How Health Savings Accounts Work: Contributions, Growth, and Withdrawals

How an HSA works in three parts

A Health Savings Account (HSA) is a bank account you own that holds money specifically for medical expenses. You put pre-tax money in, 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), the money stays yours — it does not disappear at the end of the year, and you can carry it forward indefinitely.

The account itself is held at a bank, credit union, or financial institution that offers HSA products. You control it completely. You decide how much to contribute each year (within IRS limits), how to invest the balance if you choose to, and when to withdraw money for medical expenses. There is no employer involvement after the account is set up, even if your employer helped you open it.

The three moving parts are: money going in (contributions), money growing (investment), and money going out (withdrawals for medical costs). Each part has specific rules about what counts, how much you can do, and what the tax treatment is.

Key Takeaways

• You must be enrolled in a high-deductible health plan (HDHP) to open or contribute to an HSA, but once the account exists, you can keep it even if you switch to a different type of insurance.
• Contributions are capped by the IRS each year — $4,150 for individual coverage and $8,300 for family coverage in 2024, with an extra $1,000 if you are 55 or older.
• Money in an HSA grows tax-free and can be invested in stocks, bonds, or mutual funds, not just held as cash.
• Withdrawals for may have access to medical expenses (copays, deductibles, prescriptions, dental, vision, and many other costs) are tax-free; non-medical withdrawals are taxed as income plus a 20 percent penalty before age 65.
• After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as regular income.

Who can open and contribute to an HSA

To open an HSA or add money to one, you must be covered by a high-deductible health plan (HDHP) for the entire month. The IRS defines an HDHP by its deductible amount and out-of-pocket maximum. For 2024, an HDHP for individual coverage has a deductible of at least $1,600 and an out-of-pocket maximum of no more than $3,200. For family coverage, the deductible must be at least $3,200 and the out-of-pocket maximum no more than $6,400. These numbers change annually.

You cannot have other health insurance at the same time — not a spouse's plan, not Medicare, not a Veterans Affairs plan, not coverage through a parent if you are over 26. The only exceptions are specific types of coverage that do not count as disqualifying: dental-only plans, vision-only plans, workers' compensation, and certain accident or disability policies.

If you lose HDHP coverage mid-year, you can still contribute to your HSA for the months you were covered, but you must calculate the amount proportionally. If you gain HDHP coverage mid-year, you can contribute only for the months remaining. This is called the testing period rule, and it matters because the IRS penalizes over-contributions.

How much you can contribute each year

The IRS sets annual contribution limits, and they vary by the type of coverage you have. For 2024, you can contribute up to $4,150 if you have individual HDHP coverage, or $8,300 if you have family coverage. These limits include contributions from your employer, your spouse, and yourself — they are a combined ceiling, not separate ones.

If you are 55 or older by December 31 of the tax year, you can contribute an additional $1,000 on top of the standard limit. This is called a catch-up contribution. If both you and your spouse have HSAs and are both 55 or older, you each get your own $1,000 catch-up, for a total of $2,000 extra between the two accounts.

You can contribute money at any time during the year, and you have until the tax filing important date (usually April 15 of the following year) to make contributions for the previous tax year. Many people contribute monthly, some contribute in a lump sum, and some let their employer deduct contributions from their paycheck. The timing does not matter as long as you stay within the annual limit and remain HDHP-covered for the months you are contributing.

How money in an HSA grows

Once money is in your HSA, it can sit as cash in the account, or you can invest it in stocks, bonds, mutual funds, or other securities — depending on what your HSA provider offers. This is different from an FSA, where money typically stays as cash and earns little to no interest. The growth is tax-free, meaning you do not pay capital gains tax, dividend tax, or interest tax on the earnings.

Some HSA providers require you to keep a minimum balance in cash (often $1,000 to $2,500) before you can invest the rest. Others let you invest from the first dollar. Check your account documents or call your provider to see what options are available to you. The investment choices vary widely — some providers offer a handful of mutual funds, while others offer brokerage accounts with access to thousands of securities.

The longer money stays in your HSA, the more time it has to grow. Many people use HSAs as long-term retirement savings vehicles, paying medical expenses out of pocket and leaving the HSA balance untouched to compound over decades. This is a legal strategy and is one reason HSAs are sometimes called the best retirement account you have never heard of.

