A health savings account is a bank account that lets you set aside money for medical costs before taxes are taken out

A Health Savings Account (HSA) is a savings account attached to a specific type of health insurance plan. Money you put into it reduces your taxable income — meaning you pay less in federal income tax. You can then withdraw that money to pay for doctor visits, prescriptions, dental work, and many other medical expenses without paying tax on the withdrawal either.

The account belongs to you, not your employer or insurance company. Money you don't spend stays in the account and earns interest. Unlike some other tax-advantaged accounts, unused funds roll over year to year — you never lose the balance.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) — a type of insurance where you pay more out of pocket before your insurance kicks in, but your monthly premiums are lower. Not all health plans may have access to. Your insurance company or employer can tell you whether your plan is an HDHP.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan, which your employer or insurance company can confirm.
  • Money you contribute reduces your federal income tax for that year, and withdrawals for medical expenses are not taxed.
  • The account is yours to keep — you can take it with you if you change jobs or insurance plans.
  • You can use HSA funds for a wide range of medical, dental, and vision costs, but not for insurance premiums or over-the-counter items unless prescribed by a doctor.
  • Unused money stays in the account and earns interest, unlike flexible spending accounts that operate on a "use it or lose it" basis.

How much you can contribute each year

The IRS sets annual limits on how much you can put into an HSA. These limits change each year and depend on whether your insurance covers only you or also covers family members. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage, but these numbers shift annually.

You can contribute the full amount yourself, or your employer can contribute on your behalf, or you can split the contribution between you and your employer. If you are self-employed, you can contribute up to the limit. Once you turn 55, you can contribute an extra $1,000 per year (called a catch-up contribution) until you enroll in Medicare.

Check with your bank or HSA provider each January for that year's limits, since they are published by the IRS and vary. Your employer's benefits office can also tell you the current limit.

What you can and cannot pay for with HSA money

You can withdraw HSA funds to pay for most medical, dental, and vision costs — doctor visits, hospital stays, prescription medications, eyeglasses, hearing aids, and dental work all count. The IRS maintains a detailed list, but the general rule is that if a doctor prescribes or recommends it for a medical condition, it is likely covered.

You cannot use HSA money for health insurance premiums (with a few exceptions: COBRA coverage, long-term care insurance, and Medicare premiums once you turn 65). You also cannot use it for over-the-counter medicines like cold medicine or pain relievers unless a doctor writes a prescription for them. Cosmetic procedures and gym memberships do not count.

Keep receipts for all medical expenses you pay with HSA funds. If you withdraw money for something that is not a may have access to medical expense, you owe income tax on that withdrawal plus a 20 percent penalty.

How to open and use an HSA

Your employer may offer an HSA through a bank or financial company they have partnered with. If so, you can enroll during your employer's open enrollment period — usually once a year. If your employer does not offer one, you can open an HSA on your own at most banks, credit unions, and online financial institutions, as long as you are enrolled in an HDHP.

Once your account is open, you can contribute money by payroll deduction (if your employer offers it) or by transferring funds from your checking account. Some HSAs come with a debit card that you can use at pharmacies and medical offices. Others require you to pay out of pocket and then request reimbursement from the HSA.

At tax time, your HSA contributions are reported on your tax return. If your employer deducted contributions from your paycheck, they will report this on your W-2 form. If you contributed on your own, you will report it on Form 8889 when you file your taxes.

HSA versus other savings accounts for medical costs

An HSA is different from a Flexible Spending Account (FSA), which is another tax-advantaged account some employers offer. With an FSA, you set aside pre-tax money for medical costs, but any money you do not spend by the end of the year is forfeited — you lose it. An HSA has no "use it or lose it" rule, so unused money stays yours.

An HSA also differs from a regular savings account because contributions reduce your taxable income and withdrawals for medical expenses are not taxed. A regular savings account offers neither benefit. However, an HSA requires you to be on an HDHP, which means higher out-of-pocket costs when you need medical care. A regular savings account has no such requirement.

Some people use an HSA as a long-term investment account for retirement, contributing the maximum each year and paying medical expenses out of pocket. After age 65, you can withdraw HSA money for any reason without penalty (though non-medical withdrawals are taxed as income). This makes an HSA a flexible tool for people who can afford to cover medical costs without tapping the account.

What happens to your HSA if you change jobs or insurance

Your HSA is portable — it stays with you even if you leave your job or switch health insurance plans. You do not have to close it or transfer the balance. The account and all the money in it remain yours.

If you change jobs and your new employer offers an HSA, you can keep your old account open or open a new one with your new employer's provider. Some people maintain multiple HSAs, though you cannot exceed the annual contribution limit across all accounts combined.

If you lose your HDHP coverage — for example, because you switch to a different type of health plan — you can no longer make new contributions to your HSA. However, you can still withdraw money from the account for may have access to medical expenses. Once you enroll in Medicare, you can no longer contribute to an HSA, but you can continue to withdraw for medical costs.

How HSA money is invested and grows

Most HSAs function like savings accounts and earn a small amount of interest. However, some HSA providers let you invest the money in stocks, bonds, or mutual funds, similar to a retirement account. This option is usually available only if your balance reaches a certain amount — often $1,000 or $2,000.

If you invest HSA funds, you take on investment risk, meaning the balance can go down as well as up. However, you also have the potential to earn more than you would in a savings account. You can typically switch between the savings option and investment options at any time.

Check with your HSA provider to see what investment options are available and what fees they charge. Some providers charge monthly maintenance fees or per-transaction fees, so compare costs before opening an account.

Frequently Asked Questions

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

Yes, if your spouse is covered under your family health plan. You can also use HSA funds to pay for medical costs of your spouse and dependents even if they are not on your insurance plan. Keep receipts showing the person's name and the medical service provided.

What happens if I withdraw money from my HSA for something that is not a medical expense?

You will owe federal income tax on the withdrawal 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. After age 65, the penalty goes away, but you still owe income tax on non-medical withdrawals.

Can I open an HSA if I am self-employed?

Yes, as long as you have an HDHP. You can purchase an HDHP through the health insurance marketplace or a private insurer. You can then open an HSA at a bank or financial institution and contribute up to the annual limit, which you deduct on your tax return.

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

Either method works. Some people prefer to pay medical costs out of pocket and let their HSA balance grow, then reimburse themselves later. There is no time limit on reimbursement — you can reimburse yourself years later as long as you have receipts for the original medical expense.

What if my employer contributes to my HSA — do I still get a tax deduction?

Employer contributions are already deducted from your taxable income before you receive your paycheck, so you do not claim them again on your tax return. You only claim your own contributions on your tax return if you contributed money outside of payroll deduction.