An HSA is a tax-advantaged savings account tied to a high-deductible health plan

A Health Savings Account (HSA) is a savings account you own that holds money specifically for medical expenses. Unlike a regular savings account, money you put into an HSA is not taxed, the money grows without being taxed, and you can withdraw it tax-free as long as you spend it on medical care. You can only open an HSA if you are enrolled in a high-deductible health plan (HDHP) — a type of health insurance with lower monthly premiums but higher deductibles than traditional plans.

The account stays with you even if you change jobs or health plans. You control the money, decide how much to contribute each year (within legal limits), and choose how to invest it. Unlike a flexible spending account (FSA), which is another tax-advantaged account, HSA money does not disappear at the end of the year — whatever you do not spend rolls over and remains yours.

Key Takeaways

  • An HSA requires enrollment in a high-deductible health plan and lets you set aside pre-tax money for medical expenses.
  • You can contribute up to a set annual amount (the limit changes yearly and depends on whether your coverage is individual or family), and your employer may contribute to your account as well.
  • Money in an HSA can be used for doctor visits, prescriptions, dental work, vision care, and many other medical costs, but not for insurance premiums or over-the-counter items unless prescribed.
  • After age 65, you can withdraw HSA money for any reason without penalty, though non-medical withdrawals are taxed as income.
  • An HSA is portable — it belongs to you, not your employer, so you keep the account and its balance if you change jobs.

Who can open an HSA and what the requirements are

To open an HSA, you must be enrolled in a high-deductible health plan. The IRS sets the minimum deductible each year — for 2024, that is $1,600 for individual coverage and $3,200 for family coverage, though these numbers change annually. Your HDHP must also have an out-of-pocket maximum (the most you pay in a year before insurance covers everything), and you cannot be covered by any other health plan at the same time, with limited exceptions for accident, disability, or dental-only coverage.

You also cannot be enrolled in Medicare, claimed as a dependent on someone else's tax return, or have coverage through a spouse's non-HDHP plan. If you meet these requirements, you can open an HSA through your employer (if they offer one), through a bank, credit union, or insurance company, or through a financial services firm that specializes in HSAs.

How much you can contribute each year

The IRS sets annual contribution limits that change each year. For 2024, you can contribute up to $4,150 if you have individual HDHP coverage, or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). These limits explore to the total of all your contributions combined — if your employer contributes $1,000, you can only add $3,150 more to reach the individual limit.

You contribute money before taxes are taken out of your paycheck (if your employer offers payroll deduction), which lowers your taxable income for the year. If you contribute on your own outside of payroll, you can deduct the contribution on your tax return. Your employer may also contribute to your account, and that money counts toward the annual limit but is not taxed to you.

What medical expenses you can pay for with HSA money

HSA funds can cover a broad range of medical costs. This includes doctor visits, hospital stays, surgery, prescription medications, dental work, vision care (including glasses and contact lenses), hearing aids, mental health counseling, physical therapy, and many other treatments. You can also use HSA money for medical equipment like crutches, wheelchairs, or blood pressure monitors, and for some over-the-counter items if they are prescribed by a doctor.

There are limits on what you cannot use HSA money for. You cannot use it to pay health insurance premiums (with the exception of COBRA continuation coverage, long-term care insurance, or premiums while you are receiving unemployment benefits). You also cannot use it for cosmetic procedures, gym memberships, or most over-the-counter medications and supplies unless a doctor has written a prescription for them. If you use HSA money for something that does not count as a medical expense, you owe income tax on that withdrawal plus a 20 percent penalty.

How to use your HSA money and keep records

When you have a medical expense, you can pay for it out of pocket and then withdraw money from your HSA to reimburse yourself, or you can use an HSA debit card (if your account provider offers one) to pay directly. Some people keep receipts and reimburse themselves years later — there is no time limit on when you can withdraw money for an expense, as long as you have documentation that the expense was medical and occurred while you owned the account.

You are responsible for keeping records of what you spent the money on. The IRS does not require you to submit receipts when you withdraw money, but you must be able to prove that withdrawals were for medical expenses if you are audited. Many HSA providers send you a year-end statement showing your balance and transactions, but that is not the same as proof of what the money was spent on — you need to keep the actual receipts or bills.

How your HSA grows and what happens to unused money

Money in your HSA can sit in a regular savings account earning minimal interest, or you can invest it in mutual funds, stocks, or other investments through your HSA provider. If you invest the money and it grows, that growth is not taxed. If your investments lose value, you absorb that loss. Many people use their HSA as a long-term savings tool, spending only what they need for current medical expenses and letting the rest grow over time.

Unlike a flexible spending account, HSA money does not expire. Whatever you do not spend in a given year stays in the account and is available to you forever. This makes an HSA useful for saving toward future medical expenses, such as retirement healthcare costs. After age 65, you can withdraw money from your HSA for any reason — if you use it for non-medical expenses, you pay income tax on the withdrawal but not the 20 percent penalty.

What happens to your HSA if you change jobs or coverage

Your HSA is yours to keep, regardless of what happens with your job or health insurance. If you leave your employer, the account remains open and the money stays in it. You can continue to use it for medical expenses as long as you remain enrolled in an HDHP (you do not have to use the same HDHP). If you switch to a non-HDHP plan, you can no longer make new contributions to the account, but you can still withdraw money for medical expenses incurred while you owned the account.

If you move your HSA to a new provider (for example, if you switch banks or your new employer uses a different HSA administrator), you can do a trustee-to-trustee transfer, which moves the money without tax consequences. You can also do a rollover, where you withdraw the money and deposit it into a new HSA within 60 days. If you miss the 60-day window, the withdrawal is treated as a non-medical expense and you owe taxes and penalties.

Frequently Asked Questions

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

Not for most premiums. You cannot use HSA money to pay your regular health insurance, dental insurance, or vision insurance premiums. The exceptions are COBRA continuation coverage (temporary coverage if you lose your job), long-term care insurance, and health insurance premiums while you are receiving unemployment benefits.

What happens to my HSA if I turn 65?

At 65, you become may be able to access for Medicare. You can no longer make new contributions to your HSA once you are enrolled in Medicare, but the money already in the account stays there. You can withdraw it for any reason without the 20 percent penalty, though non-medical withdrawals are taxed as regular income.

Can I withdraw money from my HSA for something that is not medical?

Yes, but it costs you. Non-medical withdrawals are taxed as ordinary income, and you also owe a 20 percent penalty on top of that. After age 65, the penalty goes away but the income tax remains. Keep receipts for all medical expenses so you can prove what the money was actually spent on if audited.

Do I lose my HSA money if I do not use it by the end of the year?

No. HSA money rolls over indefinitely — there is no "use it or lose it" rule like there is with flexible spending accounts. You can let the money accumulate over many years and use it whenever you have a medical expense, even decades later, as long as you have documentation of the expense.

Can my employer see what I spend my HSA money on?

Not if you manage the account yourself. If your employer offers payroll deduction and uses a third-party HSA administrator, the administrator may see transaction details, but your employer typically cannot see what you spent the money on — only that you made a withdrawal. Your HSA is your private account.