How money moves in and out of your HSA

A Health Savings Account is a bank account you own 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, or other may have access to medical costs. The account stays yours — if you change jobs or retire, the money comes with you.

The money flows in three ways. First, you can contribute directly from your paycheck if your employer offers it — your employer deducts the amount before taxes are calculated, so a $200 contribution reduces your taxable income by $200. Second, you can contribute on your own during tax season by sending money to the HSA provider and deducting it when you file. Third, your employer may contribute money to your account as part of your benefits package, and that money is also tax-free to you.

Money flows out when you pay for medical care. You can withdraw funds to cover deductibles, copays, prescriptions, dental and vision care, mental health treatment, medical equipment, and dozens of other may have access to expenses. You do not need your employer's permission — you control the account and decide when to withdraw. The withdrawal itself is tax-free as long as you use it for a may have access to expense.

Key Takeaways

  • You must be enrolled in a high-deductible health plan (HDHP) to open or contribute to an HSA, and you cannot be covered by other health insurance or claimed as a dependent on someone else's taxes.
  • Contributions reduce your taxable income, earnings grow tax-free, and withdrawals for may have access to medical expenses are tax-free — a triple tax advantage that no other account offers.
  • The money is yours to keep and carry forward year to year; unused balances do not disappear, and you can take the account with you if you change jobs.
  • You can invest HSA funds in stocks, bonds, or mutual funds rather than leaving the money in a savings account, though investment options depend on your provider.
  • Withdrawals for non-medical expenses are taxed as income plus a 20 percent penalty before age 65; after 65, the penalty disappears but income tax still applies.

Who can open an HSA and when

You can open an HSA only if you are enrolled in a high-deductible health plan (HDHP) — a health insurance plan with a higher deductible than standard plans. In 2024, an HDHP for individual coverage has a minimum deductible of $1,600 and a maximum out-of-pocket limit of $4,150; for family coverage, the minimum deductible is $3,200 and the maximum out-of-pocket limit is $8,300. These numbers change each year. Your health insurance documents will tell you whether your plan qualifies.

You also cannot be covered by any other health insurance at the same time — not Medicare, not Medicaid, not a spouse's plan, and not coverage through a parent if you are claimed as a dependent. If you have dental or vision insurance through a separate plan, that is usually allowed, but you need to check the rules with your HSA provider because some employers have stricter policies.

You can open an HSA during the year your HDHP starts, or any time afterward as long as you remain enrolled in an HDHP. If you lose HDHP coverage mid-year, you can still contribute for that year, but only up to the date you lost coverage. If you turn 65 and enroll in Medicare, you can no longer contribute to an HSA, though you can still withdraw money from an existing account for medical expenses.

Contribution limits and how they work

The IRS sets a maximum amount you can contribute each year. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. If you are 55 or older, you can contribute an additional $1,000 per year — called a catch-up contribution — bringing your total to $5,150 or $9,300. These limits change annually and are announced by the IRS in the fall for the following year.

Your contributions can come from your paycheck, from your own bank account, or from your employer. If your employer contributes money to your HSA, that amount counts toward your limit. For example, if your employer puts $2,000 into your account and you contribute $2,000 from your paycheck, you have reached the $4,150 individual limit and cannot contribute more that year.

You can contribute at any time during the year, but most people contribute through payroll deduction because it is automatic and reduces their taxable income immediately. If you contribute on your own, you deduct the contribution when you file your tax return. You have until the tax filing deadline (usually April 15) to make contributions for the previous year.

What counts as a may have access to medical expense

The IRS maintains a detailed list of expenses you can pay for with HSA funds tax-free. Common ones include doctor visits, hospital stays, surgery, prescription medications, dental work, vision care, mental health counseling, physical therapy, and medical equipment like wheelchairs or hearing aids. You can also use HSA funds for over-the-counter medications (with a prescription from your doctor), insulin, and certain vitamins if prescribed by a doctor.

Expenses that do not count include cosmetic surgery, gym memberships, general wellness products, and most over-the-counter items without a prescription. Long-term care insurance premiums are allowed up to a limit that depends on your age. If you are unsure whether an expense qualifies, your HSA provider can tell you, or you can check IRS Publication 969.

You do not have to use HSA funds immediately. You can pay a medical bill out of pocket and withdraw the same amount from your HSA weeks or months later, as long as you have receipts showing the expense was incurred while you owned the account. This flexibility lets you leave money invested longer if you do not need it right away.

How your money grows and where it sits

HSA funds can sit in a savings account earning interest, or you can invest them in stocks, bonds, mutual funds, or other securities depending on what your provider offers. Many HSA providers require you to keep a minimum balance in savings (often $1,000 to $2,500) before you can invest the rest. The earnings on invested funds are tax-free, just like the contributions.

