A Health Savings Account holds money you set aside for medical costs, and you control when and how it gets spent

A Health Savings Account (HSA) is a bank account attached to a high-deductible health insurance plan. You put pre-tax money into it, the money grows tax-free, and you withdraw it to pay medical bills. Unlike a flexible spending account (FSA), money you don't spend stays in the account year to year — it doesn't disappear on December 31st. The account is yours; if you change jobs or insurance, you take it with you.

The mechanics are straightforward: money goes in through payroll deduction or direct deposit, sits in an account earning interest, and comes out when you pay a doctor, pharmacy, or hospital. You get a debit card or checkbook to access it. The tax benefit is real — the money you contribute reduces your taxable income, and withdrawals for medical costs are never taxed. But the account has rules about what counts as medical, contribution limits that change yearly, and age-based restrictions on how you can use it.

Key Takeaways

  • Money in an HSA is yours to keep and carry forward each year, unlike FSA funds that expire on December 31st.
  • You can only open an HSA if you are enrolled in a high-deductible health plan, and you cannot have other first-dollar coverage like a spouse's traditional insurance.
  • Contributions are capped annually — the limit varies by whether you cover yourself alone or your family, and the IRS raises it most years.
  • Withdrawals for may have access to medical costs are tax-free; non-medical withdrawals are taxed as income plus a 20 percent penalty before age 65.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are still taxed as regular income.

Who can open an HSA and when

You must be enrolled in a high-deductible health plan (HDHP) to open an HSA. The IRS defines an HDHP by its deductible amount — for 2024, that means at least $1,600 for individual coverage or $3,200 for family coverage. Your employer may offer an HDHP as one of the plan choices during open enrollment, or you can buy one on the individual market through your state's health insurance exchange.

You cannot have other health coverage that pays before your deductible is met. This rules out traditional PPO or HMO plans from a spouse's employer, Medicare, Medicaid, TRICARE, or the Veterans Administration. You can have accident, disability, dental, or vision coverage alongside an HSA — those don't count as conflicting coverage. If you lose HDHP coverage mid-year, you stop being able to contribute to the HSA for the rest of that year, though money already in the account stays there.

Enrollment in the HDHP and opening the HSA are separate steps. Your employer may offer an HSA through a specific bank or provider, or you can open one independently at a bank, credit union, or investment firm. Some employers contribute money to your HSA as part of compensation — this counts toward your annual limit but reduces the amount you can contribute yourself.

How money gets into the account

If your employer offers an HSA, the most common route is payroll deduction. You elect an amount during open enrollment, and that money comes out of your paycheck before taxes are calculated. This reduces your taxable income for the year. Your employer sends the money to the HSA provider, usually within a few days of payroll processing.

You can also contribute on your own by writing a check or making a bank transfer to the HSA provider. These contributions are tax-deductible when you file your tax return — you report them on Form 8889 and reduce your taxable income. Self-employed people and those without employer HSAs often use this method.

The IRS sets annual contribution limits. For 2024, the limit is $4,150 for individual coverage or $8,300 for family coverage. If you are 55 or older, you can add an extra $1,000 per year — this is called a catch-up contribution. These limits change most years. If you contribute more than the limit, the excess is taxed and penalized. Your HSA provider tracks contributions and reports them to the IRS on Form 5498-SA.

What the money can be used for

Withdrawals are tax-free only for may have access to medical costs. The IRS publishes a detailed list, but the main categories are: deductibles, copayments, and coinsurance; prescription drugs and over-the-counter medications (with a prescription); dental and vision care; mental health treatment; physical therapy; medical equipment like crutches or wheelchairs; and long-term care insurance premiums. Cosmetic surgery does not count unless it is reconstructive after an injury or illness.

You do not have to spend the money in the year you contribute it. Many people use their HSA as a long-term savings vehicle, paying medical bills out of pocket and letting the HSA grow. This is legal and common. You can reimburse yourself for past medical costs at any point in the future, as long as you have receipts and the costs were incurred after the HSA was opened.

If you withdraw money for something that is not a may have access to medical cost, the withdrawal is taxed as ordinary income, and you pay a 20 percent penalty on top. For example, if you withdraw $1,000 for a vacation, you owe income tax on that $1,000 plus $200 in penalty. The exception is age 65 and older — at that point, you can withdraw money for any reason without penalty, though non-medical withdrawals are still taxed as income.

