A health savings account is a tax-advantaged savings account you own, not your employer

A health savings account (HSA) is a bank account that holds money specifically for medical expenses. You contribute pre-tax dollars, the money grows tax-free, and you withdraw it tax-free when you pay for may have access to medical costs. Unlike a flexible spending account (FSA) that your employer runs and you lose money in if you don't spend it by year-end, an HSA is yours to keep and use whenever you need it—even after you leave your job.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP)—a type of health insurance with lower monthly premiums but higher out-of-pocket costs before insurance kicks in. You cannot have an HSA if you are covered by any other health insurance, enrolled in Medicare, or claimed as a dependent on someone else's tax return.

The account works like a savings account with a debit card. You deposit money (either through payroll deduction or on your own), and you can withdraw it to pay doctors, pharmacies, hospitals, and other may have access to providers. Money you don't spend stays in the account and earns interest or investment returns, depending on how you set it up.

Key Takeaways

  • You must be enrolled in a high-deductible health plan to open an HSA, and the account belongs to you, not your employer.
  • Contributions reduce your taxable income, growth is tax-free, and withdrawals for may have access to medical expenses are tax-free—a triple tax advantage.
  • Money you don't spend stays in your account and rolls over year to year, unlike FSAs which have a use-it-or-lose-it rule.
  • You can withdraw money for any reason, but non-medical withdrawals before age 65 are taxed as income plus a 20 percent penalty.
  • After age 65, you can withdraw money for any reason without the penalty, though non-medical withdrawals are still taxed as regular income.

Contribution limits and how much you can put in each year

The IRS sets annual contribution limits that change each year. For 2024, the limit is $4,150 for individual coverage and $8,300 for family coverage. These limits apply to all HSA contributions combined—whether you contribute through payroll, make deposits on your own, or your employer contributes on your behalf. If you are age 55 or older, you can add an extra $1,000 per year (called a catch-up contribution).

You can contribute at any time during the year, but contributions for a 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 worth of funds if you remain enrolled through December 31 and the following March 31—this is called the testing period.

Many employers offer payroll deduction, which means the contribution comes straight from your paycheck before taxes are calculated. This is the easiest route because you see the tax savings immediately. You can also deposit money yourself and claim the deduction on your tax return, though you will need to track it carefully.

What counts as a may have access to medical expense

may have access to expenses include doctor visits, hospital stays, prescription medications, dental work, vision care, mental health treatment, and medical equipment like wheelchairs or hearing aids. Copays, coinsurance, and deductibles all count. Over-the-counter medications (like pain relievers or cold medicine) count only if you have a prescription from a doctor.

Expenses that do not count include health insurance premiums (with narrow exceptions for COBRA, long-term care insurance, and Medicare premiums after age 65), cosmetic procedures, gym memberships, and vitamins unless prescribed by a doctor for a specific medical condition. If you are unsure whether an expense qualifies, the IRS publishes a detailed list, and your HSA provider can usually tell you on the spot.

You do not have to spend the money in the same year you contribute it. Unlike an FSA, there is no deadline to use HSA funds. You can let the money sit and grow for years, then withdraw it whenever you have a may have access to expense. This makes an HSA a long-term savings tool, not just a way to pay this year's medical bills.

How to access your money and pay for care

Most HSA providers issue a debit card linked to your account. You can swipe it at the pharmacy, doctor's office, or hospital just like a regular debit card. The transaction is deducted from your HSA balance. Some providers also let you set up automatic bill pay or transfer money to your bank account.

If you pay out of pocket and want to reimburse yourself later, you can withdraw the money and deposit it into your personal checking account. Keep receipts and documentation—the IRS does not require you to submit them when you withdraw, but you must be able to prove the expense was may have access to if you are ever audited.

You can also leave the money invested. Many HSA providers let you invest your balance in mutual funds or other securities, similar to a 401(k). The earnings grow tax-free. This strategy makes sense if you have enough money to cover your near-term medical costs and want to build long-term savings.

