Money goes in before taxes, you spend it on medical costs, and what you don't use rolls over to next year

A Health Savings Account (HSA) is a bank account that holds money you set aside for medical expenses. You contribute money to it, the contribution reduces your taxable income that year, and you can withdraw the money tax-free to pay for may have access to medical costs. Any balance you don't spend stays in the account and grows year to year — there is no "use it or lose it" deadline like some other health accounts have.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) through your employer, the individual market, or Medicare. The HDHP is the gateway; without it, you cannot have an HSA. Once you have the HDHP, you can open an HSA at a bank, credit union, or investment firm, often the same place where your employer's plan is administered.

Key Takeaways

  • You can only open an HSA if you are enrolled in a high-deductible health plan; the HDHP is a requirement, not optional.
  • Money you put into an HSA reduces your taxable income for that year, and withdrawals for may have access to medical expenses are never taxed.
  • Your HSA balance rolls over every year with no deadline to spend it, so you can build a reserve for future medical costs or retirement.
  • You can withdraw money for prescriptions, copays, deductibles, dental work, vision care, and many other medical costs, but not for insurance premiums or over-the-counter items without a prescription.
  • After age 65, you can withdraw HSA money for any reason without penalty, though non-medical withdrawals are taxed as income.

How much you can contribute and who decides

The IRS sets a yearly limit on how much you can put into an HSA. For 2024, the limit is $4,150 if you have individual coverage under an HDHP, or $8,300 if you have family coverage. These limits change each year, and your employer or HSA provider will tell you the current year's cap when you open the account.

You can contribute the full amount yourself, your employer can contribute on your behalf, or you can split the contribution between you and your employer. If your employer offers an HSA, they often make a contribution as part of your benefits package — this is assistance programs that counts toward your limit but does not come out of your paycheck. If you contribute on your own through payroll deduction, that money is taken from your gross pay before income tax is calculated, which lowers your tax bill.

You can contribute until the tax filing deadline of the following year (usually April 15). If you enroll in an HDHP mid-year, you can still contribute a full year's worth of money to your HSA for that year, as long as you remain enrolled in the HDHP through December 31.

What counts as a may have access to medical expense

may have access to medical expenses are costs related to diagnosing, treating, or managing a health condition. Prescriptions, copays, deductibles, coinsurance, dental work, vision care, mental health treatment, and physical therapy all count. You can also use HSA money to pay for medical equipment like crutches, wheelchairs, or blood pressure monitors, and for services like acupuncture or chiropractic care if a doctor orders them.

Over-the-counter items like pain relievers, cold medicine, or allergy tablets do not count unless you have a prescription from a doctor. Insulin is an exception — you can buy insulin over the counter without a prescription and still use HSA money. Health insurance premiums do not count, except for COBRA continuation coverage, Medicare premiums (after age 65), or long-term care insurance premiums.

Cosmetic procedures, gym memberships, and vitamins do not count unless a doctor prescribes them for a specific medical condition. If you are unsure whether a cost qualifies, ask your HSA provider or check IRS Publication 502, which lists all may have access to expenses.

How to withdraw money and what records you need

You withdraw money from your HSA the same way you would from a regular bank account: through a debit card, check, transfer, or online banking. Some HSA providers issue a debit card that works at pharmacies and medical offices. Others require you to pay out of pocket and then request reimbursement from your HSA by submitting receipts and proof of payment.

You do not have to submit receipts to withdraw money, but you must keep them. If the IRS audits your HSA, you need to show that the money you withdrew was spent on may have access to expenses. Keep receipts, explanation of benefits statements, and any documentation from your provider for at least three years. If you cannot prove an expense was may have access to, the IRS will tax that withdrawal as income and may add a 20 percent penalty.

If you withdraw money for a non-may have access to expense before age 65, you owe income tax on that amount plus a 20 percent penalty. After age 65, you can withdraw money for any reason without the penalty, but non-medical withdrawals are taxed as regular income.

How your HSA grows and what happens to unused money

Money in your HSA earns interest or investment returns depending on how you hold it. Some HSA accounts are simple savings accounts that earn a small interest rate. Others let you invest the balance in mutual funds or stocks, similar to a 401(k). The growth is tax-free as long as you use the money for may have access to medical expenses.

Unlike a Flexible Spending Account (FSA), which requires you to spend the money by the end of the year or lose it, an HSA has no deadline. Any balance you do not spend rolls over to the next year, and the year after that. This means you can build a reserve over time and use it for future medical costs, or even save it for retirement.

If you change jobs or leave your employer, your HSA stays with you. The account is yours, not your employer's. You can keep the same HSA, move it to a different provider, or open a new one. Your employer's contribution stops, but your own contributions and the balance you have built up remain yours to use.

What happens to your HSA if you lose your HDHP coverage

Your HSA does not close if you leave your high-deductible health plan. You can keep the account and the money in it, but you cannot make new contributions once you are no longer enrolled in an HDHP. You can still withdraw money for may have access to medical expenses at any time.

If you switch to a different type of health plan — a PPO, HMO, or traditional plan — you keep your HSA balance but cannot add to it. If you re-enroll in an HDHP later, you can start contributing again. This makes an HSA useful as a long-term savings tool: you can build a balance while you have an HDHP, and then draw from it later even if your coverage changes.

If you enroll in Medicare, you can no longer contribute to an HSA, but you can continue to withdraw money for may have access to medical expenses. After age 65, non-medical withdrawals are taxed as income but not penalized, which makes an HSA a flexible retirement savings account if you have built up a large balance.

Common mistakes and how to avoid them

The most common mistake is withdrawing money for something you think is medical but is not. Over-the-counter items, gym memberships, and cosmetic procedures are frequent culprits. Before you withdraw, check whether the expense is on the IRS list of may have access to costs, or ask your HSA provider.

Another mistake is not keeping receipts. You do not have to submit them when you withdraw, but if you are audited, you need proof that the money went to may have access to expenses. Keep receipts and explanation of benefits statements for at least three years.

A third mistake is treating an HSA like a regular savings account and forgetting it exists. If you have an HSA through your employer, check the balance once a year and review what you spent. If you change jobs, make sure you know where your HSA is and how to access it. Some people lose track of old HSA accounts and never use the balance.

Frequently Asked Questions

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's medical costs. The person receiving the care does not have to be covered by your HDHP.

What if I withdraw money from my HSA and later find out it was not a may have access to expense?

You owe income tax on that amount. If you are under 65, you also owe a 20 percent penalty. If you discover the mistake before filing your tax return, you can deposit the money back into your HSA and avoid the tax and penalty. After you file, you would need to amend your return or pay the tax owed.

Can I use my HSA to pay for my health insurance deductible?

Yes. Your deductible is a may have access to medical expense, so you can use HSA money to pay it. You can also use HSA money for copays, coinsurance, and any other out-of-pocket costs your plan requires. You cannot use it to pay the monthly premium itself.

Do I have to use my HSA every year or does the money expire?

No expiration date. Money in your HSA rolls over year to year indefinitely. You can let it sit and grow, or withdraw it whenever you have a may have access to medical expense. This is different from a Flexible Spending Account, which has a deadline to spend the money.

What happens to my HSA if I die?

Your HSA becomes part of your estate. If your spouse is the beneficiary, they can continue to use the account for their own may have access to medical expenses and the money keeps its tax-free status. If a non-spouse inherits the HSA, they owe income tax on the full balance, though they can still use it for the deceased person's medical expenses incurred before death.