How an HSA Account Works: Deposits, Spending, and Tax Benefits

How an HSA account works

A Health Savings Account is a bank account that holds money specifically for medical expenses, paired with a high-deductible health insurance plan. You put money in before taxes are taken out, spend it on doctor visits, prescriptions, and other may have access to medical costs, and any balance you don't spend rolls over to the next year. The account earns interest or investment returns, so money you don't need right away can grow tax-free.

The mechanics are straightforward: your employer, a family member, or you deposit funds into the HSA. When you have a medical expense, you either pay out of pocket and then request reimbursement from the HSA, or you use an HSA debit card if your bank issues one. The HSA custodian (usually a bank or financial institution) tracks the balance and processes withdrawals. Unlike a flexible spending account, which forfeits unused money at year-end, an HSA keeps whatever you don't spend.

Key Takeaways

• An HSA requires enrollment in a high-deductible health plan and allows you to set aside pre-tax income for medical expenses.
• You can contribute up to $4,150 for individual coverage or $8,300 for family coverage in 2024, though these amounts change yearly.
• Money deposited into an HSA is not subject to federal income tax, and withdrawals for may have access to medical expenses are tax-free.
• Unused HSA funds roll over indefinitely, and the account can be invested in stocks or bonds to grow beyond the initial deposit.
• Withdrawals for non-medical expenses before age 65 are taxed as income plus a 20 percent penalty, but after 65 the penalty disappears.

Who can open an HSA and when

You must be covered by a high-deductible health plan to open an HSA. The IRS defines a high-deductible plan as one with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage in 2024. You cannot have other health coverage at the same time—no spouse's plan, no Medicare, no Medicaid—though there are narrow exceptions for specific types of coverage like dental-only or vision-only plans.

You open an HSA through a bank, credit union, or financial services company, not through your employer or insurance company, though your employer may offer a list of approved custodians. The account must be opened by December 31 of the year you want to make contributions for that tax year. If you enroll in a high-deductible plan mid-year, you can still open an HSA and contribute a prorated amount based on the months you were covered.

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 catch-up contribution. These limits apply to the total of all contributions from you, your employer, and anyone else—if your employer contributes $2,000, you can only add $2,150 more to reach the individual limit.

You can contribute a lump sum at any point during the year, or set up automatic monthly deposits. If you contribute more than the limit, you must withdraw the excess by the tax filing deadline or face a 6 percent excise tax on the overage each year it remains in the account. The IRS publishes updated limits in October for the following year, so check the HSA custodian's website or the IRS website before the year begins.

Tax treatment of deposits and withdrawals

Money you deposit into an HSA reduces your taxable income dollar-for-dollar. If you earn $60,000 and contribute $4,150 to an HSA, you report only $55,850 as income to the IRS. This works whether you contribute through payroll deduction (the most common method) or by depositing money yourself and deducting it on your tax return.

Withdrawals for may have access to medical expenses—doctor visits, hospital stays, prescription drugs, dental work, vision care, mental health treatment, and many other costs—are tax-free. You do not report them as income, and you do not owe tax on the withdrawal. Nonprescription medications and medical equipment like crutches or blood pressure monitors also count. The IRS publishes a full list of may have access to expenses on its website.

If you withdraw money for something that is not a may have access to medical expense, you owe income tax on that amount plus a 20 percent penalty. After age 65, the penalty disappears—you can withdraw for any reason and owe only income tax, similar to a traditional retirement account. This makes an HSA a useful retirement savings tool if you do not spend all the medical money during your working years.

How to track and spend HSA money

Your HSA custodian provides a statement showing deposits, withdrawals, interest earned, and the current balance. Many custodians offer a debit card linked to the account, so you can pay directly at the pharmacy or doctor's office without requesting reimbursement later. If your custodian does not issue a debit card, you can write a check or transfer money to your regular bank account and pay out of pocket, then request reimbursement by submitting receipts.

You are responsible for keeping records of what you spent and why. The IRS does not require you to submit receipts when you withdraw, but if you are audited, you must prove that the expense was medical and may have access to. Save receipts, explanation of benefits statements from your insurance company, and invoices from providers for at least three years after the withdrawal.

Some custodians allow you to invest HSA funds in mutual funds, stocks, or bonds rather than keeping the money in a savings account. This is optional—you can leave the balance in cash if you prefer. If you invest, you bear the market risk, but money that grows through investment gains is also tax-free as long as you withdraw it for may have access to medical expenses.

What happens to unused HSA money

Unlike a flexible spending account, which forfeits any balance you do not spend by December 31, an HSA carries forward indefinitely. If you contribute $4,150 in 2024 and spend only $2,000, the remaining $2,150 stays in the account and you can use it in 2025, 2026, or any future year. This makes an HSA a long-term savings tool—many people use it to build a medical reserve for retirement.

If you change jobs or lose coverage under a high-deductible plan, you keep the HSA and the money in it. You cannot make new contributions once you are no longer covered by a high-deductible plan, but you can continue to withdraw for may have access to medical expenses. If you enroll in Medicare, you must stop contributing to the HSA, though you can still withdraw for medical expenses.

HSA vs. flexible spending account: key differences

Both accounts hold pre-tax money for medical expenses, but they work differently. A flexible spending account (FSA) has a "use it or lose it" rule—money not spent by December 31 is forfeited, though some plans allow a $610 carryover in 2024. An HSA has no spending deadline and money rolls over forever. An FSA is offered only through an employer; an HSA is opened independently at a bank or financial company. An FSA does not earn interest or investment returns; an HSA can be invested and grow over time.

You can have an FSA and an HSA at the same time only if the FSA is a limited-purpose account that covers only dental and vision expenses. If your employer offers a standard FSA, you must choose one or the other. An HSA requires a high-deductible health plan; an FSA works with any health plan. For most people, an HSA is more flexible because the money does not disappear and can be used for retirement medical costs.

Frequently Asked Questions

Can I use HSA money for my spouse or children?

Yes, if they are covered under your family health plan. You can withdraw for their may have access to medical expenses even if they are not on the HSA account itself. If your spouse has their own high-deductible plan and HSA, they can also contribute to their own account. Adult children not on your plan cannot use your HSA.

What happens to my HSA if I switch to a different health plan?

You keep the HSA and the money in it. If the new plan is also high-deductible, you can continue contributing. If the new plan is not high-deductible, you stop contributing but can still withdraw for may have access to medical expenses. The account remains yours until you close it or die.

Can I withdraw HSA money before I turn 65 for non-medical reasons?

Yes, but you will owe income tax on the withdrawal plus a 20 percent penalty. For example, if you withdraw $1,000 for a non-medical expense and are in the 22 percent tax bracket, you owe $220 in tax plus $200 in penalty, totaling $420. After age 65, you can withdraw for any reason and owe only the income tax, with no penalty.

Do I have to use my HSA debit card, or can I pay out of pocket and get reimbursed later?

You can do either. If your custodian issues a debit card, you can pay directly. If not, or if you prefer, you can pay with your regular bank account or credit card and request reimbursement from the HSA by submitting receipts. There is no time limit on reimbursement—you can spend money in 2024 and request reimbursement in 2030 if you want.

Can I invest my HSA balance in the stock market?

Many custodians offer investment options like mutual funds or brokerage accounts, but it is optional. You can keep the balance in a savings account earning interest, or move some or all of it into investments. If you invest and the balance grows, the gains are tax-free as long as you withdraw for may have access to medical expenses. If you withdraw for non-medical reasons, you owe tax and penalty on the gains too.