How the account grows and what happens to unused money

HSA money sits in an account that earns interest or, if you choose, can be invested in mutual funds or stocks. The growth is tax-free. Some HSA providers offer only savings accounts with minimal interest; others let you invest the balance. If you invest and the value drops, you absorb the loss — there is no may provide. The account statements and tax forms you receive will show the interest or investment gains.

Unlike an FSA, money in an HSA does not expire. If you contribute $3,000 and spend $1,500, the remaining $1,500 stays in the account indefinitely. You can spend it next year, in five years, or in retirement. This makes the HSA a powerful retirement savings tool — some people max out their contributions every year and never touch the money, letting it compound tax-free until they retire.

If you change jobs, leave your employer's plan, or switch to a different health insurance plan, your HSA stays with you. You own it. The account does not close, and the money does not go back to your employer. You may need to move the account to a different provider if your new employer uses a different HSA bank, but the balance transfers with you.

Keeping records and reporting to the IRS

You must keep receipts for all medical costs you pay with HSA money. The IRS does not require you to submit receipts when you file taxes, but if you are audited, you need to show that the withdrawal was for a may have access to cost. Receipts should show the date, the provider, the service or item, and the amount paid. For prescriptions, keep the pharmacy receipt or the label from the medication bottle.

Your HSA provider sends you a Form 5498-SA each January, showing contributions made in the prior year. You do not file this form with your tax return, but you use it to complete Form 8889, which you do file. Form 8889 reports your HSA contributions, distributions, and the ending balance. If you made contributions through payroll, your employer reports those on your W-2, and you still file Form 8889 to reconcile everything.

If you withdraw money for non-medical costs before age 65, you report the withdrawal on Form 8889 and pay income tax plus the 20 percent penalty. The HSA provider will issue a Form 1099-SA showing the total distributions; you use this to fill out Form 8889 and determine how much of the distribution was taxable.

What changes when you turn 65 or lose HDHP coverage

At age 65, you become may be able to access for Medicare. Once you enroll in Medicare, you can no longer contribute to an HSA — Medicare is considered other health coverage that conflicts with the HDHP requirement. However, money already in the account stays there and can be withdrawn tax-free for may have access to medical costs for the rest of your life. After 65, non-medical withdrawals are no longer penalized, though they are still taxed as ordinary income.

If you lose HDHP coverage before 65 — because you switch to a traditional plan, lose your job, or enroll in Medicare — you stop contributing when ready. The money in the account remains yours and can still be withdrawn tax-free for may have access to medical costs. You can also roll the balance to a new HSA if you regain HDHP coverage later, though there are timing rules about how quickly you must do this.

Frequently Asked Questions

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

No, with one exception. You cannot use HSA money to pay the premium for your HDHP or any other health insurance. However, if you are unemployed and paying for COBRA continuation coverage or individual market insurance, you can use HSA money for those premiums. You can also use HSA money for long-term care insurance premiums and Medicare premiums after age 65.

What happens to my HSA if I get married or divorced?

Your HSA is yours alone — it does not automatically merge with a spouse's HSA or split in a divorce. If you marry someone with an HDHP and their own HSA, you each keep your separate accounts. If you divorce, the HSA stays with the person whose name is on the account unless a divorce decree orders otherwise. Transfers between spouses require a court order and special handling by the HSA provider.

Can I use my HSA debit card at any doctor or pharmacy?

Most HSA debit cards work at pharmacies and medical providers that accept debit cards. However, some providers may not recognize it as a medical card and may decline it. If that happens, you can pay out of pocket and then request reimbursement from your HSA provider by submitting a receipt and a withdrawal form. Keep receipts for all medical costs, even if you pay with your regular debit card or cash.

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

If you over-contribute, you must withdraw the excess and any earnings on it before your tax filing important date. The excess is taxed as income, and you pay a 6 percent penalty for each year the excess sits in the account. Report this on Form 8889. To avoid this, track your contributions carefully if you have multiple HSAs or if your employer contributes on your behalf.

Can I transfer money from my HSA to pay for my child's medical costs?

Only if your child is your tax dependent and you are paying for their may have access to medical costs. You can withdraw HSA money to cover their deductible, copayments, prescriptions, or other may have access to care. The money must be spent on their medical costs, not transferred to them as a gift. If your child is an adult and not your dependent, you cannot use your HSA to pay their medical bills.