A Health Savings Account lets you set aside pre-tax money to pay for medical expenses now or later

A Health Savings Account (HSA) is a bank account attached to a high-deductible health insurance plan. Money you put into it is not taxed, money you withdraw for medical costs is not taxed, and any balance you don't spend rolls over year to year. You own the account and the money in it—if you change jobs or insurance plans, the account stays with you.

The trade-off is that your health insurance plan must have a higher deductible than a standard plan. For 2024, that means at least $1,600 for individual coverage or $3,200 for family coverage. In exchange, you get a tax break on money you save for medical bills, and you can use that money to pay for things your insurance doesn't cover fully—copays, deductibles, prescriptions, dental work, vision care, and dozens of other health expenses.

Key Takeaways

  • You contribute pre-tax money to an HSA, which reduces your taxable income for the year.
  • You can withdraw money tax-free to pay for may have access to medical expenses, including deductibles, copays, prescriptions, and dental or vision care.
  • Money you don't spend stays in the account and earns interest or investment returns; there is no "use it or lose it" important date each year.
  • You must be enrolled in a high-deductible health plan to open or contribute to an HSA, and you cannot have other health coverage that would disqualify you.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

How money flows in and out of an HSA

You fund an HSA in three ways: you contribute money directly from your paycheck (if your employer offers it), you contribute money yourself from a bank account, or your employer contributes on your behalf. All three routes are pre-tax, meaning the money reduces your taxable income for the year. If you contribute $3,000 and earn $50,000, you only pay income tax on $47,000.

When you need to pay a medical bill, you withdraw money from the account. You can do this by writing a check, using a debit card linked to the account, or transferring money to your bank. The withdrawal is tax-free as long as you use it for a may have access to medical expense—a category that includes insurance deductibles and copays, prescription drugs, dental and vision care, mental health treatment, and many other health-related costs. The IRS publishes a full list, but the rule is straightforward: if it's a health expense your insurance doesn't fully cover, an HSA can pay for it.

You do not have to withdraw money in the same year you contribute it. If you contribute $3,000 in 2024 and only spend $1,200 on medical bills that year, the remaining $1,800 stays in the account and is available in 2025, 2026, or any year after. There is no important date to spend the money, and no penalty for leaving it there.

Contribution limits and who can open an HSA

The IRS sets a yearly limit on how much you can contribute. For 2024, the limit is $4,150 for individual coverage or $8,300 for family coverage. If you are 55 or older, you can contribute an extra $1,000 per year. These limits change slightly each year, and your employer or HSA provider will tell you the current year's limit.

To open an HSA, you must be enrolled in a high-deductible health plan and have no other health coverage that would disqualify you. You cannot have Medicare, Medicaid, TRICARE, or a spouse's health plan that is not high-deductible. You also cannot claim yourself as a dependent on someone else's tax return. If any of these explore to you, you are not able to contribute to an HSA, though you may still be able to withdraw money from an existing account for medical expenses.

Your employer may offer an HSA through a payroll deduction, or you can open one on your own through a bank, credit union, or investment firm. If you open one yourself, you handle contributions and withdrawals directly, and you pay any account fees out of pocket.

What happens to money you don't spend

Unlike a Flexible Spending Account (FSA), which requires you to spend money by the end of the year or lose it, an HSA has no expiration date. Money rolls over indefinitely. This means an HSA can function as a long-term savings vehicle for health expenses in retirement.

Many HSA providers let you invest the balance in stocks, bonds, or mutual funds, similar to a retirement account. If you invest the money and it grows, the growth is tax-free as long as you eventually use it for medical expenses. Some people use an HSA as a supplemental retirement account, letting the balance grow for decades and then withdrawing it in retirement to cover Medicare premiums, long-term care, or other health costs.

If you withdraw money for a non-medical reason before age 65, you pay income tax on the withdrawal plus a 20% penalty. After age 65, you can withdraw money for any reason without the penalty, though you still pay income tax on non-medical withdrawals. This makes an HSA particularly useful in retirement, when you have more medical expenses and the penalty no longer applies.