Withdrawals for medical expenses

You can withdraw money from your HSA tax-free as long as you use it to pay for a may have access to medical expense. The IRS maintains a detailed list, but the broad categories include: doctor visits and hospital stays, prescription drugs, dental work, vision care (including glasses and contacts), mental health treatment, physical therapy, and medical equipment like crutches or wheelchairs. Over-the-counter medications count only if you have a prescription. Cosmetic procedures do not count unless they are medically necessary (for example, reconstructive surgery after an accident).

You do not have to withdraw money in the same year you incur the expense. You can pay a medical bill out of pocket in 2024, keep the receipt, and withdraw the money from your HSA in 2030 if you want to. There is no time limit on reimbursing yourself for past expenses, as long as you have documentation. This flexibility is another reason HSAs function as retirement accounts — you can let the balance grow and reimburse yourself decades later.

When you withdraw money, you are responsible for keeping records that show the expense was may have access to. The IRS does not require you to submit receipts when you withdraw, but you must be able to produce them if audited. Many HSA providers offer debit cards that flag transactions as medical, which simplifies record-keeping, but the burden of proof is always on you.

Non-medical withdrawals and the tax penalty

If you withdraw money from your HSA for something that is not a may have access to medical expense, the withdrawal is taxed as ordinary income, and you pay an additional 20 percent penalty on top of the income tax. For example, if you withdraw $1,000 for a non-medical expense and you are in the 22 percent tax bracket, you would owe $220 in income tax plus $200 in penalty, for a total of $420 in taxes on that $1,000.

This penalty applies only before age 65. Once you turn 65, you can withdraw money for any reason without the 20 percent penalty. Non-medical withdrawals after 65 are still taxed as income, but the penalty goes away. This is why some people view an HSA as a stealth retirement account — after 65, it functions like a traditional IRA, except the money you withdraw for medical expenses remains tax-free.

If you withdraw money by mistake or realize later that an expense does not count as may have access to, you can put the money back into the account. This is called a rollover or recontribution, and it must happen within a specific timeframe (usually 60 days, depending on your provider). Check your account documents for the exact important date.

HSAs and other insurance or accounts

You can have only one HSA at a time. If you open a second account at a different bank, you are not creating two separate HSAs — you are creating a duplicate account, and the IRS treats contributions to both as over-contributions, which triggers penalties and taxes. If you switch banks or providers, you transfer the existing account rather than opening a new one.

An HSA is separate from an FSA (flexible spending account). Some employers offer both, and you can participate in an FSA for dependent care expenses while also having an HSA for medical expenses. However, you cannot have a general-purpose FSA and an HSA at the same time — the FSA would disqualify you from HSA contributions. A limited-purpose FSA (which covers only dental and vision) does not disqualify you.

An HSA is also separate from a Dependent Care FSA, a Health Reimbursement Arrangement (HRA), or a Medicare Advantage plan's Health Savings component. Each has different rules and different tax treatment. If you have multiple accounts or types of coverage, read the plan documents carefully or ask your benefits administrator which accounts you can use together.

Frequently Asked Questions

Can I keep my HSA if I leave my job or switch to a different health plan?

Yes. Your HSA is your personal account, not your employer's. If you leave your job, the account stays with you. If you switch to a plan that is not an HDHP, you keep the account and can withdraw money for medical expenses, but you cannot add new contributions until you are back on an HDHP. The money already in the account remains yours indefinitely.

What happens to my HSA if I die?

The account becomes part of your estate and passes to your beneficiary, usually your spouse or estate. If your spouse inherits it, they can treat it as their own HSA and continue using it. If anyone else inherits it, the account is treated as income to them in the year of your death, and they owe income tax on the full balance. Designate a beneficiary in your account documents to make the process clearer for your heirs.

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

Yes, as long as they are your tax dependents. You can withdraw money tax-free to pay for a spouse's or child's may have access to medical expenses, even if they are not on your health plan. You cannot use it for an adult child over 26 unless you claim them as a dependent on your tax return, which has its own may be able to access rules.

Do I have to use my HSA money by a certain date?

No. Unlike an FSA, which has a "use it or lose it" rule (money not spent by the end of the year is forfeited), an HSA has no expiration date. Money rolls over automatically every year, and you can let it accumulate indefinitely. This is one of the key differences between the two accounts.

What if I am not sure whether an expense counts as may have access to?

The IRS publishes a detailed list of may have access to medical expenses on its website. If you are unsure, check that list or ask your HSA provider — many have customer service teams that can tell you whether a specific expense qualifies. When in doubt, keep the receipt and do not withdraw the money until you are certain, because withdrawing for a non-may have access to expense triggers the 20 percent penalty.