How a Health Savings Account Actually Works

A Health Savings Account lets you set aside pre-tax money for medical expenses, then withdraw it tax-free when you need it

A Health Savings Account (HSA) is a savings account paired with a high-deductible health insurance plan. You contribute money to the account before taxes are taken out of your paycheck, the money grows without being taxed, and you withdraw it tax-free to pay for may have access to medical expenses. The account stays open year to year — unlike a Flexible Spending Account (FSA), which resets annually — so unused money accumulates and remains yours.

The basic flow is straightforward: your employer or you fund the account, the money sits invested or in cash, and you pay medical bills from it. You keep receipts and records, but you do not need to submit claims to anyone. You simply withdraw what you need when you need it.

Key Takeaways

• You must be enrolled in a high-deductible health plan (HDHP) to open and contribute to an HSA; without one, you cannot fund the account.
• 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 no other account offers.
• You can withdraw money for any may have access to medical expense: deductibles, copays, prescriptions, dental work, vision care, and many other costs covered under IRS rules.
• Money you do not spend stays in the account indefinitely and can be invested in mutual funds or kept in cash, making it different from FSAs that expire at year-end.
• After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as ordinary income.

Who Can Open an HSA and When

You can open an HSA only if you are enrolled in a high-deductible health plan (HDHP). The IRS sets the minimum deductible each year — for 2024, it is $1,600 for individual coverage and $3,200 for family coverage. Your plan must also have an out-of-pocket maximum (the most you pay before insurance covers everything) that does not exceed $4,150 for individual or $8,300 for family coverage in 2024. These numbers change annually.

You cannot have other health coverage at the same time, with limited exceptions for specific plans like dental-only or vision-only insurance. You also cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare.

You can open an HSA through your employer if they offer one, or you can open one independently through a bank or financial institution. The deadline to open an account and make contributions for a given tax year is typically April 15 of the following year, though employer plans may have earlier deadlines.

How Much You Can Contribute Each Year

The IRS sets annual contribution limits that change each year. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year as a catch-up contribution. These limits apply to your total contributions from all sources — your employer, you, and anyone else contributing on your behalf.

You can contribute throughout the year, but if you enroll in an HDHP partway through the year, you can only contribute a prorated amount for the months you were covered. However, the IRS allows a special rule: if you enroll in an HDHP by December 1, you can contribute the full annual amount for that year, as long as you stay enrolled through December 31 of the following year.

Contributions are deductible whether your employer makes them or you do. If your employer contributes, the money does not count as taxable income. If you contribute yourself, you can deduct the amount on your tax return.

What Counts as a may have access to Medical Expense

The IRS maintains a detailed list of may have access to medical expenses. Common ones include health insurance deductibles, copays, coinsurance, prescription medications, dental work, vision care, hearing aids, and mental health treatment. You can also use HSA funds for medical equipment like crutches, wheelchairs, or blood pressure monitors, and for certain over-the-counter items like pain relievers and allergy medicine (though rules on OTC items changed in 2020).

Expenses do not have to be for you alone — you can pay for may have access to medical expenses for your spouse and dependents, even if they are not covered by your HDHP. This makes an HSA useful for families where only one person has the high-deductible plan.

Expenses that do not count include cosmetic procedures, gym memberships, vitamins (unless prescribed by a doctor), and most over-the-counter items that are not medications. If you are unsure whether an expense qualifies, the IRS Publication 502 lists the full rules, and your HSA provider can also answer specific questions.

How to Withdraw Money and Keep Records

You withdraw money from your HSA by requesting a distribution from your account provider. Most HSAs come with a debit card that lets you pay directly at the pharmacy, doctor's office, or hospital. You can also request a check or electronic transfer to your bank account, then pay the provider yourself.

You do not need to submit receipts to your HSA provider when you withdraw money. However, you must keep records of your may have access to medical expenses in case the IRS audits you. Save receipts, explanation of benefits (EOB) statements from your insurance, and invoices from providers. The IRS can ask you to prove that withdrawals matched may have access to expenses, and if you cannot, the withdrawal is treated as a non-may have access to withdrawal and taxed as income plus a 20 percent penalty.

Some people withdraw money and reimburse themselves later — for example, paying a medical bill out of pocket and then withdrawing from the HSA months or years later. This is allowed as long as the expense was incurred after the HSA was opened and you have documentation.

How Your Money Grows and Investment Options

HSA funds can sit in a cash account earning minimal interest, or you can invest them in mutual funds, stocks, or bonds through your provider. The investment options vary by provider — some offer a limited menu of funds, while others allow you to direct investments like a brokerage account. Any growth from investments is tax-free as long as you use the money for may have access to expenses.

Because an HSA does not expire at the end of the year, it can grow substantially over time. Many people use it as a long-term retirement savings tool: they pay medical expenses out of pocket and leave the HSA untouched to invest. After age 65, you can withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are taxed as ordinary income.

Your HSA balance is yours to keep if you change jobs or leave your employer's plan. The account and its balance transfer with you, though you may need to move it to a new provider if your new employer uses a different HSA custodian.

What Happens to Unused Money and Changing Plans

Unlike an FSA, which forfeits unused money at the end of the year, an HSA carries over all unused funds indefinitely. This means you can accumulate a large balance over time if you do not spend it all. Some people view this as a retirement savings account and intentionally leave money in it to grow.

If you leave your HDHP and enroll in a different type of health insurance, you can no longer contribute to the HSA, but you keep the account and the money in it. You can still withdraw funds for may have access to medical expenses at any time. If you later re-enroll in an HDHP, you can resume contributions.

If you withdraw money for a non-may have access to expense before age 65, you pay income tax on the amount plus a 20 percent penalty. After age 65, the penalty goes away, but you still owe income tax on non-may have access to withdrawals. This makes the HSA more flexible in retirement than it is while you are working.

Frequently Asked Questions

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

You cannot use HSA funds to pay premiums for regular health insurance. However, you can use them to pay premiums for long-term care insurance, Medicare premiums (after age 65), and COBRA continuation coverage. You can also use HSA funds to pay for dental and vision insurance premiums in some cases.

What if I withdraw money and later find out it was not a may have access to expense?

You owe income tax on the withdrawal plus a 20 percent penalty. You can avoid the penalty if you correct the mistake by redepositing the money into the HSA within a certain timeframe, though rules vary. Contact your HSA provider immediately if this happens.

Can my spouse contribute to my HSA?

Yes, if your spouse does not have their own HSA. Your combined contributions cannot exceed the family coverage limit. Your spouse's contribution counts toward your household total, so coordinate with them to avoid exceeding the annual limit.

Do I lose my HSA if I change employers?

No. Your HSA belongs to you, not your employer. When you change jobs, you keep the account and its balance. You may need to move it to a new provider if your new employer uses a different HSA custodian, but the money stays yours.

Can I use my HSA for my adult child's medical expenses?

Only if your adult child is claimed as a dependent on your tax return. If they are independent, you cannot use your HSA to pay their medical expenses, even if you help them financially.