How a Health Savings Account Works: The Three-Part System

A Health Savings Account Lets You Save Pre-Tax Money for Medical Costs

A Health Savings Account (HSA) is a savings account attached to a high-deductible health insurance plan. Money you put into it reduces your taxable income, grows tax-free, and comes out tax-free when you use it for medical expenses. You control the account — not your employer, not your insurance company — and the money stays yours even if you change jobs or insurance plans.

The account works in three connected parts: you contribute money (usually through payroll deductions), the money sits in the account earning interest or investment returns, and you withdraw it to pay for medical costs. Each part has rules about how much, when, and what counts.

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 that is not high-deductible.
• Contributions are capped at $4,150 for individual coverage and $8,300 for family coverage in 2024, and you can add $1,000 more if you are 55 or older.
• Money you withdraw for may have access to medical expenses — doctor visits, prescriptions, dental work, vision care, and many other costs — comes out tax-free and does not count as income.
• After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as regular income.
• The account is portable: if you change jobs or insurance, the money stays in your HSA and you keep control of it.

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 insurance company will tell you whether your plan qualifies.

You cannot have an HSA if you are also covered by Medicare, a spouse's non-high-deductible plan, a parent's plan (if you are under 26), or most other health insurance. You also cannot claim the dependent care tax credit in the same year you contribute to an HSA, though you can use HSA money to pay for dependent care itself.

You open an HSA through a bank, credit union, or investment company — not through your insurance company or employer, though your employer may offer one as a payroll option. You can open one on your own at any time during the year, but contributions for a given tax year must be made by April 15 of the following year (the tax filing deadline).

How Much You Can Contribute Each Year

The IRS sets annual contribution limits. 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 — this is called a catch-up contribution. These limits change slightly each year to keep pace with inflation.

If you enroll in an HDHP partway through the year, you can still contribute the full annual amount if you remain enrolled through December 31. If you drop the coverage before the end of the year, your contribution limit is reduced proportionally — for example, if you were covered for six months, you can contribute half the annual limit.

Contributions can come from you, your employer, or both. If your employer contributes, that amount counts toward the limit. You can contribute through payroll deduction (which skips both income tax and payroll tax) or by depositing money directly to the account (which skips income tax but not payroll tax if you are self-employed).

What Happens to the Money While It Sits in Your Account

An HSA is a real savings account or investment account. The money does not disappear or expire. You can leave it untouched for years, and it will earn interest or investment returns depending on how the account is structured.

Some HSAs work like savings accounts: your bank holds the money and pays you a small interest rate. Others let you invest the balance in mutual funds, stocks, or bonds, similar to a 401(k). The account provider sets the options available. Money that grows through interest or investment gains is also tax-free — you do not pay tax on the earnings.

There is no "use it or lose it" rule. Unlike a Flexible Spending Account (FSA), money left in your HSA at the end of the year rolls forward to the next year. You can accumulate thousands of dollars over time and use them whenever you need to.

Which Medical Expenses Count for Tax-Free Withdrawals

You can withdraw money tax-free for may have access to medical expenses. The IRS publishes a detailed list, but the main categories are: doctor visits and hospital care, prescription medications, dental work, vision care (including glasses and contacts), mental health treatment, physical therapy, and medical equipment like crutches or hearing aids.

Some costs that surprise people: over-the-counter medications (like ibuprofen or allergy pills) count only if you have a prescription from a doctor. Cosmetic procedures do not count unless they are medically necessary — for example, reconstructive surgery after an injury counts, but teeth whitening does not. Health insurance premiums generally do not count, except for COBRA continuation coverage, long-term care insurance, and health insurance you pay for while receiving unemployment benefits.

You do not have to submit receipts to the HSA provider when you withdraw money, but you must keep them for your tax records. If the IRS audits you, you need to show that the withdrawal was for a may have access to expense. Withdrawals that do not may have access to are taxed as regular income plus a 20 percent penalty.

How to Withdraw Money and Pay for Medical Costs

Most HSA providers give you a debit card linked to the account. You can swipe it at the doctor's office, pharmacy, or hospital just like a regular card. Some providers also let you write checks or transfer money to your bank account.

You can also pay the medical provider out of pocket and then reimburse yourself from the HSA later — even years later. This strategy lets you keep the money invested longer and only withdraw when you need cash. You must have documentation (an invoice or receipt) showing the expense was may have access to and the date it was incurred, but you do not have to reimburse yourself in the same year the expense happened.

If you use the debit card, the provider may ask you to submit a receipt to confirm the expense was medical. This is a compliance check, not a tax issue — the money is still yours to use for may have access to expenses.

What Happens to Your HSA After Age 65 or If You Stop Having an HDHP

After you turn 65, you can withdraw money from your HSA for any reason without the 20 percent penalty. Non-medical withdrawals are taxed as regular income, just like withdrawals from a traditional IRA. Medical withdrawals remain tax-free at any age.

If you enroll in Medicare, you can no longer contribute to an HSA, but you keep the account and can continue to withdraw money for may have access to medical expenses tax-free. Many people use their HSA to pay for Medicare premiums, copays, and deductibles.

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

Frequently Asked Questions

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

Yes, as long as you are married and file taxes jointly. You can also use it for your children's medical expenses and your parents' medical expenses, even if they are not claimed as dependents on your tax return. The key is that the person receiving the care must be a family member and the expense must be may have access to.

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

The withdrawal is taxed as regular income, and you owe a 20 percent penalty on top. For example, if you withdraw $1,000 for a non-may have access to expense, you pay income tax on the $1,000 plus a $200 penalty. Keep receipts so you can prove to the IRS that an expense was may have access to if you are audited.

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

You can do either. Paying out of pocket and reimbursing yourself later is actually a common strategy because it lets your money stay invested longer. Just keep the receipt showing the date and amount of the medical expense so you can document the reimbursement.

What happens to my HSA if I change jobs?

The account is yours, not your employer's. The money stays in the account no matter where you work. You can keep the same HSA provider or transfer the balance to a new provider if your new employer offers a different one. There is no deadline to move the money.

Can I invest my HSA balance, or does it have to stay in a savings account?

It depends on your provider. Some HSAs offer only savings accounts with interest. Others let you invest in mutual funds or other securities once your balance reaches a certain amount (often $1,000 or $2,000). Check with your provider about what investment options are available.