Tax advantages and how they work

An HSA offers three tax breaks. First, contributions reduce your taxable income for the year—if you contribute $3,000, your taxable income drops by $3,000, which lowers your federal income tax bill. Second, any interest or investment gains in the account are not taxed. Third, withdrawals for may have access to medical expenses are not taxed. Combined, this makes an HSA one of the most tax-efficient savings accounts available.

If your employer contributes to your HSA, that money is not counted as taxable income to you. It reduces your paycheck but does not count toward your income for tax purposes. If you contribute on your own, you claim the deduction on your tax return (Form 1040, line 12, or Schedule 1 if you use the standard deduction).

The tax advantage shrinks if you withdraw money for non-medical reasons. Before age 65, non-medical withdrawals are taxed as ordinary income plus a 20 percent penalty. After age 65, the penalty goes away, but the withdrawal is still taxed as income. This discourages early or frivolous withdrawals but does not lock your money away forever.

What happens to your HSA when you change jobs or retire

Your HSA is portable—it stays with you no matter where you work. When you leave a job, the account remains yours. You can keep contributing to it as long as you stay enrolled in an HDHP, even if you are self-employed or between jobs. If you switch to a different health plan that is not an HDHP, you can no longer contribute, but you can still withdraw money for may have access to expenses.

At age 65, you become may be able to access for Medicare, and you can no longer contribute to an HSA (because Medicare is not an HDHP). However, you can still withdraw money for may have access to medical expenses tax-free. After 65, you can also withdraw money for any reason without the 20 percent penalty—though non-medical withdrawals are taxed as regular income, just like a traditional IRA.

If you die, your HSA passes to your beneficiary (usually your spouse or estate). A spouse can treat the HSA as their own and continue using it. Other beneficiaries must withdraw the balance, and non-medical amounts are taxed as income in the year of withdrawal.

How HSAs compare to FSAs and other savings options

A flexible spending account (FSA) is similar to an HSA but has key differences. FSAs are run by your employer, you lose any unspent money at the end of the year (with a small carryover option in some plans), and you cannot take the account with you if you leave your job. FSAs also have lower contribution limits—$3,300 for 2024. The main advantage of an FSA is that you can access the full year's contribution immediately, even if you have not finished paying it through payroll yet.

A dependent care FSA is separate from a health FSA and covers childcare or elder care expenses, not medical costs. You can have both a health FSA and a dependent care FSA in the same year, but you cannot have an HSA and a health FSA at the same time.

An HSA is generally better for long-term savings because the money is yours, it rolls over indefinitely, and the tax benefits are stronger. An FSA is better if you have predictable medical expenses this year and want to use pre-tax dollars without worrying about investment decisions. If you have the choice between an HDHP with an HSA and a traditional plan with an FSA, the HSA usually wins on cost and flexibility—but only if you can afford the higher deductible.

Frequently Asked Questions

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

Yes, as long as your spouse is covered under your health plan or you file taxes jointly. You can also use HSA funds for your children's medical expenses, even if they are not on your health insurance. The key is that you must be able to claim them as dependents on your tax return.

What happens if I withdraw money for a non-medical reason before age 65?

The withdrawal is taxed as ordinary income, and you owe a 20 percent penalty on top. For example, if you withdraw $1,000 for a non-medical reason, you pay income tax on $1,000 plus $200 in penalties. After age 65, the penalty disappears, but the withdrawal is still taxed as income.

Can I have an HSA if I am self-employed?

Yes, as long as you enroll in an HDHP through the individual market (not through an employer). You can contribute up to the annual limit and deduct the contribution on your tax return. Self-employed people often use HSAs as a retirement savings tool because of the triple tax advantage.

Do I need to submit receipts to my HSA provider when I withdraw money?

No, you do not have to submit receipts at the time of withdrawal. However, you must keep documentation in case of an audit. The IRS can ask you to prove that withdrawals were for may have access to expenses, and if you cannot, you may owe taxes and penalties on those amounts.

What if I have leftover money in my HSA at the end of the year?

Unlike an FSA, leftover money stays in your HSA and rolls over to the next year. You can use it whenever you need it, even years later. There is no deadline to spend it, and there is no penalty for letting it accumulate.