A Health Savings Account is a bank account that holds money specifically for medical expenses

A Health Savings Account (HSA) is a savings account attached to a high-deductible health insurance plan. The money you put in stays yours — it does not go to your insurance company. You use it to pay for medical costs like doctor visits, prescriptions, dental work, and glasses. Any money you do not spend in a year rolls over to the next year, so it builds up over time.

The main reason HSAs exist is tax savings. Money you put into an HSA is not taxed as income, and money you withdraw to pay for medical expenses is not taxed either. This is different from regular savings, where you pay taxes on the interest your money earns. If you have a high-deductible health plan anyway, an HSA lets you set aside money for medical costs before taxes are taken out of your paycheck.

Key Takeaways

  • An HSA is a separate bank account that holds money for medical expenses, and it is only available if you have a high-deductible health insurance plan.
  • Money you contribute to an HSA is not taxed as income, and withdrawals for medical expenses are not taxed, which saves you money compared to paying with after-tax dollars.
  • You can use HSA funds to pay for doctor visits, prescriptions, dental care, vision care, and many other medical services, but not for insurance premiums or over-the-counter items without a prescription.
  • Any money left in your HSA at the end of the year stays in the account and earns interest, so it can grow into a larger fund over time.
  • If you withdraw money from your HSA for non-medical expenses before age 65, you pay income tax on that money plus a 20 percent penalty.

Who can open an HSA and when

You can only open an HSA if you are enrolled in a high-deductible health insurance plan. Your employer may offer one through payroll, or you can open one on your own if you buy insurance through the marketplace or a private insurer. You must not be covered by any other health insurance (with narrow exceptions for accident or dental-only plans), and you cannot be claimed as a dependent on someone else's taxes.

The window to open an HSA is limited. If your employer offers one, you can usually enroll during your company's open enrollment period or when you first become may be able to access. If you buy your own insurance, you can open an HSA when you enroll in a high-deductible plan. Once you have the account, you can keep it even if you change jobs or switch insurance plans — the account itself is yours and stays with you.

How much you can contribute each year

The amount you can put into an HSA changes each year and depends on whether your insurance covers just you or your whole family. For 2024, the limits are set by the IRS and vary. Your bank or insurance company will tell you the current limit when you open the account. You can contribute less than the limit if you want — there is no minimum.

You can contribute money in two ways. If your employer offers an HSA, you can have money taken directly from your paycheck before taxes are calculated. This is the most common route and saves you the most in taxes. If you do not have an employer plan, you can contribute on your own by depositing money into your HSA account, though you will need to claim the tax deduction when you file your taxes.

What you can and cannot pay for with HSA money

HSA funds cover a wide range of medical expenses. You can use the money for doctor visits, hospital stays, surgery, prescription medications, dental work, vision care, hearing aids, and mental health treatment. You can also pay for medical equipment like blood pressure monitors, crutches, or wheelchairs. The IRS publishes a full list, but the basic rule is: if a doctor orders it or it treats a medical condition, it usually qualifies.

Some things do not may have access to. Over-the-counter medicines like cold medicine or pain relievers do not count unless a doctor writes a prescription for them. Health insurance premiums themselves do not may have access to (with exceptions for COBRA continuation coverage or premiums while you are unemployed). Cosmetic procedures, gym memberships, and vitamins do not may have access to. If you are unsure whether something counts, your HSA provider can tell you before you withdraw the money.

How HSA money grows and what happens to unused funds

Most HSAs are held at banks or investment firms, and the money can earn interest or be invested in mutual funds, just like a regular savings account. Some HSAs offer only a basic savings account with minimal interest. Others let you invest the balance in stocks or bonds, which means your money can grow faster — but it can also lose value. Check what your HSA provider offers when you open the account.

Unlike a flexible spending account (FSA), which is a different type of medical savings account, HSA money does not disappear at the end of the year. Any balance you do not spend rolls over to the next year and stays in the account indefinitely. This means an HSA can become a long-term savings tool. Some people use it as retirement savings because after age 65, you can withdraw money for any reason without the penalty — you just pay income tax on non-medical withdrawals, like a regular retirement account.

Withdrawing money and what happens if you use it for non-medical expenses

To withdraw money from your HSA, you typically use a debit card that comes with the account, or you request a transfer to your checking account. Some providers let you pay medical providers directly from the HSA. Keep receipts for any medical expenses you pay for with HSA money, because the IRS can ask you to prove that withdrawals were for may have access to medical costs.

If you withdraw money for something that is not a may have access to medical expense, you owe income tax on that amount plus a 20 percent penalty. For example, if you withdraw $500 for a non-medical expense and you are in the 22 percent tax bracket, you would owe $110 in taxes plus the $100 penalty, for a total of $210. After age 65, the penalty goes away — you only pay income tax on non-medical withdrawals — but the tax still applies.

HSA accounts when you change jobs or insurance

Your HSA is yours to keep. If you leave your job, the account does not close. You can continue to use the money in it for medical expenses, and you can keep contributing to it if you stay enrolled in a high-deductible health plan. If your new employer offers an HSA, you can roll your old account into the new one, or keep both accounts open — you just cannot contribute more than the annual limit across all your HSAs combined.

If you switch to a health insurance plan that is not high-deductible, you can no longer contribute new money to your HSA. However, you can still withdraw money from the account to pay for medical expenses. The account stays open and the money remains yours. If you later switch back to a high-deductible plan, you can resume contributions.

Frequently Asked Questions

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

Yes, if your spouse is covered under your health insurance plan, you can use your HSA to pay for their medical expenses. If your spouse has their own health insurance and their own HSA, they should use their own account. You can also use HSA funds to pay for medical expenses of any dependent you claim on your taxes, including children and parents in some cases.

What happens to my HSA if I die?

If your beneficiary is your spouse, they can treat the HSA as their own account and continue using it. If the beneficiary is someone else, the account value is taxed as income to that person, though they can still use remaining funds for your medical expenses without additional penalty. The rules vary by state and HSA provider, so check your account documents or ask your provider.

Can I invest my HSA balance in stocks?

Some HSA providers offer investment options like mutual funds or individual stocks, but not all do. Check with your provider to see what options are available. If you invest, your balance can grow faster, but it can also decline in value. Many people keep a portion in savings for near-term medical expenses and invest the rest for long-term growth.

Do I need receipts to prove I spent HSA money on medical expenses?

You should keep receipts and documentation for all HSA withdrawals. The IRS does not require you to submit them when you file taxes, but you must be able to produce them if the IRS audits your account. Your HSA provider may also ask for proof that a withdrawal was for a may have access to expense.

Can I use my HSA to pay for therapy or mental health treatment?

Yes. Mental health treatment, including therapy, counseling, and psychiatric care, qualifies as a medical expense. You can use HSA funds to pay for copays, deductibles, or the full cost if you pay out of pocket. Prescription medications for mental health conditions also may have access to.