How a Health Savings Account Works: Deposits, Spending, and Tax Benefits

How an HSA works in three steps

A Health Savings Account lets you set aside pre-tax money to pay for medical expenses now or in the future. You contribute money to the account, the contribution reduces your taxable income, and you withdraw funds to pay for may have access to medical costs without owing income tax on that money. The account is yours to keep — it does not reset each year, and unused money rolls forward indefinitely.

To use an HSA, you must be enrolled in a High Deductible Health Plan (HDHP) — a health insurance plan with a higher deductible than a standard plan. The IRS sets the minimum deductible each year; for 2024, it is $1,600 for individual coverage and $3,200 for family coverage. You cannot have other health coverage that is not an HDHP, and you cannot be claimed as a dependent on someone else's tax return.

The HSA itself is held at a bank, credit union, or investment firm — not through your employer or insurance company, though your employer may help you set one up. You control the account, decide how much to contribute (within annual limits), and choose how to spend the money.

Key Takeaways

• You contribute pre-tax dollars to an HSA, which reduces your taxable income for the year you contribute.
• Withdrawals for may have access to medical expenses — copays, deductibles, prescriptions, dental, vision, and many other costs — are not taxed.
• Money you do not spend stays in the account and grows year to year; there is no "use it or lose it" deadline.
• You can invest HSA funds in stocks, bonds, or mutual funds, and investment gains are not taxed as long as you withdraw for may have access to medical expenses.
• Once you turn 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

Contribution limits and who can contribute

For 2024, you can contribute up to $4,150 per year if you have individual HDHP coverage, or $8,300 if you have family coverage. These limits are set by the IRS and change each year. If you are 55 or older, you can add an extra $1,000 per year (called a catch-up contribution). Your employer, you, or both of you together can contribute, but the total from all sources cannot exceed the annual limit.

You contribute through payroll deduction (if your employer offers it), by sending a check to the HSA custodian, or by transferring money electronically. Payroll deduction is the most common route because the money comes out before taxes are calculated, so you see the tax savings immediately on your paycheck. If you contribute outside of payroll, you claim the deduction on your tax return (Form 1040, Schedule 1) when you file.

You can only contribute for months when you are enrolled in an HDHP and have no other disqualifying coverage. If you drop your HDHP in June, you can only contribute for January through June. If you enroll in an HDHP in September, you can contribute for September through December.

What you can spend HSA money on

may have access to medical expenses include copays, coinsurance, deductibles, and out-of-pocket costs for doctor visits, hospital stays, surgery, and emergency care. Prescription medications and insulin are covered. Dental work (fillings, root canals, cleanings, orthodontia), vision care (eye exams, glasses, contact lenses), and hearing aids all count. Mental health treatment, physical therapy, and chiropractic care are covered if a doctor orders them.

Over-the-counter items are covered only if you have a prescription: a doctor must write a prescription for pain relievers, allergy medicine, or cold medicine for the purchase to be HSA-may be able to access. Vitamins and supplements without a prescription are not covered. Cosmetic procedures are not covered unless they are medically necessary (for example, reconstructive surgery after an accident).

You can also use HSA money to pay insurance premiums in specific situations: COBRA premiums (continuation coverage after job loss), long-term care insurance premiums, and health insurance premiums while you are receiving unemployment benefits. You cannot use HSA funds to pay regular health insurance premiums while employed.

Keep receipts and documentation for every withdrawal. The IRS does not require you to submit them when you withdraw, but you must be able to prove the expense was may have access to if you are audited. Many HSA custodians provide a debit card that flags may have access to expenses, but you are responsible for tracking what you spend.

How investment growth works in an HSA

Once your HSA balance reaches a certain threshold (usually $1,000 to $2,500, depending on the custodian), you can invest the money in mutual funds, stocks, bonds, or other securities. The investment grows tax-free, and you pay no tax on the gains when you withdraw for may have access to medical expenses. This makes an HSA different from a regular savings account — it can grow substantially over decades if you do not need to spend the money right away.

If you withdraw invested funds for a non-may have access to expense before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. If you withdraw for a may have access to medical expense, there is no penalty and no tax, even if the money has grown significantly. This is why some people treat an HSA as a long-term investment vehicle: they pay medical expenses out of pocket and let the HSA grow, then withdraw it tax-free later.

Investment risk is yours to manage. If you invest HSA funds in stocks and the market drops, your account balance drops with it. Some custodians offer conservative options (money market funds, stable value funds) for people who want to avoid that risk.

