An HSA lets you set aside money before taxes are taken out of your paycheck

A Health Savings Account (HSA) is a savings account tied to a high-deductible health insurance plan. Money you put into it comes out of your paycheck before federal income tax, Social Security tax, and Medicare tax are calculated. That means the money you contribute reduces your taxable income for the year.

The pre-tax part is the main financial advantage. If you earn $50,000 and contribute $3,000 to an HSA, you only pay income tax on $47,000. Your employer also saves on payroll taxes for that $3,000, and many employers pass some of that savings back to you by contributing to your HSA themselves.

You can use HSA money to pay for may have access to medical expenses—copays, deductibles, prescriptions, dental work, vision care, and many other health costs. Money you don't spend stays in the account and grows year to year. After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

Key Takeaways

  • HSA contributions come out of your paycheck before income tax and payroll taxes are withheld, lowering the income you pay tax on.
  • You must be enrolled in a high-deductible health plan (HDHP) to open and contribute to an HSA; a regular health plan does not may have access to.
  • Money spent on may have access to medical expenses is never taxed, and unused money rolls over year to year with no "use it or lose it" important date.
  • After age 65, you can withdraw HSA money for any reason, though non-medical withdrawals count as taxable income.
  • Your employer can contribute to your HSA, and those contributions also reduce your taxable income.

Who can open an HSA and contribute pre-tax money

You must be covered by a high-deductible health plan (HDHP) to contribute to an HSA. The IRS sets the minimum deductible each year—for 2024, that is $1,600 for individual coverage and $3,200 for family coverage. If your plan's deductible is lower than that, you cannot contribute to an HSA, even if you want to.

You also cannot be covered by any other health insurance at the same time (with narrow exceptions for accident, disability, dental, and vision plans). If you have Medicare, you stop being able to contribute to an HSA, though you can keep the account and spend money from it.

If your employer offers an HDHP and an HSA, you can usually set up contributions during open enrollment or when you first become may be able to access. Your employer may also offer to contribute money on your behalf—this is common and counts as pre-tax income to you as well.

How much you can contribute and what the tax savings look like

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 (called a catch-up contribution). These limits change slightly each year.

Your contribution reduces your taxable income dollar for dollar. If you contribute $3,000 and you are in the 22% federal tax bracket, you save roughly $660 in federal income tax. You also save on Social Security tax (6.2%) and Medicare tax (1.45%), so the total savings is closer to $3,000 × 9.65%, or about $290 more. The exact amount depends on your tax bracket and state income tax.

If your employer contributes to your HSA, that money also counts toward the annual limit but does not count as wages on your W-2. For example, if your employer puts in $1,500 and you put in $2,000, you have used $3,500 of your $4,150 limit.

What happens to money you don't spend in the same year

Unlike a Flexible Spending Account (FSA), an HSA has no "use it or lose it" rule. Money you do not spend rolls over to the next year automatically. You can let it sit in the account for decades if you choose, and it keeps growing tax-free as long as you only withdraw it for may have access to medical expenses.

Many people treat an HSA as a retirement savings tool for this reason. You can invest the money in mutual funds or other investments (depending on what your HSA provider offers), and the growth is tax-free. Once you turn 65, you can withdraw money for any reason without the 20% penalty that applies to non-medical withdrawals before 65, though you will owe income tax on non-medical withdrawals.

Keep receipts for any medical expenses you pay out of pocket. If you withdraw money from your HSA years later to reimburse yourself for old medical costs, the IRS allows this as long as you have documentation that the expense was may have access to and occurred after you opened the account.

How to set up pre-tax contributions through your employer

If your employer offers an HDHP and HSA, you usually enroll during open enrollment or when you first become may be able to access for health insurance. You will choose how much to contribute each pay period. That amount is deducted from your paycheck before taxes are calculated.

Your employer will send the money to the HSA provider (a bank or financial institution) on your behalf. You receive a debit card or checkbook to access the money, or you can request a transfer to your personal bank account. Some providers let you set up automatic transfers to a savings or investment account.

If you do not have access to an employer HSA, you can open one on your own through a bank, credit union, or investment firm. You contribute with after-tax dollars, but you can deduct the contribution on your tax return (Form 8889) to get the same pre-tax benefit. This route requires more paperwork at tax time.

may have access to medical expenses you can pay with HSA money

The IRS maintains a detailed list of may have access to medical expenses. Common ones include insurance premiums (deductibles, copays, coinsurance), prescription medications, dental and orthodontic care, vision exams and glasses, hearing aids, mental health counseling, and physical therapy. You can also use HSA money to pay for over-the-counter medications if you have a prescription for them.

Some expenses are not covered: cosmetic surgery (unless medically necessary), gym memberships, vitamins and supplements (unless prescribed), and most over-the-counter items without a prescription. If you are unsure whether an expense qualifies, the IRS Publication 502 lists hundreds of examples, or you can ask your HSA provider.

You do not have to spend the money in the same year you contribute it. You can pay a medical expense out of pocket and reimburse yourself from your HSA months or years later, as long as you have kept the receipt and the expense occurred after you opened the account.

The difference between an HSA and other tax-advantaged accounts

An HSA is often confused with a Flexible Spending Account (FSA), but they work differently. An FSA also uses pre-tax money, but it has a "use it or lose it" rule—money left over at the end of the year is forfeited (with a small carryover option in some plans). An FSA also requires you to estimate how much you will spend and lock in that amount for the year. An HSA has no important date and no penalty for leaving money unspent.

A Health Reimbursement Arrangement (HRA) is another option some employers offer. An HRA is funded entirely by the employer, and unused money stays in the account. However, you cannot take an HRA with you if you leave the job, and you cannot invest the money. An HSA is portable—it belongs to you, not your employer.

If your employer offers both an FSA and an HSA, you can usually choose one or the other, not both. Many people choose an HSA because of the flexibility and the ability to invest the money long-term.

Frequently Asked Questions

Can I contribute to an HSA if I am self-employed?

Yes. You must have a high-deductible health plan, which you can purchase on your own or through a spouse's employer. You open an HSA at a bank or investment firm and contribute with after-tax dollars, then deduct the contribution on your tax return (Form 8889). The deduction works the same way as an employer contribution—it reduces your taxable income.

What happens to my HSA if I change jobs?

Your HSA stays with you. The money in the account is yours, not your employer's. You can keep the same HSA or move it to a new provider. If your new employer offers an HSA, you can contribute to your existing account or open a new one. You cannot have two active HSAs at the same time, so if you open a new one, you must close or roll over the old one.

Do I have to file anything special on my taxes for an HSA?

If your employer deducts HSA contributions from your paycheck, they report it on your W-2, and you do not need to do anything extra. If you contribute on your own (self-employed or after-tax contributions), you deduct it on Form 8889 and attach it to your tax return. Your HSA provider sends you a Form 5498-SA each January showing what you contributed.

Can I withdraw money from my HSA to pay for health insurance premiums?

You can use HSA money to pay for health insurance premiums only in specific situations: if you are receiving unemployment benefits, if you are retired and over 65 and paying for Medicare premiums, or if you are paying for COBRA continuation coverage. You cannot use it for regular health insurance premiums while you are working.

What if I use HSA money for something that is not a may have access to medical expense?

Before age 65, you owe income tax on the withdrawal plus a 20% penalty. After age 65, you owe income tax but no penalty. Keep records of what you spend HSA money on in case the IRS asks. If you made a mistake, you can sometimes correct it by redepositing the money within a certain timeframe—ask your HSA provider about their rules.