What a Health Savings Account Is

A Health Savings Account (HSA) is a tax-advantaged savings account you can open if you have a high-deductible health insurance plan. Money you put into an HSA is not taxed when you deposit it, the money grows without being taxed, and you do not pay taxes when you withdraw it to pay for medical expenses. This triple tax advantage is what makes an HSA different from a regular savings account.

You own the HSA yourself — it is not tied to your employer or your insurance company, even if your employer helps you set one up. Any money left in the account at the end of the year stays there and keeps growing. Unlike a Flexible Spending Account (FSA), which forces you to use the money or lose it, an HSA rolls over indefinitely.

The account is meant to cover medical costs: doctor visits, prescriptions, dental work, vision care, and medical equipment. You can also use HSA money to pay the premiums on certain insurance policies, including long-term care insurance. The IRS publishes a full list of what counts as a medical expense.

Key Takeaways

  • You can only open an HSA if you are covered by a high-deductible health plan (HDHP), which has a deductible of at least $1,600 for individual coverage or $3,200 for family coverage in 2024.
  • Money you deposit into an HSA is not taxed, grows without being taxed, and is not taxed when you withdraw it for medical expenses — giving you three layers of tax savings.
  • You own the HSA even if your employer sets it up, and any unused money stays in the account year to year instead of disappearing.
  • You can withdraw HSA money for non-medical expenses, but you will owe income tax plus a 20 percent penalty on that amount unless you are over 65.
  • HSAs are offered through banks, credit unions, and investment firms — not through your insurance company — and you can move your HSA to a different provider if you want.

Who Can Open an HSA

To open an HSA, you must be covered by a high-deductible health plan (HDHP). For 2024, an HDHP has a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. Your out-of-pocket maximum (the most you would pay in a year before insurance covers everything) must be no more than $4,150 for individual coverage or $8,300 for family coverage. These numbers change each year.

You cannot have other health insurance at the same time — no spouse's plan, no parent's plan, no second policy. You also cannot be covered by Medicare or claimed as a dependent on someone else's tax return. If you are self-employed, you can still open an HSA as long as you have an HDHP.

Your employer does not have to offer an HSA for you to open one. You can search for HSA providers on your own and open an account directly. Many banks and investment firms offer HSAs, and you can compare their fees and features before choosing.

How Much You Can Deposit Each Year

The IRS sets annual limits on how much you can deposit into an HSA. For 2024, the limit is $4,150 if you have individual coverage or $8,300 if you have family coverage. If you are 55 or older, you can deposit an extra $1,000 per year (called a catch-up contribution). These limits reset on January 1 each year.

If your employer contributes to your HSA, that money counts toward your limit. For example, if your employer deposits $2,000 and you deposit $1,500, you have used $3,500 of your $4,150 limit. You cannot exceed the annual limit, and if you do, the IRS will charge you a tax penalty on the overage.

You can deposit money into your HSA at any time during the year, but you have until the tax filing deadline (usually April 15) to make deposits that count toward the previous year's limit. This is called the catch-up period.

How to Use HSA Money for Medical Expenses

When you have a medical expense, you can withdraw money from your HSA to pay for it. You do not need approval from your insurance company or your employer — the HSA is your account, and you decide when to withdraw. Most HSA providers give you a debit card linked to the account, so you can pay at the doctor's office or pharmacy directly.

You can also pay the expense out of pocket and then reimburse yourself from your HSA later, even months or years later. Keep your receipts and records, because the IRS can ask you to prove that the money went toward a medical expense. If you cannot show proof, the withdrawal is treated as a non-medical withdrawal and you owe taxes and penalties.

Medical expenses that count include doctor visits, hospital stays, prescription drugs, dental work, vision care, hearing aids, and medical equipment like crutches or blood pressure monitors. The IRS website has a searchable database of approved medical expenses. Some common items like over-the-counter pain relievers now count, but others like cosmetic surgery do not.

What Happens If You Use HSA Money for Non-Medical Expenses

If you withdraw money from your HSA for something that is not a medical expense, you owe income tax on that amount plus a 20 percent penalty. For example, if you withdraw $500 for a vacation, you would owe income tax on the $500 (at your tax bracket rate) plus $100 in penalties. This makes non-medical withdrawals expensive.

The one exception is if you are 65 or older. After 65, you can withdraw HSA money for any reason without the 20 percent penalty. You still owe income tax on non-medical withdrawals, but the penalty goes away. This is why some people use an HSA as a retirement savings account — they let the money grow for decades and then use it for any purpose after 65.

If you withdraw money by mistake or change your mind, some HSA providers will let you return the money within a short window (usually a few days) without penalty. Check your provider's policy.

HSA Providers and How to Choose One

HSAs are offered by banks, credit unions, and investment firms — not by your insurance company. Your employer may have partnered with one provider and set up payroll deductions, but you are not required to use that provider. You can open an HSA with a different company if you want better features or lower fees.

When comparing HSA providers, look at the account fees (some charge monthly maintenance fees, others do not), the investment options (some let you invest the money in stocks and bonds, others keep it in cash), and the debit card features (some charge per transaction, others do not). A provider with no monthly fee and low investment expenses will cost you less over time.

If you already have an HSA with one provider and want to move it to another, you can do a trustee-to-trustee transfer. The money moves directly from one account to the other without being taxed or counted against your annual deposit limit. You can do this as often as you want.

HSA vs. FSA: Key Differences

An HSA and a Flexible Spending Account (FSA) are both tax-advantaged accounts for medical expenses, but they work differently. With an FSA, you must use the money within the plan year or lose it — there is no rollover. With an HSA, unused money stays in the account forever. This makes an HSA more flexible if you are not sure how much you will spend on medical care.

An FSA is offered only through your employer, and you cannot open one on your own. An HSA can be opened through your employer or on your own. An FSA does not require a high-deductible health plan, but an HSA does. If your employer offers both, you can usually choose one or the other, but not both in the same year.

An FSA has a lower annual limit (usually $3,200 for 2024) than an HSA. An HSA lets you invest the money in stocks and bonds, while an FSA typically keeps the money in cash. For most people, an HSA is more valuable because the money does not disappear and you can grow it over time.

Frequently Asked Questions

Can I open an HSA if my spouse has a regular health insurance plan?

No. If you are married and file taxes jointly, both spouses must have high-deductible plans to open HSAs. If one spouse has a regular plan, neither of you can open an HSA. If you file taxes separately, each spouse can have their own HSA as long as they each have an HDHP.

What happens to my HSA if I change jobs?

Your HSA stays with you. It is not tied to your employer, so you keep the account and the money even after you leave. If your new employer offers an HSA, you can keep your old one or open a new one. You can have multiple HSAs, but your total deposits across all accounts cannot exceed the annual limit.

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

Yes. HSA money can be used to pay for medical expenses of you, your spouse, and your dependents — even if they are not on your health insurance plan. Keep receipts showing whose expense it was, in case the IRS asks.

Do I have to invest my HSA money, or can I leave it in cash?

You can do either. Some HSA providers let you keep the money in a cash account that earns a small amount of interest. Others let you invest in mutual funds or stocks. You decide based on how long you plan to keep the money and how much risk you want to take.

What if I do not use all my HSA money before I turn 65?

The money stays in the account. After 65, you can withdraw it for any reason without the 20 percent penalty — you only owe income tax on non-medical withdrawals. Many people use HSAs as retirement savings accounts for this reason.