What a Health Savings Account Is and Who Can Open One

A Health Savings Account (HSA) is a bank account you own that holds money specifically for medical expenses. Unlike a regular savings account, the money you put in is not taxed, the money that grows inside is not taxed, and withdrawals for medical costs are not taxed. You keep the account even if you change jobs or health insurance.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) — a type of health insurance where you pay a lower monthly premium but a higher deductible before insurance kicks in. For 2024, the IRS defines an HDHP as a plan with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. You cannot have an HSA if you are on Medicare, covered by another person's health plan, or enrolled in a non-HDHP.

You open an HSA through a bank, credit union, or financial institution — not through your employer or insurance company, though your employer may offer one as a payroll option. The account itself is yours to control and manage.

Key Takeaways

  • An HSA requires enrollment in a high-deductible health plan and lets you set aside pre-tax money for medical expenses that your insurance does not cover.
  • You can contribute up to $4,150 per year for individual coverage or $8,300 for family coverage in 2024, and unused money rolls over year to year.
  • Money withdrawn for medical expenses — copays, deductibles, prescriptions, dental, vision, and many other costs — is not taxed, but withdrawals for non-medical expenses are taxed and penalized.
  • An HSA is portable: you own it and keep it even if you change jobs, insurance, or no longer have an HDHP.
  • Some people use an HSA as a retirement savings tool by investing the balance and withdrawing only what they need for medical costs, since the account grows tax-free.

How Much You Can Contribute and What Happens to Unused Money

The IRS sets annual contribution limits. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year. These limits change yearly, and your employer or HSA provider will notify you of the new amount each January.

Money you do not spend in a given year stays in your account and earns interest or investment returns. There is no "use it or lose it" rule like there is with a flexible spending account (FSA). This means an HSA can grow over time if you do not withdraw the full balance every year.

You can contribute in a lump sum or spread contributions throughout the year. If you enroll in an HDHP mid-year, you can still contribute the full annual amount for that year, but only if you remain enrolled through December 31 and the following March 15 — this is called the testing period. If you drop the HDHP before that date, you must return any contributions made for months you were not enrolled.

Which Medical Expenses You Can Pay From Your HSA

You can withdraw HSA money tax-free for any expense the IRS classifies as a may have access to medical expense. This includes copays and coinsurance, deductibles, prescription medications, dental work, vision care, hearing aids, and mental health treatment. It also covers some less obvious costs: over-the-counter medications (with a prescription from your doctor), medical equipment like crutches or wheelchairs, and certain long-term care insurance premiums.

You cannot use HSA money for health insurance premiums, with three exceptions: COBRA continuation coverage, premiums while you are unemployed and receiving unemployment benefits, and Medicare premiums once you turn 65. You also cannot use it for cosmetic procedures, gym memberships, or general wellness products not prescribed by a doctor.

Keep receipts and documentation for every withdrawal. The IRS can audit your HSA and ask you to prove that withdrawals were for may have access to expenses. If you withdraw money for a non-may have access to expense before age 65, you pay income tax on that amount plus a 20 percent penalty. After age 65, the penalty goes away — you still pay income tax on non-may have access to withdrawals, but no additional penalty.

How an HSA Differs From a Flexible Spending Account

Both HSAs and FSAs let you set aside pre-tax money for medical expenses, but they work differently. An FSA is tied to your employer and ends when you leave the job. An HSA is yours to keep. An FSA has a "use it or lose it" rule — money you do not spend by the end of the year (with a small carryover option in some plans) is forfeited. An HSA rolls over indefinitely.

An FSA contribution limit is typically lower than an HSA — usually around $3,200 per year. An HSA lets you invest the balance and potentially earn returns; most FSAs are straightforward savings accounts. You can have an FSA and an HSA at the same time only if your FSA is a limited-purpose FSA that covers only dental and vision expenses.

An FSA may make sense if you have predictable medical expenses each year and want to use the money when ready. An HSA makes sense if you want to save for future medical costs, invest the balance, or keep the account long-term.

