What happens when you open and use an HSA

A Health Savings Account is a bank account you own that holds money specifically for medical expenses. You put pre-tax dollars into it, the money sits there earning interest, and you withdraw it to pay for doctor visits, prescriptions, dental work, or other medical costs. The account stays yours — if you change jobs or retire, the account goes with you, and any money you don't spend stays in the account to grow.

The mechanics are straightforward: your employer, or you individually, deposits money into the HSA. That money is not subject to federal income tax or payroll tax. When you have a medical bill, you pay it from the HSA account using a debit card, check, or transfer. You keep receipts for tax purposes, but the withdrawal itself is not taxed. Any money left over at the end of the year rolls forward — there is no "use it or lose it" important date like there is with a Flexible Spending Account.

The catch is that you can only open an HSA if you are enrolled in a High Deductible Health Plan (HDHP). That is a health insurance plan with a higher deductible than typical plans — meaning you pay more out of pocket before insurance kicks in. The HSA is designed to help you cover those out-of-pocket costs.

Key Takeaways

  • You must be enrolled in a High Deductible Health Plan to open an HSA; without that insurance, the account is not available to you.
  • Money you deposit into an HSA is not subject to federal income tax or payroll tax, which reduces your taxable income for the year.
  • You can withdraw HSA funds for any may have access to medical expense — doctor visits, prescriptions, dental, vision, mental health — without tax penalty.
  • Unused money stays in your account and grows year to year; you own the account and take it with you if you change jobs.
  • If you withdraw HSA money for non-medical expenses before age 65, you pay income tax plus a 20 percent penalty on that withdrawal.

How much you can contribute and who can contribute

The IRS sets annual contribution limits, and they change each year. For 2024, the limit is $4,150 if you have individual coverage or $8,300 if you have family coverage. These limits explore to all contributions combined — whether your employer contributes, you contribute, or both of you do together. If you are age 55 or older, you can contribute an additional $1,000 per year.

Your employer can contribute to your HSA, you can contribute to your own HSA, or both can happen in the same year as long as the total does not exceed the limit. If your employer offers an HSA and contributes to it, that contribution does not count as taxable income to you. If you contribute on your own, you deduct that contribution from your taxable income when you file taxes — meaning you get the tax benefit either way.

You can only contribute during the months you are enrolled in an HDHP. If you switch to a different health plan mid-year, you can only contribute a pro-rated amount for the months you were covered by the HDHP. If you lose HDHP coverage, you cannot contribute for the rest of that year, but you can still withdraw money that is already in the account for may have access to medical expenses.

What counts as a may have access to medical expense

may have access to expenses are medical, dental, vision, and mental health costs that would normally be deductible on your taxes. This includes doctor visit copays and coinsurance, prescription medications, dental cleanings and root canals, eyeglasses and contact lenses, hearing aids, physical therapy, and mental health counseling. It also covers some items you might not think of: over-the-counter pain relievers, allergy medications, and first aid supplies all count.

What does not count: cosmetic procedures (unless medically necessary), gym memberships, vitamins and supplements (unless prescribed by a doctor for a specific condition), and insurance premiums themselves — with one exception. You can use HSA funds to pay premiums for long-term care insurance, and if you are receiving unemployment benefits, you can use HSA funds to pay for health insurance premiums while you are unemployed.

The IRS publishes a full list of may have access to expenses, and it is worth checking before you withdraw for something you are unsure about. If you withdraw for a non-may have access to expense, you owe income tax on that amount plus a 20 percent penalty — so it is worth the five minutes to verify.

How the account grows and what happens to unused money

HSA funds earn interest or investment returns depending on how you hold the money. Most HSA accounts function like savings accounts and earn a small interest rate set by your bank. Some HSA providers let you invest the money in mutual funds or other investments, similar to a retirement account — this is optional and depends on your specific account provider.

Money you do not spend in a given year stays in the account. There is no important date to spend it, no forfeiture, and no penalty for leaving it there. This is different from a Flexible Spending Account, which typically requires you to spend the money within the plan year or lose it. Because HSA money rolls over indefinitely, the account can function as a long-term savings vehicle for future medical expenses.

