment account and only withdraw money when they have large medical bills.

How HSA money is invested and grows

Once money is in your HSA, you can leave it in a cash account (like a savings account) or invest it in stocks, bonds, mutual funds, or other securities. The investment options depend on which bank or financial institution holds your account — some offer only cash, while others offer a full range of investment choices.

Any growth from investments is tax-free. If you invest $5,000 and it grows to $7,000, that $2,000 gain is never taxed as long as you use the money for may have access to medical expenses. This is a major advantage over a regular savings account, where investment gains would be taxable.

The tradeoff is risk. If you invest HSA money in stocks and the market drops, your account balance drops too. Many people keep money they plan to use soon in cash and invest only the portion they won't need for several years.

Withdrawing money and keeping records

You can withdraw money from your HSA anytime by writing a check, using a debit card, or requesting a transfer to your bank account. There's no waiting period and no approval process — the money is yours. However, you must keep records showing that the withdrawal was for a may have access to medical expense.

The IRS doesn't require you to submit receipts when you withdraw, but you need to keep them for your records in case of an audit. If you withdraw money and can't prove it was for a may have access to expense, you'll owe income tax plus a 20% penalty on that amount.

Some people withdraw money years after the expense occurred. For example, you could pay a $2,000 dental bill out of pocket in 2024, keep the receipt, and reimburse yourself from your HSA in 2027. This strategy lets your HSA grow longer while still getting the tax benefit.

What happens to your HSA if you change jobs or lose coverage

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 medical expenses, and if you're still on an HDHP (either through a new job or through the individual market), you can keep contributing to it.

If you lose HDHP coverage and switch to a different type of health insurance, you can no longer contribute new money to the HSA. However, the money already in the account remains yours and can still be used for may have access to medical expenses. Once you're back on an HDHP, you can resume contributions.

If you use HSA money for non-may have access to expenses after you're no longer on an HDHP, you'll owe income tax and a 20% penalty on those withdrawals. The only exception is if you're 65 or older — at that point, you can withdraw money for any reason, but non-medical withdrawals are taxed as regular income (no penalty).

HSA vs. FSA: The main differences

Both HSAs and FSAs let you set aside pre-tax money for medical expenses, but they work differently. An FSA is usually offered through an employer and has a "use it or lose it" rule — money you don't spend by the end of the year is forfeited (though some plans allow a small carryover or grace period). An HSA has no expiration; money rolls over indefinitely.

An HSA requires an HDHP; an FSA does not. An HSA can be invested; an FSA typically stays in cash. An HSA is portable — you own it and take it with you if you change jobs. An FSA is tied to your employer and ends when you leave.

An FSA usually has a higher annual limit ($3,300 in 2024) than an HSA, but that limit applies only to that plan year. An HSA limit is per calendar year and can be carried forward forever. If you have access to both, you can't contribute to both in the same year — you must choose one.

Frequently Asked Questions

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

Generally no, but there are exceptions. You cannot use HSA funds to pay premiums for regular health insurance. However, you can use HSA money to pay premiums for COBRA coverage (continuation coverage after job loss), long-term care insurance, or health insurance while you're receiving unemployment benefits. Check with your HSA provider about which premiums may have access to.

What happens if I withdraw money from my HSA for something that's not a medical expense?

You'll owe income tax on that amount plus a 20% penalty. For example, if you withdraw $1,000 for a non-may have access to expense and you're in the 22% tax bracket, you'd owe $220 in taxes plus $200 in penalties — a total of $420. After age 65, the penalty goes away, but you still owe income tax on non-medical withdrawals.

Do I have to use my HSA money before I use my health insurance?

No. You can use your HSA and your insurance in any order you choose. Some people use insurance first and save their HSA for future years. Others use HSA money first to preserve insurance benefits. There's no rule about which to use when — it's your decision based on your situation.

Can I open an HSA if my employer doesn't offer one?

Yes. You can open an HSA through a bank, credit union, or financial institution as long as you're enrolled in an HDHP. You'll contribute money yourself and report it on your tax return to claim the deduction. You won't get the payroll deduction benefit, but the account works the same way.

What if I have leftover HSA money when I retire?

The money stays in your account and you can use it for medical expenses for the rest of your life. After age 65, you can withdraw money for any reason — you'll owe income tax but not the 20% penalty. Many people treat their HSA as a retirement account and let it grow for decades.