A health savings account holds money you set aside for medical costs, and you control how you spend it

An HSA is a bank account attached to a high-deductible health plan. You put pre-tax money into it, the money grows tax-free, and you withdraw it to pay for medical expenses—doctor visits, prescriptions, dental work, vision care, medical equipment. The money is yours to spend as you choose, whenever you need it. Unlike a flexible spending account (FSA), which forces you to use the money by the end of the year or lose it, an HSA rolls over. Money you don't spend stays in the account and keeps growing.

The catch is that you can only open an HSA if you're enrolled in a high-deductible health plan (HDHP). Your employer may offer one, or you can buy one on the individual market. Once you have the HDHP, you open the HSA through a bank, credit union, or investment firm—often the same institution that holds your regular checking account. You then decide how much to contribute each year (up to a limit set by the IRS, which changes annually). The money comes out of your paycheck before taxes if your employer runs it, or you contribute on your own and deduct it when you file taxes.

Key Takeaways

  • You can only open an HSA if you're enrolled in a high-deductible health plan; without that plan, the account cannot be opened.
  • Money in an HSA is yours to spend on any may have access to medical expense—copays, deductibles, prescriptions, dental, vision, hearing aids, and some medical equipment.
  • Unlike FSAs, HSA money rolls over year to year and can be invested to grow, making it useful for long-term medical savings.
  • Withdrawals for non-medical expenses are taxed as income and charged a 20 percent penalty before age 65, but after 65 the penalty disappears and you can withdraw for any reason (though non-medical withdrawals are still taxed).
  • You must keep receipts and records of what you spent the money on, because the IRS can audit HSA withdrawals years later.

Opening an HSA and choosing where to hold it

Your employer may offer an HSA as part of their benefits package, usually through a specific bank or investment firm. If they do, you'll see it listed during open enrollment alongside your health plan options. You elect the HDHP and the HSA at the same time. Your employer then either sets up the account for you or gives you a list of approved institutions where you can open one.

If you buy your own health plan on the individual market (through your state's marketplace or directly from an insurer), you'll need to open an HSA on your own. You can open one at most banks, credit unions, and investment firms—Fidelity, Vanguard, and Charles Schwab all offer HSAs, as do many regional banks. Shop around: some charge monthly fees, some don't. Some let you invest the money in stocks and bonds; others keep it in a savings account. If you plan to use the money soon, a savings account is simpler. If you won't touch it for years, investing can grow it faster.

Once you've chosen an institution, you'll provide proof that you're enrolled in an HDHP—usually a copy of your plan documents or a letter from your insurer. The institution will verify your may be able to access and open the account. You'll receive a debit card or checkbook tied to the account, and you can start contributing.

How much you can contribute each year

The IRS sets an annual limit on how much you can put into an HSA. The limit changes each year and depends on whether your HDHP covers just you or also covers family members. For 2024, the limit is $4,150 for self-only coverage and $8,300 for family coverage. These numbers shift annually, so check the IRS website or your HSA provider's website at the start of each year.

If you're 55 or older, you can contribute an extra $1,000 per year—a "catch-up" contribution. This applies even if you're still working and your employer is contributing on your behalf. You and your employer cannot together exceed the annual limit, so if your employer contributes $2,000, you can only add $2,150 more (for self-only coverage in 2024).

You contribute through payroll deduction if your employer offers the HSA, which means the money comes out before income tax is calculated—lowering your taxable income. If you open an HSA on your own, you contribute directly and deduct the amount when you file your tax return. Either way, the money is not subject to income tax.

What you can spend HSA money on

The IRS maintains a list of may have access to medical expenses. The broad categories are doctor visits, hospital stays, surgery, prescription drugs, dental work, vision care, hearing aids, and some medical equipment and supplies. Copays and coinsurance count. Your deductible counts. Physical therapy, mental health counseling, and substance abuse treatment count. Insulin, inhalers, and blood pressure monitors count.