After age 65, the rules change slightly. You can still withdraw HSA funds for may have access to medical expenses without penalty. But if you withdraw for non-medical expenses, you only owe income tax — the 20 percent penalty goes away. This makes the HSA similar to a traditional retirement account after 65, though it remains most valuable when used for medical costs.

How to access your money and keep records

Most HSA providers issue a debit card linked to your account, so you can pay for medical expenses directly at the point of care — at the pharmacy, the doctor's office, or the hospital. You can also request a check or transfer money to your personal bank account and pay out of pocket, then reimburse yourself from the HSA later. Some people do this intentionally, letting the HSA grow untouched while they pay medical bills from their regular income, then withdraw from the HSA years later.

You must keep receipts and documentation for every withdrawal. The IRS does not require you to submit these with your tax return, but you need to have them if you are audited. A receipt showing the date, the provider, the service or medication, and the amount is sufficient. If you cannot produce documentation for a withdrawal, the IRS may disallow it and assess tax plus penalty.

Your HSA provider sends you a statement each year showing deposits, withdrawals, and interest earned. Keep these statements for your records. If you change HSA providers, request a full transaction history from the old provider before you close the account.

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

Your HSA is yours to keep. If you leave your job, the account does not disappear and your employer cannot take the money back. You own whatever balance remains in the account, and you can continue to withdraw it for may have access to medical expenses for the rest of your life. You can also continue to contribute to it if you enroll in an HDHP through a new employer or through the individual market.

If you lose HDHP coverage and switch to a different health plan, you cannot make new contributions for the rest of that year. However, you can still withdraw money that is already in the account for may have access to medical expenses. Once you re-enroll in an HDHP — whether with a new employer or on your own — you can resume contributions.

If you are covered by Medicare, you cannot contribute to an HSA, but you can still withdraw funds for may have access to medical expenses. Many people use their HSA to pay for Medicare premiums, copays, and deductibles in retirement.

HSA versus other savings accounts for medical costs

An HSA offers a tax advantage that a regular savings account does not: the money going in is not taxed, the growth is not taxed, and the withdrawals are not taxed (if used for may have access to expenses). A Flexible Spending Account (FSA) offers the same tax break on contributions, but FSA money does not roll over — you must spend it within the plan year or lose it. An HSA has no such important date.

A Health Reimbursement Arrangement (HRA) is another employer-funded account for medical expenses, but you do not own it — your employer does. If you leave the job, the money stays with the employer. With an HSA, you own the account and take it with you.

If you have the choice between an HDHP with an HSA and a traditional health plan with an FSA, the decision depends on your expected medical costs. If you expect high medical expenses, the lower premiums of an HDHP might not offset the higher deductible. If you expect low medical expenses, the HDHP and HSA combination often saves money overall because of the tax benefits and the ability to let money accumulate over time.

Frequently Asked Questions

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

Yes, if they are your tax dependents. You can withdraw HSA funds to pay for medical expenses of your spouse and any dependent children, even if they are not enrolled in your health plan. You must keep documentation showing the expense was for a may have access to medical cost.

What if I withdraw money from my HSA for a non-medical expense by mistake?

You owe income tax on that amount plus a 20 percent penalty. If you realize the mistake quickly, some HSA providers allow you to redeposit the money within a certain timeframe to reverse the withdrawal. Contact your HSA provider when ready if this happens — do not wait until tax time.

Can I carry over HSA money if I retire before age 65?

Yes. Your HSA stays with you in retirement and continues to grow. You can withdraw funds for may have access to medical expenses at any age without penalty. After age 65, non-medical withdrawals are taxed as income but no longer subject to the 20 percent penalty.

Do I have to use my HSA debit card, or can I pay out of pocket and reimburse myself later?

You can do either. Some people pay medical bills from their regular bank account and reimburse themselves from the HSA months or years later, letting the HSA grow in the meantime. You must keep the original receipt to document the expense, but there is no time limit on when you can withdraw.

What happens to my HSA if I become ineligible because I enrolled in Medicare?

You cannot make new contributions once you enroll in Medicare, but you can continue to withdraw existing funds for may have access to medical expenses, including Medicare premiums and out-of-pocket costs. The money remains yours and continues to grow if you do not spend it.