The Tax Advantage and How It Works in Practice

The tax benefit of an HSA comes in three layers. First, money you contribute is deducted from your taxable income — if you earn $50,000 and contribute $3,000 to an HSA, you only pay income tax on $47,000. Second, any interest or investment gains inside the account are not taxed. Third, withdrawals for may have access to medical expenses are not taxed.

If your employer offers an HSA through payroll, contributions come out before taxes are calculated, so you see the tax savings when ready in your paycheck. If you open an HSA on your own, you deduct the contribution when you file your tax return. Either way, you reduce your taxable income for the year.

The tax savings depend on your income tax bracket. If you are in the 22 percent federal tax bracket and contribute $3,000 to an HSA, you save roughly $660 in federal taxes that year. State taxes may explore as well, depending on where you live.

Using an HSA as a Long-Term Savings and Retirement Tool

Many people use an HSA as a retirement account because of its unique tax treatment. You can invest the balance in stocks, bonds, or mutual funds rather than leaving it in a savings account. If you invest wisely and do not withdraw the money, it grows tax-free for decades.

After age 65, you can withdraw money from your HSA for any reason without penalty — you will pay income tax on non-medical withdrawals, just as you would with a traditional IRA. This makes an HSA a powerful retirement tool: you can use it for medical expenses tax-free, or for any other expense after 65 with only income tax (no penalty).

Some people deliberately keep medical expenses low during working years, paying out of pocket when possible, and let their HSA balance grow. They then use the account to cover medical costs in retirement or leave it to their heirs. This strategy works only if you can afford to pay medical expenses without the HSA and if your HDHP premiums are low enough that the savings outweigh the higher deductible.

Deciding Whether an HSA Makes Sense for Your Situation

An HSA is most valuable if you are healthy, have predictable medical expenses you can cover out of pocket, and want to save for future healthcare costs. It is less valuable if you have chronic conditions requiring frequent doctor visits and prescriptions, because your deductible will be high and you will spend the HSA money when ready rather than letting it grow.

Compare the total cost of an HDHP to other plans your employer offers. Add the monthly premium, the deductible, and typical out-of-pocket costs for your family. Then calculate how much you could contribute to an HSA and how much you would actually use. If the HDHP premium is much lower than other plans and you can afford the higher deductible, the HSA may save you money. If the deductible is so high that you will spend most of it anyway, the tax advantage shrinks.

Also consider your income stability. An HSA works best if you have steady income and can afford to contribute regularly. If your income is unpredictable, you may struggle to build a balance or may need to withdraw money before it grows.

Frequently Asked Questions

Can I have an HSA if I am on Medicare?

No. Once you enroll in Medicare, you are no longer may be able to access to contribute to an HSA. If you already have an HSA, you can keep it and withdraw money for medical expenses, but you cannot add new contributions. You can still use the balance to pay Medicare premiums and may have access to medical expenses.

What happens to my HSA if I leave my job?

Your HSA is yours to keep. It does not belong to your employer. You can continue to use the account, invest the balance, and withdraw money for medical expenses. You can also roll it to a different HSA provider if you want to change banks or investment options. The account follows you from job to job.

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

Yes. If you are married and file taxes jointly, you can use your HSA to pay for your spouse's may have access to medical expenses, even if they are not on your health plan. You can also use it for your children and other dependents listed on your tax return.

What if I withdraw money from my HSA for a non-medical expense?

Before age 65, you pay income tax on the withdrawal plus a 20 percent penalty. After age 65, you pay only income tax, with no penalty. Keep in mind that you lose the tax deduction for that contribution, so you are essentially paying tax twice on that money.

Can I invest the money in my HSA?

Most HSA providers let you invest the balance in mutual funds, stocks, or bonds, though some require a minimum balance (often $1,000 to $2,000) before you can invest. Check with your HSA provider about investment options and fees. Investment returns are not taxed as long as the money stays in the account.