A health savings account pays for medical expenses tax-free, but only specific ones

A health savings account (HSA) is a bank account where you set aside money to pay for medical costs without paying federal income tax on it. The money you put in reduces your taxable income. The money you withdraw for may have access to medical expenses is never taxed. You keep the account even if you change jobs or health insurance plans, and any balance you don't spend rolls over to the next year.

The catch: you can only use it for certain expenses. The IRS has a specific list of what counts as a may have access to medical expense. If you withdraw money for something not on that list, you pay income tax on the withdrawal plus a 20 percent penalty—unless you're over 65, in which case you pay the tax but not the penalty.

Key Takeaways

  • You can use HSA funds to pay for doctor visits, prescription drugs, dental work, vision care, mental health treatment, and medical equipment without paying federal income tax on the withdrawal.
  • Over-the-counter medications and supplies like pain relievers, allergy medicine, and bandages are covered only if you have a prescription or a doctor's written order.
  • Gym memberships, cosmetic procedures, and general wellness products are not covered, even if they improve your health.
  • You can withdraw money to reimburse yourself for medical expenses you paid out of pocket in previous years, as long as you have receipts and the expense was incurred after you opened the account.
  • After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as income.

Medical expenses you can pay for with HSA funds

The IRS allows HSA withdrawals for most costs related to diagnosis, treatment, or prevention of disease. This includes doctor and dentist visits, hospital stays, surgery, X-rays, lab tests, and prescription medications. Mental health treatment—therapy, psychiatry, and medications for mental illness—counts. So do hearing aids, glasses, contact lenses, and the exams to fit them.

Dental work covered by your health insurance is covered by your HSA. So is dental work not covered by insurance: root canals, crowns, implants, and orthodontia all may have access to. Vision correction surgery like LASIK is covered. Fertility treatment, including IVF and medications, is covered. Insulin pumps, continuous glucose monitors, and other medical devices are covered.

Nursing home care and long-term care facilities count as may have access to expenses if the primary reason you're there is medical care. Home care services provided by a nurse or aide also count. Prescription birth control is covered. Over-the-counter pain relievers, cold medicine, allergy medicine, and antacids are covered only if you have a prescription from a doctor or a written order stating medical necessity.

What you cannot use HSA money for

Gym memberships and fitness classes are not covered, even if your doctor recommends exercise. Vitamins and supplements are not covered unless they treat a specific diagnosed deficiency and you have a doctor's prescription. Cosmetic procedures—teeth whitening, Botox, hair removal—are not covered. Weight loss programs and diet plans are not covered unless they treat obesity as a disease and a doctor prescribes the specific program.

General wellness products like essential oils, herbal remedies, and over-the-counter sleep aids are not covered. Sunscreen is not covered. Toothpaste and mouthwash are not covered. Maternity clothes are not covered, though prenatal vitamins with a prescription are. Childcare is not covered, even if you need it to attend medical appointments.

Insurance premiums themselves are generally not covered—you cannot use HSA money to pay your health insurance premium, with three exceptions: COBRA continuation coverage, Medicare premiums (after age 65), and long-term care insurance premiums (up to certain limits).

How to pay for expenses: direct payment or reimbursement

You can use your HSA debit card to pay a provider directly at the time of service. The card works like any other debit card, and the transaction is recorded in your HSA account. Some providers' billing systems are set up to accept HSA cards; others are not, so you may need to pay out of pocket and request reimbursement later.

You can also pay a medical expense with your own money and then withdraw an equal amount from your HSA to reimburse yourself. You do not need to do this immediately—you can pay out of pocket now and reimburse yourself years later, as long as you keep the receipt and the expense was incurred after you opened the account. This strategy lets you leave money in the HSA to grow tax-free while you cover current costs with other funds.

Keep receipts and documentation for all expenses you reimburse yourself for. The IRS does not require you to submit receipts when you withdraw money, but you must be able to produce them if audited, and your HSA custodian may ask for them to verify the withdrawal is may have access to.

HSA funds after age 65 and what happens to unused money

After you turn 65, you can withdraw money from your HSA for any reason without the 20 percent penalty. Non-medical withdrawals are still taxed as regular income, but the penalty goes away. This makes an HSA function like a traditional retirement account after 65, though it remains more flexible because you can still withdraw for medical expenses tax-free.

Any money you don't spend in your HSA stays in the account and rolls over to the next year. There is no "use it or lose it" deadline. The account continues to grow tax-free as long as you own it. If you die, the account passes to your beneficiary according to the terms you set when you opened it. If your beneficiary is your spouse, they can treat it as their own HSA. If your beneficiary is anyone else, the account is taxed as income to them in the year of your death.

Frequently Asked Questions

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

Yes. As long as you claim them as dependents on your tax return, you can use your HSA to pay for their may have access to medical expenses. You do not need to be covered by the same health insurance plan. The money in your HSA is yours to use for any dependent's medical costs.

What if I buy something over the counter and later find out it's not covered?

If you withdraw HSA funds for a non-may have access to expense, you owe income tax on the withdrawal plus a 20 percent penalty. You should report this on your tax return. If you made a mistake, you can sometimes correct it by redepositing the money within a certain timeframe, but rules vary by HSA custodian, so contact yours immediately if this happens.

Can I use my HSA to pay for a medical expense from before I opened the account?

No. You can only reimburse yourself for expenses incurred on or after the date you opened the account. If you had medical bills from the previous year, you cannot use HSA funds to pay them retroactively.

Do I have to spend my HSA money every year, or does it carry over?

HSA money carries over completely. There is no annual limit on how much you can accumulate. You can let it grow for years and withdraw it whenever you need it for a may have access to expense, even decades later.

What counts as a "prescription" for over-the-counter items?

A prescription means a written order from a licensed doctor, dentist, or other may have access to medical provider. The prescription must state that the specific over-the-counter item is medically necessary to treat a diagnosed condition. A general recommendation to "take pain relievers" is not enough; the provider must write an order for that specific medication.