What an HSA is and why it exists

A Health Savings Account (HSA) is a bank account designed to hold money specifically for medical expenses. Unlike a regular savings account, the money you put in is not taxed by the federal government, and the money you withdraw to pay for medical care is also not taxed. This tax advantage is the main reason HSAs exist — they let you set aside pre-tax dollars for healthcare costs.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) — a type of health insurance with lower monthly premiums but higher out-of-pocket costs before insurance kicks in. The tradeoff is intentional: the lower premiums free up money that you can put into an HSA instead, and the HSA money grows tax-free while you use it to cover those higher out-of-pocket costs.

An HSA is portable, meaning it belongs to you, not your employer. If you change jobs or retire, the account stays yours and the money stays in it. This is different from a Flexible Spending Account (FSA), which you lose if you leave your job.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan, and you cannot have other health coverage at the same time.
  • Money you contribute to an HSA is not taxed, money you earn in interest is not taxed, and money you withdraw for medical expenses is not taxed.
  • You can use HSA funds to pay for doctor visits, prescriptions, dental work, vision care, and many other medical expenses, but not for insurance premiums or over-the-counter items without a prescription.
  • After age 65, you can withdraw HSA money for any reason without penalty, though non-medical withdrawals are taxed as income.
  • Unlike an FSA, an HSA does not have a "use it or lose it" rule — unused money rolls over to the next year and can grow indefinitely.

Who can open an HSA and when

To open an HSA, you must meet three conditions at the same time. First, you must be enrolled in a high-deductible health plan. Second, you cannot have any other health insurance coverage — no spouse's plan, no parent's plan, no Medicaid, no Medicare, no TRICARE. Third, you cannot be claimed as a dependent on someone else's tax return.

Most people open an HSA through their employer, because employers often offer them alongside HDHP plans and may contribute money to the account as part of compensation. You can also open an HSA on your own if you buy an HDHP through the health insurance marketplace or directly from an insurer. Banks, credit unions, and investment firms all offer HSAs.

You can open an HSA at any time during the year, but the contribution limits reset on January 1. If you enroll in an HDHP partway through the year, you can still contribute a full year's worth of money to your HSA for that calendar year — this is called the "testing period" rule.

How much you can contribute and what the limits are

The IRS sets annual contribution limits, and they change each year. For 2024, the limit is $4,150 if you have individual coverage and $8,300 if you have family coverage. These limits explore to all your HSAs combined — if you have two HSAs, the total contributions across both cannot exceed the limit.

If you are 55 or older, you can contribute an extra $1,000 per year on top of the regular limit. This is called a "catch-up contribution" and is designed to help people save more as they approach retirement.

Contributions can come from you, your employer, or both. If your employer contributes, that money counts toward your limit. You can contribute to your HSA until the tax filing important date of the following year — usually April 15 — and still count it toward the previous year's limit.

What you can and cannot pay for with HSA money

You can use HSA funds to pay for most medical expenses that your health insurance does not cover, including deductibles, copays, and coinsurance. This includes doctor visits, hospital stays, prescription medications, dental work, vision care, mental health treatment, and physical therapy. You can also use HSA money to pay for medical equipment like crutches, wheelchairs, or hearing aids.

You cannot use HSA money to pay for health insurance premiums, with three exceptions: COBRA coverage (temporary insurance if you lose your job), Medicare premiums (once you turn 65), and long-term care insurance. You also cannot use HSA money for over-the-counter medications unless you have a prescription from a doctor, and you cannot use it for cosmetic procedures or gym memberships.

If you withdraw money from your HSA for something that is not a may have access to medical expense, you owe income tax on that withdrawal plus a 20% penalty. The only exception is after age 65, when the penalty goes away — you still owe income tax on non-medical withdrawals, but not the penalty.

How HSA money grows and what happens to unused funds

An HSA is a savings account with a bank or investment account with a brokerage, depending on which provider you choose. If you keep the money in a savings account, it earns interest. If you invest it in stocks or mutual funds, it can grow faster — but it can also lose value. Many people use an HSA as a long-term savings tool and invest the money rather than keeping it in cash.

Unlike an FSA, an HSA has no "use it or lose it" rule. Money you do not spend in one year rolls over to the next year, and the year after that, indefinitely. This means you can let your HSA grow over decades if you do not need to withdraw it. Some people use an HSA as a retirement account, contributing the maximum each year and investing the money, then using it to pay for medical expenses in retirement.

You can withdraw money from your HSA anytime, for any reason. If the withdrawal is for a may have access to medical expense, there is no tax or penalty. If it is not, you owe income tax plus a 20% penalty — unless you are 65 or older, in which case you owe only income tax.

How to open an HSA and what documents you need

If your employer offers an HSA, you usually enroll during open enrollment or when you first become may be able to access. Your employer will direct you to the HSA provider they have chosen, and you will set up the account online or by phone. You will need your Social Security number, proof of your HDHP enrollment, and basic personal information like your address and date of birth.

If you are opening an HSA on your own, you can contact any bank, credit union, or investment firm that offers HSAs. You will need to provide proof that you are enrolled in an HDHP — usually a copy of your insurance card or a letter from your insurer. The provider will walk you through the account setup, which typically takes 10 to 15 minutes online.

Once your account is open, you can contribute money by direct deposit, bank transfer, or check. You can also request a debit card from your HSA provider to pay for medical expenses directly from the account. Keep receipts for all medical expenses you pay for with HSA money, in case the IRS asks you to prove that the withdrawal was for a may have access to expense.

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 tied to your job — if you leave your employer, you lose the account and any money in it (with a short grace period to spend what is left). An HSA is yours to keep no matter what job you have.

An FSA has a "use it or lose it" rule: money you do not spend by the end of the year is forfeited, though employers can allow a grace period of up to 2.5 months or let you carry over up to $640 (the amount changes yearly). An HSA has no such rule — unused money rolls over forever.

An FSA has a lower annual limit (usually around $3,200 for individual coverage) but you can access the money when ready once you enroll. An HSA has a higher limit but requires an HDHP. If you have a low-deductible health plan through your job, an FSA may be your only option. If you have an HDHP, an HSA is usually the better choice because the money does not expire.

Frequently Asked Questions

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

Yes. HSA money can be used to pay for may have access to medical expenses for you, your spouse, and any dependent children, even if they are not on your health insurance plan. You do not need to be married or have them on your tax return — the rule is that they must be your spouse or dependent.

What happens to my HSA if I turn 65?

Your HSA does not close. After 65, you can withdraw money for any reason without the 20% penalty — you will owe income tax on non-medical withdrawals, but not the penalty. You can also use HSA money to pay for Medicare premiums and long-term care insurance, which you could not do before.

Can I have both an HSA and an FSA at the same time?

Generally no. If you have an HSA, you cannot have a regular FSA. However, you can have an HSA and a limited-purpose FSA that only covers dental and vision expenses, or a dependent care FSA that covers childcare costs. Check with your employer about what combinations they offer.

What if I leave my job — do I lose my HSA?

No. Your HSA stays with you. You can keep the account open, continue to use the money for medical expenses, and even keep contributing to it if you enroll in an HDHP through the marketplace or buy one directly from an insurer. The account is yours permanently.

Do I have to report my HSA on my taxes?

Yes. You will receive a Form 1099-SA from your HSA provider showing how much you withdrew during the year. You report this on your tax return. If all your withdrawals were for may have access to medical expenses, you do not owe any additional tax. If some were not, you owe income tax and a 20% penalty on the non-may have access to amount.