How a Health Savings Account Works and What You Can Use It For

A Health Savings Account lets you set aside pre-tax money to pay for medical expenses now or in retirement

A Health Savings Account (HSA) is a savings account tied to a high-deductible health insurance plan. Money you put into it is not taxed as income, the money grows tax-free, and you pay no tax when you withdraw it to cover medical costs. Unlike a flexible spending account (FSA), which you must spend down each year or lose the balance, an HSA rolls over indefinitely — money you don't use stays in the account and can grow for decades.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) and have no other health coverage except what the IRS allows (such as accident insurance or dental-only plans). You cannot have Medicare or be claimed as a dependent on someone else's tax return. If you meet these conditions, you can open an HSA through your employer, a bank, or an investment firm.

The account works in three stages: you contribute money (and get a tax deduction), the balance sits and can be invested, and you withdraw it tax-free for medical expenses. You are never required to spend the money in any given year, and you can let it accumulate for retirement healthcare costs.

Key Takeaways

• An HSA requires enrollment in a high-deductible health plan and allows you to contribute pre-tax money that grows tax-free and withdraws tax-free for medical expenses.
• Unlike an FSA, HSA money rolls over year to year with no "use it or lose it" important date, so you can save for future medical costs or retirement.
• You can invest HSA funds in stocks, bonds, or mutual funds through most providers, turning it into a long-term wealth-building tool beyond just a spending account.
• Withdrawals for non-medical expenses are taxed as income plus a 20 percent penalty before age 65; after 65, non-medical withdrawals are taxed but the penalty drops.

How much you can contribute 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 explore to all HSA contributions combined — whether you contribute through payroll deduction, direct deposit, or a check. Your employer may contribute on your behalf, and that counts toward your limit.

If you turn 55 during the year, you can add an extra $1,000 "catch-up" contribution. This catch-up amount stays the same each year and does not increase with inflation. You can make contributions until the tax filing important date (usually April 15) for the prior year, giving you time to catch up if you missed earlier in the year.

Contribution limits are set by the IRS and published each October for the following year. Check the IRS website or your HSA provider's website to confirm the current year's limit before you contribute.

What medical expenses you can pay with HSA money

The IRS maintains a list of may have access to medical expenses that you can pay with HSA funds tax-free. These include doctor visits, hospital stays, prescription drugs, dental work, vision care, mental health treatment, and medical equipment like wheelchairs or hearing aids. You can also use HSA money for over-the-counter medications (such as pain relievers or allergy medicine) if you have a prescription or a doctor's written order.

Expenses that do not count include cosmetic procedures, gym memberships, vitamins (unless prescribed for a specific condition), and most over-the-counter items without a prescription. Long-term care insurance premiums are allowed up to certain limits, and you can use HSA funds to pay Medicare premiums after age 65 — but not supplemental (Medigap) premiums.

Keep receipts and documentation for all HSA withdrawals. The IRS does not require you to submit proof when you withdraw, but you must be able to show that withdrawals match may have access to expenses if you are audited. If you withdraw money for a non-may have access to expense, that amount is taxed as ordinary income plus a 20 percent penalty.

Tax treatment: contributions, growth, and withdrawals

Money you contribute to an HSA reduces your taxable income for the year. If you contribute through payroll deduction (the most common route), the money comes out before taxes are calculated, so you see the tax savings when ready in your paycheck. If you contribute directly, you deduct the contribution on your tax return (Form 1040, Schedule 1).

Any interest, dividends, or investment gains inside the HSA account grow tax-free. You do not pay tax on the growth each year, and you do not report it on your tax return. This is different from a regular savings account or brokerage account, where you owe tax on interest and gains annually.

When you withdraw money for a may have access to medical expense, you owe no tax on the withdrawal — not on the contribution, not on the growth, and not on the gains. This triple tax advantage (deductible contribution, tax-free growth, tax-free withdrawal for medical expenses) is what makes an HSA unique among savings accounts.

