How a Health Savings Account Actually Works

An HSA lets you set aside pre-tax money to pay for medical expenses now or decades later

A Health Savings Account is a bank account paired with a high-deductible health insurance plan. Money you deposit goes in untaxed, grows without being taxed, and comes out untaxed when you use it for medical bills. You control the account — not your employer, not your insurance company — and the money stays yours even if you change jobs or retire.

The account works because the IRS treats it as a savings vehicle, not insurance. You fund it yourself (or your employer can contribute), you decide how much to spend each year, and you keep any balance that rolls over. This is different from a Flexible Spending Account, which forces you to spend the money or lose it by December 31st.

Key Takeaways

• You can only open an HSA if you are enrolled in a high-deductible health plan, and you cannot have other health coverage like Medicare or a spouse's plan at the same time.
• Money deposited to an HSA is not subject to federal income tax, and withdrawals for medical expenses are not taxed either, giving you a double tax advantage.
• You can invest HSA funds in stocks, bonds, or mutual funds instead of leaving the money in a savings account, and investment gains are not taxed.
• After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as ordinary income.
• The account belongs to you permanently — the money does not disappear at the end of the year, and you take it with you if you change jobs.

Who can open an HSA and when

You must be enrolled in a high-deductible health plan to open an HSA. The IRS sets the deductible threshold each year — for 2024, a high-deductible plan for an individual has a deductible of at least $1,600, and for a family it is at least $3,200. Your insurance company will tell you whether your plan qualifies; most insurers label these plans clearly as HSA-may be able to access.

You cannot have an HSA if you are covered by Medicare, enrolled in a spouse's non-high-deductible plan, or claimed as a dependent on someone else's tax return. You also cannot have a Flexible Spending Account or Health Reimbursement Arrangement at the same time, though some employers offer both and let you choose one.

You can open an HSA through your employer's plan administrator, through a bank or financial institution that offers HSAs, or through a brokerage firm. If your employer does not offer one, you can open an individual HSA on your own as long as you have a may have access to high-deductible plan.

How money goes in and what it costs

You contribute money to your HSA in the same way you would deposit to any savings account — by transfer, direct deposit, or check. If your employer offers an HSA, they can deduct contributions directly from your paycheck before taxes are calculated, which lowers your taxable income for the year.

If you open an HSA on your own, you can deduct the contributions on your tax return when you file. The IRS sets annual contribution limits: for 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage. These limits change each year. If you are 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution.

Most HSA providers charge a monthly maintenance fee (typically $2 to $5), and some charge a fee to invest your money or to withdraw it. Shop around — some banks and credit unions offer HSAs with no monthly fee if you maintain a minimum balance. The fee is worth paying only if you plan to use the account as a long-term investment vehicle rather than just a year-to-year spending account.

What you can spend HSA money on

You can withdraw money from your HSA to pay for any medical expense that would be deductible on your tax return. This includes doctor visits, hospital stays, prescription drugs, dental work, vision care, mental health treatment, and medical equipment like wheelchairs or hearing aids. It also covers some over-the-counter items: insulin, pain relievers, allergy medicine, and cold medicine are covered, but vitamins and supplements are not unless prescribed by a doctor.

You cannot use HSA money for health insurance premiums, except for COBRA continuation coverage, long-term care insurance, or Medicare premiums after you turn 65. You also cannot use it for cosmetic procedures, gym memberships, or general wellness products.

Keep receipts for everything you buy with HSA money. The IRS does not require you to submit receipts when you withdraw, but you must be able to prove the expense was medical if you are audited. Many HSA providers issue a debit card that you can use at pharmacies and doctors' offices, which creates an automatic record.

How your HSA grows over time

Unlike a Flexible Spending Account, money in your HSA rolls over every year. If you contribute $3,000 and spend $1,500, the remaining $1,500 stays in the account and earns interest or investment returns. This makes an HSA a powerful long-term savings tool — you can accumulate decades of medical expenses worth of funds if you do not need to spend the money right away.

Most HSA providers let you invest your balance in mutual funds, stocks, or bonds once you reach a minimum balance (often $1,000 to $2,500). Investment gains are not taxed, and you can withdraw the money tax-free when you use it for medical expenses. This means an HSA can function as a retirement account specifically for health care costs.

If you withdraw money for a non-medical reason before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. After age 65, you can withdraw money for any reason without the penalty, though you will owe income tax on non-medical withdrawals. This makes an HSA a backup retirement savings account if you do not spend all the medical funds.

What happens when you change jobs or retire

Your HSA is yours to keep. If you leave your job, the account does not close and the money does not go back to your employer. You can continue to use the funds for medical expenses, and you can keep investing them if your current provider allows it. If your new employer offers an HSA, you can roll your old account into the new one, or keep both accounts open.

If you retire before age 65 and are no longer on a high-deductible plan, you can no longer make new contributions to your HSA. However, you can still withdraw money for medical expenses tax-free, and you can keep any balance invested. Once you turn 65 and enroll in Medicare, you can no longer contribute, but you can withdraw for medical expenses (including Medicare premiums) tax-free for the rest of your life.

HSA versus other health savings options

A Flexible Spending Account (FSA) lets you set aside pre-tax money for medical expenses, but you must spend it or lose it by the end of the year — there is no rollover. An FSA is useful if you have predictable medical costs and want to lower your taxes, but it does not work as a long-term savings tool. An HSA is better if you want to accumulate funds over time.

A Health Reimbursement Arrangement (HRA) is funded entirely by your employer, not by you. You cannot contribute your own money, and the account belongs to your employer — if you leave, the balance may not follow you. An HRA is useful for employer-provided coverage, but it gives you less control than an HSA.

A regular savings account has no tax advantage. An HSA gives you a triple tax benefit: contributions are not taxed, growth is not taxed, and withdrawals for medical expenses are not taxed. This makes it the most tax-efficient way to save for health care costs if you are may be able to access.

Frequently Asked Questions

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

Yes. HSA money can be used for medical expenses of you, your spouse, and your dependents, even if they are not on your health insurance plan. You do not need to be married to use the account for a spouse's expenses, but you must be able to claim them as a dependent on your tax return.

What happens if I withdraw money from my HSA for something that is not medical?

Before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. After age 65, you owe only income tax, with no penalty. Keep records of what you spend HSA money on in case the IRS asks — if you cannot prove an expense was medical, the withdrawal is treated as non-medical.

Can I have an HSA if my employer does not offer one?

Yes. You can open an individual HSA through a bank, credit union, or brokerage as long as you are enrolled in a high-deductible health plan. You will deduct your contributions on your tax return instead of having them deducted from your paycheck, but the tax benefit is the same.

Do I have to spend my HSA money every year?

No. Unlike a Flexible Spending Account, HSA money rolls over indefinitely. You can accumulate funds for years and use them whenever you need to pay for medical expenses. This makes an HSA useful as a long-term savings account for retirement health care costs.

What if I change health insurance plans — do I lose my HSA?

No. Your HSA stays with you as long as you remain enrolled in a high-deductible plan. If you switch to a non-high-deductible plan, you cannot make new contributions, but you can still withdraw money for medical expenses. If you switch back to a high-deductible plan later, you can resume contributions.