Withdrawals and record-keeping

You withdraw money from an HSA by writing a check, using a debit card, or requesting a transfer to your bank account. Many custodians allow you to submit a receipt and request reimbursement, so you can pay a medical expense out of pocket and withdraw from the HSA later. There is no deadline for reimbursement — you can pay a 2024 medical expense and withdraw the money in 2030 if you want.

The IRS requires you to keep records showing that each withdrawal was for a may have access to expense. This means keeping the receipt, the bill, or an explanation of benefits from your insurance company. You do not file these with your tax return, but you must have them available if the IRS asks. If you cannot prove an expense was may have access to, the withdrawal is treated as taxable income plus a 20 percent penalty.

Your HSA custodian will send you a Form 1099-SA each January showing total withdrawals from the previous year. You report this on your tax return (Form 8889) to show how much you withdrew and confirm it was for may have access to expenses. If you withdraw more than you spent on may have access to expenses, you report the overage as taxable income.

What happens to your HSA when you change jobs or retire

Your HSA belongs to you, not your employer. If you leave your job, the account stays open and the money remains yours. You can continue to use it to pay for may have access to medical expenses, and you can continue to invest it. You do not have to close it or transfer it unless you want to move it to a different custodian.

If you enroll in a non-HDHP plan (such as a standard PPO or HMO) after leaving your job, you can no longer contribute to the HSA, but you can still withdraw from it for may have access to medical expenses. Once you turn 65 and enroll in Medicare, you can no longer contribute, but you can withdraw for Medicare premiums (Part B and Part D), Medicare Advantage premiums, and long-term care insurance premiums without penalty. Non-medical withdrawals after 65 are taxed as income but not penalized.

If you die, your HSA passes to your beneficiary. If the beneficiary is your spouse, they can treat it as their own HSA. If the beneficiary is anyone else, they must withdraw the balance within a set time and pay income tax on it (unless it is used for your final medical expenses).

HSA vs. FSA: When to choose each

A Flexible Spending Account (FSA) is similar to an HSA but works differently in important ways. An FSA is offered through your employer, the money is pre-tax, and you can use it for the same may have access to medical expenses. However, FSA money does not roll over — you must spend it by the end of the plan year or lose it (though some employers allow a grace period or a small carryover). An FSA has no investment option; the money sits in an account earning nothing.

An HSA is better if you want to save for future medical expenses, invest the money, or keep the account after you leave your job. An FSA is better if you have predictable medical expenses each year and want to use all the money you contribute. You cannot have both an HSA and an FSA in the same year, though you can switch between them if your coverage changes.

Some employers offer both an HSA (if you choose an HDHP) and an FSA (if you choose a standard plan). You pick one or the other based on your health needs and whether you want the flexibility of an HSA or the simplicity of an FSA.

Frequently Asked Questions

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

Yes, as long as your spouse is a dependent on your tax return. You can use HSA funds to pay for medical expenses for your spouse, your children, and any other dependent you claim, even if they are not covered by your HDHP. The expense must still be may have access to — copays, deductibles, prescriptions, dental, and vision all count.

What happens if I withdraw money for something that is not a may have access to medical expense?

Before age 65, you owe income tax on the withdrawal plus a 20 percent penalty. For example, if you withdraw $500 for a non-may have access to expense and you are in the 22 percent tax bracket, you owe $110 in income tax plus $100 in penalty, for a total of $210. After age 65, you owe income tax but no penalty. Keep receipts so you can prove an expense was may have access to if the IRS questions it.

Can I use my HSA to pay for health insurance premiums?

Only in specific situations. You can use HSA funds to pay COBRA premiums (if you lost your job), health insurance premiums while you are receiving unemployment benefits, and long-term care insurance premiums. You cannot use it to pay your regular employer health insurance premium or an ACA marketplace premium while you are employed. After age 65, you can use it for Medicare premiums and Medicare Advantage premiums.

Do I have to spend my HSA money by the end of the year?

No. Unlike an FSA, an HSA has no deadline to spend the money. You can let it grow year after year, invest it, and withdraw it whenever you need it. This makes an HSA useful for saving toward future medical expenses, especially in retirement when medical costs typically rise.

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

Yes. You can open an HSA at a bank, credit union, or investment firm as long as you are enrolled in an HDHP. You will not get the payroll deduction benefit, but you can contribute the full annual amount and claim the deduction on your tax return. Search for "HSA custodian" or "HSA provider" to find institutions that offer them in your area.