A health savings account lets you set aside pretax money to pay for medical costs now or later

A Health Savings Account (HSA) is a bank account tied to a high-deductible health insurance plan. Money you put into it is not taxed as income, and you do not pay taxes when you withdraw it to cover medical expenses. The account stays open year to year — unlike a flexible spending account, which you lose if you do not spend the money by the end of the year.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). Your employer may offer one, or you can buy one on your own through the health insurance marketplace. Once you have the plan, you can open an HSA through a bank, credit union, or insurance company.

The money in your HSA is yours to keep. If you change jobs, switch insurance plans, or retire, the account goes with you. You can invest the balance in stocks or bonds if you want it to grow, or keep it in cash.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan, and you cannot have other health coverage at the same time.
  • Contributions reduce your taxable income, and withdrawals for medical expenses are tax-free, making HSAs a way to save on both income tax and medical costs.
  • The money rolls over year to year with no "use it or lose it" deadline, so you can build a balance over time.
  • After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as regular income.

How much you can contribute each year

The IRS sets annual contribution limits, and they change each year. 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).

Your employer may contribute to your HSA as well. That money counts toward your limit but does not come out of your paycheck. If both you and your employer contribute, the total cannot exceed the annual limit.

You can contribute money throughout the year, or you have until the tax filing deadline (usually April 15) to make contributions for the previous year. If you enroll in an HDHP partway through the year, you can still contribute a full year's worth of money if you stay enrolled through December 31.

What medical expenses you can pay with HSA money

You can withdraw money tax-free for any medical expense that your health insurance does not cover or that you have not yet met your deductible on. This includes doctor visits, prescriptions, dental work, vision care, mental health treatment, and medical equipment like wheelchairs or hearing aids.

The IRS publishes a long list of covered expenses. Some less obvious ones include acupuncture, chiropractic care, therapy copays, over-the-counter medications (with a prescription from your doctor), and even some travel costs if the trip is primarily for medical treatment. Cosmetic procedures like teeth whitening or Botox are not covered unless they treat a medical condition.

You do not have to use the money right away. You can let it sit in the account and pay medical bills out of pocket, then reimburse yourself from the HSA later — even years later. Keep receipts to prove the expense was medical and that you paid for it.

How to withdraw money and what records you need

Most HSAs come with a debit card you can use at the pharmacy or doctor's office. You can also write a check, transfer money to your bank account, or request a reimbursement check from the HSA provider.

You do not have to submit receipts every time you withdraw money, but you must keep them. The IRS can audit your HSA and ask you to prove that withdrawals were for medical expenses. If you cannot show proof, that withdrawal is treated as taxable income, and you owe a 20 percent penalty on top of income tax.

Some HSA providers offer a mobile app or online portal where you can track expenses and upload receipts. Others require you to keep paper records. Check with your HSA provider about their record-keeping process.

What happens if you use HSA money for non-medical expenses

Before age 65, withdrawals for non-medical expenses are taxed as regular income plus a 20 percent penalty. For example, if you withdraw $1,000 for a vacation and you are in the 22 percent tax bracket, you owe $220 in income tax plus $200 in penalty — a total of $420 in taxes on that $1,000.

After age 65, you can withdraw money for any reason without the 20 percent penalty. Non-medical withdrawals are still taxed as income, but the penalty goes away. This makes an HSA function like a regular retirement account after 65.

If you leave your HDHP and enroll in a different type of health plan, you can no longer contribute to the HSA, but you can keep the account open and withdraw money for medical expenses tax-free. You just cannot add new money to it.

How HSAs compare to flexible spending accounts

A flexible spending account (FSA) is similar to an HSA but has key differences. FSA money does not roll over — you must spend it by the end of the year or lose it (though some plans allow a small carryover or grace period). FSAs do not require a high-deductible plan, so you can have one with any health insurance.

HSAs are better if you want to save money long-term, because the balance grows year to year. FSAs are better if you know you will have large medical expenses this year and want to use pretax money to cover them.

You cannot have both an HSA and an FSA at the same time, with one exception: you can have an HSA and a limited-purpose FSA that only covers dental and vision expenses.

How to open an HSA and what you need

First, enroll in a high-deductible health plan. If your employer offers one, you can choose it during open enrollment. If not, you can buy one on the health insurance marketplace (Healthcare.gov or your state's marketplace) during the annual enrollment period or if you have a may have access to life event.

Once you have the HDHP, you can open an HSA at a bank, credit union, or through your health insurance company. You will need your Social Security number, proof of enrollment in the HDHP, and a government ID. Some employers set up HSAs automatically when you enroll in their HDHP; others require you to open one on your own.

There is no fee to open an HSA, though some providers charge monthly maintenance fees or investment fees if you invest the balance. Compare providers before you choose one.

Frequently Asked Questions

Can I have an HSA if I am on Medicare?

No. Once you enroll in Medicare, you cannot contribute to an HSA anymore. If you already have an HSA, you can keep it and withdraw money for medical expenses tax-free, but you cannot add new money to it.

What if I do not use all my HSA money in a year?

The money stays in your account and rolls over to the next year. There is no deadline to spend it, and no penalty for leaving it there. You can build a large balance over time and use it for medical expenses whenever you need it.

Can I use HSA money to pay health insurance premiums?

You can use it to pay premiums for long-term care insurance or health insurance while you are unemployed (COBRA or marketplace coverage). You cannot use it to pay premiums for your current employer health plan or Medicare premiums, with limited exceptions for Medicare supplemental insurance.

What if I withdraw money and later find out it was not a covered expense?

You owe income tax on that amount plus a 20 percent penalty. If you discover this during an audit, the IRS will calculate what you owe. Some people put the money back into the HSA to correct the mistake, though the IRS does not require this.

Can I move my HSA to a different provider?

Yes. You can roll over your HSA balance to another bank or provider without penalty. Contact your current provider about their rollover process. The new provider will give you instructions for transferring the money.