Different providers offer different investment options. Some are limited to a few mutual funds; others let you build a full brokerage portfolio. If investment options matter to you, compare providers before opening an account. You can also move your HSA to a different provider if your current one does not offer what you want — this is called a trustee-to-trustee transfer and does not count as a withdrawal.

Money you do not spend in a given year rolls forward to the next year. There is no "use it or lose it" deadline like some employer health plans have. This means an HSA can become a long-term savings tool — you can accumulate money over decades and use it for medical expenses in retirement.

What happens if you withdraw money for non-medical expenses

If you withdraw HSA funds for something that is not a may have access to medical expense, the withdrawal is treated as taxable income. You owe income tax on that amount at your regular tax rate. You also owe a 20 percent penalty on top of the income tax. For example, if you withdraw $1,000 for a non-may have access to expense and you are in the 22 percent tax bracket, you owe $220 in income tax plus $200 in penalty, leaving you $580 of the original $1,000.

The penalty applies only to the amount you withdraw for non-medical use, not to your entire account balance. If you withdraw $5,000 and $4,000 is for medical expenses and $1,000 is not, only the $1,000 faces the penalty and income tax.

After age 65, the penalty disappears. You can withdraw money for any reason without the 20 percent penalty, though you still owe income tax on non-medical withdrawals. This makes an HSA function like a traditional retirement account after 65 — you can use it for medical expenses tax-free, or for anything else and pay only income tax.

Keeping records and proving expenses

You do not have to submit receipts to your HSA provider every time you make a withdrawal. However, you must keep receipts and documentation for at least three years in case the IRS audits you. The IRS can ask you to prove that withdrawals were for may have access to expenses, and if you cannot show documentation, the withdrawal is treated as non-may have access to and you owe taxes and penalties.

Keep receipts from doctors, pharmacies, dentists, and hospitals. If you paid out of pocket and reimbursed yourself from your HSA later, keep both the original receipt and a record of when you withdrew the money. Digital copies are acceptable — photograph or scan your receipts and store them in a folder or cloud service.

Some HSA providers offer debit cards that you can use to pay medical providers directly. When you use the card, the provider reports the transaction to your HSA provider, creating an automatic record. This reduces paperwork, though you should still keep your own copies of receipts.

Moving your HSA if you change jobs

Your HSA belongs to you, not your employer. If you leave your job, the account stays open and the money remains yours. You can continue to use it for medical expenses, and you can continue to invest it. You cannot make new contributions unless you are still enrolled in an HDHP through another employer or through the individual market.

Some employers use a third-party HSA provider (like Fidelity, HealthEquity, or Lively) that you can access directly. Others use a provider tied to the employer's benefits system. If your employer's provider is tied to your employment, you may need to move your account to a provider you can access independently. This is done through a trustee-to-trustee transfer — you contact your new provider, give them your old provider's information, and they handle the move without you touching the money. There is no tax consequence and no limit to how many times you can transfer.

Frequently Asked Questions

Can I use my HSA to pay my health insurance premium?

You cannot use HSA funds to pay your regular monthly health insurance premium. However, you can use HSA funds to pay COBRA premiums (if you lose employer coverage), Medicare premiums (after age 65), and long-term care insurance premiums up to an age-based limit. Check with your HSA provider about which premiums they allow.

What happens to my HSA if I lose my HDHP coverage?

Your HSA account stays open and the money remains yours. You can withdraw it for may have access to medical expenses anytime. You cannot make new contributions once you lose HDHP coverage, but you can keep the account open indefinitely and use it in retirement. If you regain HDHP coverage later, you can resume contributions.

Can my spouse and I share one HSA?

No. Each person must have their own HSA. If you are both enrolled in family coverage under an HDHP, you can each open an HSA and contribute up to the family limit combined. For example, if the family limit is $8,300, you might each contribute $4,150, or one person contributes $6,000 and the other contributes $2,300.

Can I invest my HSA in cryptocurrency or individual stocks?

It depends on your provider. Some HSA providers offer brokerage accounts that let you buy individual stocks, ETFs, and other securities. Others limit you to mutual funds or savings accounts. Check your provider's investment options before opening an account, or ask if you can transfer to a provider with broader options.

Do I have to report my HSA on my tax return?

You report HSA contributions when you file your tax return if you contributed on your own (not through payroll). If you contributed through payroll, your employer reports it and you do not need to report it again. You do not report withdrawals for may have access to medical expenses. If you made non-may have access to withdrawals, you report those as income on your return.