How money moves through a health savings account

A health savings account (HSA) is a bank account that holds money specifically for medical expenses. You put pre-tax dollars in, the money sits there earning interest, and you withdraw it to pay for doctor visits, prescriptions, dental work, and other may have access to medical costs. The account stays open year to year — unlike a flexible spending account (FSA), which empties at the end of the year.

The money you contribute reduces your taxable income for that year. If you earn $50,000 and put $3,000 into an HSA, you only report $47,000 to the IRS. That means you pay income tax on less money. You also do not pay payroll taxes (Social Security and Medicare) on HSA contributions, which saves you roughly 7.65% right there.

Once the money is in the account, it belongs to you. Your employer does not take it back if you leave the job. You do not lose it if you do not use it that year. It accumulates, and you can use it years later — even in retirement.

Key Takeaways

  • You contribute pre-tax money to an HSA, which lowers your taxable income and the taxes you owe that year.
  • The money rolls over year to year and earns interest, so an HSA can function as a long-term savings account if you do not need it for immediate medical costs.
  • You can withdraw money tax-free only for may have access to medical expenses — doctor visits, prescriptions, dental, vision, and some medical equipment, but not insurance premiums or cosmetic procedures.
  • If you withdraw money for non-medical expenses before age 65, you pay income tax on it plus a 20% penalty; after 65, you pay only income tax.
  • You must be enrolled in a high-deductible health plan (HDHP) to open and contribute to an HSA, but you can keep the account open even if you switch to a different insurance plan later.

Who can open an HSA and when

You must be enrolled in a high-deductible health plan (HDHP) to open an HSA. An HDHP is an insurance plan with a higher deductible than a standard plan — meaning you pay more out of pocket 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. Your employer may offer an HDHP as one of the plan choices during open enrollment, or you can buy one on the individual market.

You cannot have other health insurance at the same time — no spouse's plan, no parent's plan, no separate coverage. You also cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare.

If you meet these rules, you can open an HSA through your employer (if they offer one), through a bank, or through a financial services company. The account is yours to manage, even if your employer helped you set it up. If you leave that job, the account stays open and the money stays yours.

How much you can contribute each year

The IRS sets annual contribution limits, and they change slightly each year. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. These limits include contributions from both you and your employer — if your employer puts in $1,000, you can only add $3,150 more.

If you are 55 or older, you can contribute an extra $1,000 per year (called a catch-up contribution). This extra amount is available only to you, not your employer.

You can contribute at any time during the year, but contributions for a given tax year must be made by the tax filing deadline (usually April 15 of the following year). If you enroll in an HDHP partway through the year, you can still contribute a full year's amount if you remain in the plan through December 31.

What you can and cannot buy with HSA money

You can withdraw money tax-free for may have access to medical expenses. These include doctor visits, hospital stays, surgery, prescription medications, dental work, vision care, hearing aids, and certain medical equipment like blood pressure monitors or crutches. You can also use HSA money to pay your insurance deductible, copays, and coinsurance.

You cannot use HSA money for health insurance premiums (with three exceptions: COBRA coverage, Medicare premiums once you turn 65, and long-term care insurance). You also cannot use it for cosmetic procedures, over-the-counter medications (unless prescribed by a doctor), gym memberships, or vitamins.

The IRS publishes a detailed list of may have access to expenses. If you are unsure whether something counts, ask your HSA provider before you withdraw the money. If you withdraw money for a non-may have access to expense, you owe income tax on that amount plus a 20% penalty.

How to withdraw money and keep records

Most HSAs come with a debit card that you can use at pharmacies, doctor offices, and hospitals. Some accounts also let you write checks or transfer money to your bank account. When you use the card, the transaction is usually flagged as medical, so keep your receipts anyway — the IRS can ask you to prove that withdrawals were for may have access to expenses.

You do not have to withdraw money in the same year you incur the expense. You can pay a medical bill out of pocket and then reimburse yourself from the HSA months or years later, as long as you have receipts. This flexibility lets you use the HSA as a savings account if you do not need the money right away.

Keep records of all medical expenses and all HSA transactions. The IRS does not require you to submit receipts with your tax return, but you must have them if you are audited. Your HSA provider will send you a statement each year showing contributions and withdrawals.

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

If you withdraw money before age 65 for something that is not a may have access to medical expense, you owe income tax on that amount plus a 20% penalty. For example, if you withdraw $1,000 for a non-may have access to expense and you are in the 22% tax bracket, you would owe $220 in income tax plus $200 in penalty — a total of $420 on top of losing the $1,000.

After age 65, the penalty goes away. You can withdraw money for any reason, but you still owe income tax on non-medical withdrawals. This makes the HSA function like a traditional IRA after 65 — a retirement savings account with tax-deferred growth.

If you accidentally withdraw money for a non-may have access to expense, you can sometimes put it back into the account (called a recontribution) within a certain timeframe. Ask your HSA provider about their recontribution policy.

What happens to your HSA if you change jobs or insurance

Your HSA is yours to keep. If you leave your job, the account does not close and the money does not disappear. You can roll it over to a new HSA at a different bank or financial institution, or you can leave it where it is and manage it on your own.

If you switch to a non-HDHP insurance plan (like a traditional PPO or HMO), you can no longer make new contributions to the HSA. However, you can still withdraw money from the account for may have access to medical expenses. The account sits there until you use it up or until you turn 65, at which point you can withdraw for any reason.

If you enroll in Medicare, you must stop contributing to the HSA. You can still use the money in the account for may have access to medical expenses, including Medicare premiums and out-of-pocket costs.

How HSA money grows over time

Most HSAs offer investment options — you can keep the money in a savings account earning interest, or you can invest it in mutual funds or other securities. If you invest the money, it can grow faster than in a regular savings account, but it also carries risk. Some people use their HSA as a long-term retirement savings tool, investing the money and letting it compound for decades.

The growth is tax-free as long as you use the money for may have access to medical expenses. If you withdraw for non-medical reasons, you owe tax on the growth plus the 20% penalty (if you are under 65).

Your HSA provider will send you tax forms (usually a Form 1099-SA) showing how much you withdrew and how much growth occurred. You do not report HSA contributions on your tax return — your employer reports them, or you deduct them if you opened the account on your own.

Frequently Asked Questions

Can I use HSA money 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 three exceptions are COBRA coverage (if you lose your job), Medicare premiums (once you turn 65), and long-term care insurance. You can use HSA money for your insurance deductible, copays, and coinsurance.

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

The money rolls over to the next year. Unlike a flexible spending account (FSA), there is no "use it or lose it" rule. You can let the money accumulate for years and use it whenever you need it. If you invest the money, it can grow tax-free.

Can I withdraw HSA money for my spouse's medical expenses?

Yes, if your spouse is your dependent for tax purposes. You can also withdraw for your children's medical expenses and your parents' medical expenses if you claim them as dependents. The money must be used for may have access to medical expenses, and you need receipts.

What happens to my HSA if I die?

The money passes to your beneficiary (usually your spouse or estate). If your spouse inherits the HSA, they can treat it as their own account and continue using it for medical expenses. If anyone else inherits it, they owe income tax on the full balance, though they can still use it for the deceased person's medical expenses incurred before death.

Can I have an HSA and a flexible spending account (FSA) at the same time?

No. You cannot contribute to both in the same year. However, you can have a limited-purpose FSA that covers only dental and vision expenses, and pair it with an HSA. Ask your employer whether this option is available.