A Health Savings Account Lets You Set Aside Pre-Tax Money for Medical Costs

A Health Savings Account (HSA) is a tax-advantaged savings account that works alongside a high-deductible health insurance plan. Money you put into it reduces your taxable income, grows tax-free, and comes out tax-free when you use it for may have access to medical expenses. You control the account — not your employer or insurance company — and the money stays yours even if you change jobs or insurance plans.

The account exists to help you pay for costs your insurance doesn't cover yet: deductibles, copays, coinsurance, and other out-of-pocket expenses. But it also functions as a retirement savings tool, because after age 65 you can withdraw money for any reason (though non-medical withdrawals are taxed as income).

Key Takeaways

  • You can only open an HSA if you're enrolled in a high-deductible health plan, and you cannot have other health coverage at the same time.
  • Contributions reduce your taxable income, growth is tax-free, and withdrawals for medical expenses are tax-free — a three-way tax advantage no other account offers.
  • You decide how much to contribute each year (within IRS limits), and unused money rolls over indefinitely rather than disappearing at year-end.
  • The account is portable: you own it outright, so it moves with you if you change employers, insurance plans, or jobs.
  • After age 65, you can withdraw money for any reason, though non-medical withdrawals are taxed as regular income.

Who Can Open an HSA and When

You can open an HSA only if you're enrolled in a high-deductible health plan (HDHP) — a specific category of insurance with a minimum deductible set by the IRS each year. For 2024, that minimum is $1,600 for individual coverage and $3,200 for family coverage. Your plan must also have an out-of-pocket maximum (the most you'll pay in a year) that doesn't exceed $8,050 for individual or $16,100 for family coverage.

You cannot have an HSA if you're covered by any other health insurance at the same time — not Medicare, not a spouse's plan, not a parent's plan, not Veterans benefits. The only exception is coverage for accidents, disability, dental, vision, or long-term care, which doesn't disqualify you.

You open the account through a bank, credit union, or financial institution that offers HSAs — not through your insurance company or employer, though your employer may offer one as a payroll option. If your employer doesn't offer one, you can open an individual HSA on your own.

How Much You Can Contribute Each Year

The IRS sets annual contribution limits, which change yearly. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you're 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). These limits explore to your total contributions across all HSAs you own — you can't open multiple accounts to exceed the limit.

You can contribute money in several ways: through payroll deductions (which skip income tax and often Social Security tax), by depositing your own money and deducting it on your tax return, or by rolling over funds from another HSA. Contributions must be made by the tax filing important date (usually April 15) to count toward that tax year, though payroll contributions can continue through December 31.

Unlike a flexible spending account (FSA), unused money doesn't disappear. Your HSA balance rolls over year to year indefinitely, so you can let it grow if you don't need it when ready.

What Counts as a may have access to Medical Expense

You can withdraw HSA funds tax-free for a wide range of medical costs: insurance deductibles and copays, coinsurance, prescription medications, dental work, vision care, mental health treatment, and medical equipment like wheelchairs or hearing aids. Preventive care covered by your insurance at no cost to you (like annual checkups or vaccines) doesn't count as a may have access to expense, because you're not paying out of pocket.

Some expenses that surprise people: over-the-counter medications count only if you have a prescription for them, but insulin counts without a prescription. Gym memberships don't count, but physical therapy does. Cosmetic surgery doesn't count unless it's reconstructive (repairing an injury or birth defect). Long-term care insurance premiums count, but only up to certain limits based on your age.

Keep receipts and documentation for every withdrawal, because the IRS can audit HSA spending. If you withdraw money for something that isn't a may have access to expense, you pay income tax on that amount plus a 20% penalty — unless you're over 65, in which case you pay income tax but no penalty.

How the Tax Advantage Works

An HSA gives you three tax breaks that stack together. First, contributions reduce your taxable income — whether you contribute through payroll (which skips income and payroll tax) or deposit your own money and deduct it on your tax return. Second, any interest or investment gains inside the account grow tax-free. Third, withdrawals for may have access to medical expenses come out tax-free.

Compare this to a regular savings account: you contribute after-tax dollars, pay tax on interest earned, and pay tax again when you withdraw. Or compare it to a flexible spending account (FSA), which also offers tax-free contributions and withdrawals but forces you to use the money by year-end or lose it. An HSA has no use-it-or-lose-it rule, so the tax advantage compounds over time if you don't need the money when ready.

The trade-off is that you must be enrolled in a high-deductible plan, which means you pay more out of pocket before insurance kicks in. Whether that trade-off makes sense depends on how much medical care you actually use and whether you can afford to cover costs until you hit your deductible.

How to Use Your HSA When You Need Medical Care

When you have a medical expense, you have choices about when to withdraw the money. You can pay the bill out of pocket and withdraw from your HSA when ready, or you can pay out of pocket now and withdraw later (even years later, as long as you keep the receipt). Some people use their HSA as a long-term investment account, paying medical bills from their regular checking account and letting the HSA grow.

Most HSA providers issue a debit card linked to the account, so you can pay directly at the pharmacy, doctor's office, or hospital. Some providers also let you submit receipts online and request reimbursement. Keep all documentation — receipts, invoices, explanation of benefits from your insurance — because you need proof that the expense was may have access to if the IRS ever questions your withdrawals.

If you withdraw money for a non-may have access to expense by mistake, you can sometimes correct it. Talk to your HSA provider about their process for reversing a withdrawal and redepositing the funds.

What Happens to Your HSA If You Change Jobs or Insurance

Your HSA is yours to keep. If you leave your job, the account doesn't disappear — you own it outright and can take it with you. If your employer was making contributions, those stop, but your existing balance remains in the account and you can continue to use it for may have access to expenses.

If you switch to a different health insurance plan that isn't a high-deductible plan, you can no longer make new contributions to your HSA. But you can still withdraw money from the existing balance for may have access to medical expenses for as long as you live. If you later re-enroll in a high-deductible plan, you can resume contributions.

You can move your HSA to a different financial institution if you find one with better investment options or lower fees. This is called a trustee-to-trustee transfer and doesn't count as a withdrawal, so there are no tax consequences.

Frequently Asked Questions

Can I use my HSA to pay my insurance premium?

No, not your regular monthly premium. You can use HSA funds to pay for COBRA continuation coverage, Medicare premiums (Part A, B, and D), or long-term care insurance premiums, but not the premium for your current health plan. You can pay deductibles, copays, and coinsurance with HSA funds.

What happens to my HSA if I turn 65?

Your HSA doesn't close. You can still withdraw money for may have access to medical expenses tax-free. After 65, you can also withdraw money for any reason — it's taxed as regular income but without the 20% penalty. This makes an HSA a useful retirement savings tool if you've built up a balance.

Can my employer contribute to my HSA?

Yes. Employer contributions don't count toward your income, and they count toward your annual contribution limit. If your employer contributes $2,000 and you contribute $2,000, you've hit the limit. Employer contributions are portable — they stay in your account if you leave the job.

What if I have a spouse with a separate HSA?

Each of you has your own account and your own contribution limit. If you both have individual coverage, you each can contribute up to $4,150 in 2024. If you have family coverage together, you share a $8,300 limit between you — you can't both contribute the full family amount.

Can I invest the money in my HSA?

Most HSA providers let you invest the balance in mutual funds, stocks, or bonds, similar to a brokerage account. Some require a minimum balance (often $1,000 or $2,000) before you can invest. Investment growth is tax-free, which is why some people use HSAs as long-term retirement accounts rather than just spending accounts.