How HSA money works in retirement

After age 65, you can withdraw HSA money for any reason without the 20 percent penalty. Non-medical withdrawals are still taxed as ordinary income, but the penalty disappears. This means an HSA can function like a traditional IRA in retirement — you can use it for medical expenses tax-free, or for living expenses with only income tax owed.

Many people use this feature to save aggressively in an HSA during their working years, invest the balance, and then tap it in retirement for both medical and non-medical costs. Since healthcare expenses in retirement are often substantial, an HSA can cover those costs tax-free while other retirement savings remain untouched.

If you have Medicare, you can no longer contribute to an HSA, but you can continue to withdraw from an existing balance for any reason after age 65 without penalty. You can use HSA funds to pay Medicare premiums (Part B, Part D, and Part C), but not Medigap premiums or out-of-pocket costs that Medicare does not cover.

HSA ownership and portability

An HSA belongs to you, not your employer. If you leave your job, the account stays yours and you keep the balance. You can roll it to a new HSA at a different provider, or keep it where it is. There is no time limit to use the money, and no requirement to spend it before you leave.

You can have only one HSA at a time (with rare exceptions for family coverage changes). If you open a second HSA while one is active, you may exceed the annual contribution limit and owe taxes and penalties on the excess. Check with your current provider before opening a new account.

If you change health plans but stay with the same employer, you can usually keep your HSA and continue contributing as long as your new plan is also a high-deductible plan. If you move to a plan that is not high-deductible, you can no longer contribute, but you keep the existing balance and can withdraw it for medical expenses.

HSA versus FSA: key differences

Both accounts let you use pre-tax money for medical expenses, but they work differently. An FSA has a "use it or lose it" rule — money you don't spend by the end of the year (or a short grace period) is forfeited. An HSA has no important date; money rolls over indefinitely. An FSA is usually offered through an employer and cannot be invested; an HSA can be opened independently and often allows you to invest the balance in mutual funds or stocks.

An FSA has a lower annual limit (usually around $3,200) and is not portable — if you leave your job, you lose the account. An HSA is portable and has a higher limit. However, an FSA lets you contribute even if you have a low-deductible health plan, whereas an HSA requires a high-deductible plan.

Some employers offer both accounts. If you have access to both, you can contribute to an FSA for near-term medical expenses and use an HSA for long-term savings and investment. You cannot use FSA and HSA money for the same expense, so track which account you use for each purchase.

Frequently Asked Questions

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

You can use HSA funds to pay premiums for COBRA coverage, long-term care insurance (up to IRS limits), and Medicare premiums (Part B, Part D, and Part C) after age 65. You cannot use HSA money to pay premiums for your current employer health plan or for Medigap supplemental insurance. Check your plan documents or ask your HSA provider which premiums are allowed.

What happens to my HSA if I switch to a low-deductible health plan?

You can no longer contribute to the HSA once you enroll in a non-high-deductible plan, but you keep the existing balance. You can withdraw money from the account for may have access to medical expenses at any time, even after you leave the high-deductible plan. The account remains yours until you spend it down or reach age 65, when the penalty for non-medical withdrawals is waived.

Can I invest my HSA balance?

Many HSA providers allow you to invest the balance in mutual funds, stocks, or bonds, similar to a brokerage account. Some providers require a minimum balance (often $1,000 to $2,500) before you can invest. Check with your provider to see what investment options are available and whether there are fees. Investment growth is tax-free, but investment losses do not create a tax deduction.

Do I have to use my HSA for medical expenses, or can I just save it?

You can save HSA money indefinitely without spending it. There is no requirement to use the account in any given year. Many people use an HSA as a long-term investment account for retirement healthcare costs, letting the balance grow for decades. After age 65, you can withdraw for any reason without penalty, so some people treat it like a supplemental retirement account.

What if I withdraw HSA money for a non-medical expense before age 65?

The withdrawal is taxed as ordinary income, and you owe an additional 20 percent penalty on top of the income tax. For example, a $1,000 non-medical withdrawal might result in $200 to $300 in taxes and penalties depending on your tax bracket. Keep records of all withdrawals in case you are audited and need to prove the expense was medical.