Some things don't count: cosmetic surgery (unless it's reconstructive after an injury or illness), over-the-counter medications without a prescription, gym memberships, vitamins, and most dental work that's purely cosmetic. If you're unsure whether something qualifies, ask your HSA provider or check the IRS Publication 502, which lists hundreds of specific items.

You can spend the money by using the debit card your HSA provider gives you, writing a check, or requesting a transfer to your regular bank account. Keep the receipt. The IRS doesn't require you to submit receipts when you withdraw, but you must keep them for your records. If the IRS audits your HSA, they can ask for proof that you spent the money on may have access to expenses—and they can do this years after the withdrawal.

What happens if you spend HSA money on non-medical expenses

If you withdraw money for something that's not a may have access to medical expense, you owe income tax on that amount plus a 20 percent penalty. So if you withdraw $1,000 for a non-medical expense and you're in the 22 percent tax bracket, you'd owe $420 in taxes and penalties combined. This makes HSA withdrawals for non-medical reasons expensive.

The 20 percent penalty disappears once you turn 65. After that, you can withdraw money for any reason—medical or not—and you'll only owe income tax on non-medical withdrawals, the same as you would on a traditional IRA. This is one reason HSAs are sometimes called "stealth retirement accounts": if you don't need the money for medical expenses, you can let it grow and use it in retirement like any other savings account.

If you accidentally spend HSA money on a non-medical expense, you can put the money back into the account within a certain window (usually 60 days) and avoid the penalty. Check with your provider about their specific rules.

HSA money and changing jobs or health plans

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 keep using it to pay for medical expenses, and you can keep contributing to it if you stay enrolled in an HDHP (through a new employer, the individual market, or Medicare). If you switch to a health plan that's not an HDHP, you can no longer contribute new money, but you can still withdraw money already in the account for may have access to medical expenses.

If you change employers and your new employer offers an HSA through a different institution, you can roll your old HSA into the new one, similar to rolling over a 401(k). You can also keep both accounts open if you prefer. There's no limit to how many HSAs you can have, but you can only contribute up to the annual limit across all of them combined.

Investing HSA money for long-term growth

If your HSA provider offers investment options, you can move money into stocks, bonds, or mutual funds instead of keeping it in a savings account. This makes sense if you won't need the money for several years and want it to grow faster than a savings account would allow. The growth is tax-free, and you can withdraw it tax-free for medical expenses at any time.

Some providers require you to keep a minimum balance in the savings portion of the account (often $1,000 or $2,500) before you can invest the rest. Others let you invest everything. If you're young and healthy and expect to have medical expenses covered by your insurance, investing can turn your HSA into a significant retirement asset over time. If you're older or expect to use the money soon, keeping it in savings is simpler and safer.

Frequently Asked Questions

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

No, with one exception: you can use HSA money to pay for COBRA coverage (the temporary health insurance you can buy if you lose your job) or for health insurance while you're receiving unemployment benefits. You cannot use it to pay your regular monthly premium for an HDHP or any other health plan.

What if I have both an HSA and an FSA?

You can have both, but there are strict rules. If you have an FSA, you can only have a limited-purpose FSA (which covers dental and vision only) alongside your HSA. A general-purpose FSA and an HSA cannot coexist in the same year. Check with your employer about which combination they offer.

Do I have to spend my HSA money every year or lose it?

No. HSA money rolls over indefinitely. There's no "use it or lose it" important date like there is with an FSA. You can let the money sit in the account for decades if you want, and it will still be there for medical expenses whenever you need it.

What records do I need to keep?

Keep receipts and explanations of benefits (EOBs) from your doctor or pharmacy for every HSA withdrawal. The IRS can audit HSA withdrawals up to seven years after you make them, so store receipts safely. You don't need to submit them when you withdraw, but you must have them if asked.

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

Most pharmacies and many doctor's offices accept HSA debit cards directly. Some require you to pay out of pocket and then request reimbursement from your HSA provider. Ask your provider which merchants accept the card, or call ahead before your appointment.