Keeping records and proving expenses are may have access to

The IRS does not require you to submit receipts when you withdraw money from an HSA, but you must keep records in case of an audit. Save receipts, invoices, and explanation of benefits statements from your insurance company for at least three years. If the IRS questions a withdrawal, you need to show that the expense was medical and that you paid it out of pocket.

Some expenses are straightforward—a prescription, a copay, a dental filling. Others are less obvious. Cosmetic surgery is not covered, but reconstructive surgery after an injury is. Over-the-counter pain relievers are covered, but only if you have a prescription from a doctor. Gym memberships are not covered, but physical therapy is. If you are unsure whether an expense qualifies, ask your HSA provider or check the IRS publication on medical expenses before you withdraw the money.

If you withdraw money for something that turns out not to be a may have access to expense, you owe income tax on that amount plus the 20% penalty. This is why keeping good records matters—it protects you if there is ever a question about what you spent the money on.

How an HSA differs from other health savings options

An HSA is not the only way to save for medical expenses. A Flexible Spending Account (FSA) also lets you set aside pre-tax money, but it has a "use it or lose it" rule: money you don't spend by the end of the year is forfeited. An FSA also has a lower contribution limit (usually around $3,200 per year) and you cannot take it with you if you change jobs. An HSA has no spending important date, a higher contribution limit, and stays with you for life.

A Health Reimbursement Arrangement (HRA) is funded by your employer, not by you, and the money is the employer's property. If you leave the job, you may lose the balance. An HSA is your account; the money belongs to you regardless of where you work.

If you have a standard health plan with a low deductible, you cannot open an HSA. You would need to switch to a high-deductible plan first. The trade-off is that you pay more out of pocket until you meet the deductible, but you get the tax advantage of the HSA to help offset that cost.

Common mistakes to avoid

One frequent mistake is treating an HSA like a general savings account and withdrawing money for non-medical expenses without realizing the tax and penalty consequences. If you withdraw $1,000 for a vacation, you owe income tax on that $1,000 plus a 20% penalty—a total of roughly $300 to $400 depending on your tax bracket. Keep the account separate from your regular savings and only withdraw for actual medical bills.

Another mistake is not keeping receipts. If you withdraw money and lose the documentation, you cannot prove the expense was medical if the IRS asks. Save everything for at least three years, even if you think an audit is unlikely.

A third mistake is over-contributing. If you contribute more than the yearly limit, the excess is taxed and penalized. If your employer contributes and you also contribute, make sure the total does not exceed the limit. Your HSA provider should track this, but it is your responsibility to verify.

Frequently Asked Questions

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

Yes. As long as your spouse is a dependent on your tax return, you can use your HSA to pay for their medical expenses. If your spouse has their own HSA and high-deductible plan, they can also contribute to their own account.

What happens to my HSA if I change jobs?

The account stays with you. You own it, not your employer. You can keep the account open at the same provider, move it to a new provider, or leave it where it is and open a new one at your new employer. The money is yours to keep and use whenever you need it for medical expenses.

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

You can use it to pay for Medicare premiums, COBRA continuation coverage, and long-term care insurance premiums. You cannot use it to pay for your regular health insurance premium, with the exception of COBRA and Medicare. Check with your HSA provider if you are unsure about a specific premium.

What if I have a high-deductible plan but don't want to open an HSA?

You don't have to open one. An HSA is optional. However, if you are enrolled in a high-deductible plan and do not use an HSA, you lose the tax advantage of setting aside pre-tax money for medical expenses. Most people with high-deductible plans open an HSA to offset the higher out-of-pocket costs.

Can I withdraw money from my HSA before I meet my insurance deductible?

Yes. You can withdraw money from your HSA for any may have access to medical expense, whether or not you have met your deductible. The HSA and the insurance deductible are separate. You can use HSA money to pay toward your deductible, or to pay for expenses your insurance does not cover at all.