Health Savings Accounts: How They Work & Key Benefits

A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals and families save for and pay for qualified medical expenses. HSAs provide a way to save pre-tax dollars, grow investments tax-free, and receive tax-free distributions for eligible medical costs.

This article covers the details of health savings accounts, their benefits, eligibility, and the process of opening and managing an HSA.

What is a Health Savings Account and how does it work?

A Health Savings Account lets you set aside tax-free money for qualified medical expenses. You can contribute up to a set limit each year, invest the funds, and withdraw them tax-free when used for health care.

The combination of tax savings and flexibility makes an HSA one of the most powerful tools for managing both current and future medical costs.

HSA Contribution Limits for 2025

The IRS sets annual contribution limits for Health Savings Accounts. For 2025, you can contribute up to $4,300 if you have self-only coverage and up to $8,550 for family coverage. If you’re 55 or older, you can add an extra $1,000 as a catch-up contribution.

Triple Tax Benefits of an HSA

Health Savings Accounts come with three major tax perks:

Tax-deductible contributions – You can lower your taxable income by contributing to your HSA.
Tax-free growth – Any interest or investment gains stay untaxed while in the account.
Tax-free withdrawals – As long as the money is used for qualified medical expenses, you won’t owe taxes when you take it out.

What Expenses Can You Pay with HSA Funds?

HSA funds can be used for a wide range of health-related costs that prevent or treat illness or injury. These include:

Doctor visits and copays
Prescription drugs
Dental and vision care
Mental health services

You can’t use your HSA for nonmedical costs like cosmetic procedures, gym memberships, or most over-the-counter items unless prescribed. If you do, the withdrawal becomes taxable—and if you’re under 65, there’s a 20% penalty.

You Own the Account

An HSA stays with you no matter what. Even if you switch jobs, change health plans, or retire, the account is still yours. That flexibility makes it one of the few long-term tools for covering medical costs that you can truly control.

Who Is Eligible for an HSA?

To open a Health Savings Account in 2025, you must meet all of the following requirements:

You must have a high-deductible health plan (HDHP): For 2025, the IRS defines an HDHP as having a deductible of at least $1,650 for individual coverage or $3,300 for family coverage.
You can’t have any other health coverage: This includes Medicare or other health plans that offer tax benefits.
You can’t be claimed as a dependent: If someone else lists you on their tax return, you’re not eligible to open your own HSA.

These rules are designed to make sure HSAs are used by people who rely on high-deductible plans as their main form of coverage.

Steps to Set Up a Health Savings Account

Once you’re eligible for an HSA, the next move is finding the right provider and opening the account. A well-chosen HSA can help you save more, invest smarter, and avoid unnecessary fees.

Best Places to Get an HSA

You can open a Health Savings Account through banks, credit unions, insurance companies, or dedicated HSA platforms. Look for a provider that offers:

Low fees – Watch out for monthly maintenance, investment, or transfer fees.
Investment options – Some providers let you invest in mutual funds, ETFs, or stocks once your balance hits a certain threshold.
Easy access – Features like mobile apps, online portals, and HSA debit cards make it simple to track and use your funds.
Solid support – Good customer service matters when you’re managing your health finances.

What You’ll Need to Open an HSA

To get started, you’ll typically need to provide:

Your Social Security number
Proof of enrollment in a high-deductible health plan (HDHP)
A valid ID
An initial deposit (optional with some providers)
A named beneficiary

The entire process is usually quick and can often be done online.

Ways to Fund Your HSA

You can put money into your HSA in a few different ways:

Payroll deductions – If your employer offers this, it’s the most seamless way to save pre-tax dollars.
Direct contributions – You can add money on your own, and still claim a tax deduction.
Transfers or rollovers – You’re allowed to move funds from another HSA or even make a one-time transfer from an IRA.

No matter how you contribute, just make sure not to exceed the IRS limit for the year.

How to Manage Your HSA Effectively

Effective management of a Health Savings Account begins with diligent tracking of contributions and expenses. This ensures compliance with IRS rules and maximizes the tax benefits of the account.

Track Your Contributions

Keep track of your HSA contributions to ensure you stay within the annual contribution limits set by the IRS.

Keep Records for Tax Purposes

Maintain records of your HSA contributions and qualified medical expenses to support your tax deductions and tax-free distributions. This documentation will help you avoid potential issues with the IRS.

Investing Your HSA Funds

Investing your HSA funds can help your account grow faster, increasing your ability to cover future medical expenses. Many HSA providers offer a range of investment options, including mutual funds, stocks, and bonds.

Keeping Track of Medical Expenses

Monitor your medical and dental expenses throughout the year to determine when it makes sense to use your HSA funds. You can also save receipts for other qualified medical expenses not covered by your health insurance plan.

When to Use HSA Funds

Using HSA funds to pay for qualified expenses can help reduce your out-of-pocket costs. However, consider whether it might be more beneficial to let your account grow tax-free and cover current expenses through other means.

HSA Rollovers and Transfers Explained

Moving money between Health Savings Accounts can help you cut fees, get better investment options, or switch to a more user-friendly provider. But the IRS treats rollovers and transfers differently—here’s what to know.

Rules for HSA Rollovers

You’re allowed one rollover per 12 months.
The funds must be deposited into the new HSA within 60 days to avoid taxes and penalties.
During that time, you’re holding the funds personally—so timing matters.

Rules for HSA Transfers

Transfers are handled directly between providers—you never touch the money.
There’s no limit to how many times you can do this.
No 60-day window applies.

Why People Move HSA Funds

You might switch providers to:

Lower fees
Access better investment options
Get improved customer support
Combine multiple HSAs into one for easier management

If your current provider isn’t meeting your needs, a rollover or transfer can help you make the most of your account.

How to Use an HSA in Retirement

A Health Savings Account isn’t just for short-term medical bills—it can also play a key role in your retirement plan. Once you turn 65, it becomes one of the most flexible tax-advantaged accounts you can use.

HSA Rules After Age 65

After age 65, you can use your HSA for any expense. If it’s not a qualified medical expense, you’ll just pay regular income tax—no penalty applies. But if you stick to medical costs, the money still comes out tax-free.

What to Know Before Age 65

If you withdraw HSA funds for nonmedical expenses before turning 65, you’ll pay income tax plus a 20% penalty. That’s why it’s smart to save the account for health care costs—or let it grow until retirement.

How Medicare Affects Your HSA

Once you enroll in Medicare, you can’t make new HSA contributions. But the money already in your account is still yours to use for:

Medicare premiums
Dental and vision care
Prescription drugs
Copays and other out-of-pocket expenses

It’s one of the few ways to cover health costs in retirement without increasing your taxable income.

Final Thoughts

A Health Savings Account gives you a rare combination of flexibility, long-term savings potential, and tax advantages. Whether you’re covering current medical bills or planning ahead for retirement, an HSA can help you do it more efficiently.

To get the most out of your account, choose a provider with low fees and solid investment options, contribute consistently, and track your expenses carefully. With the right approach, your HSA can become one of the smartest tools in your financial plan.

Frequently Asked Questions

Can I use my HSA to pay for medical expenses for my dependents?

Yes. You can use your HSA to pay for qualified medical expenses for anyone you claim as a dependent on your tax return, including your spouse and children—even if they aren’t covered under your HDHP.

What should I consider when choosing investments within my HSA?

Think about your risk tolerance, how soon you might need the money, and your long-term goals. A mix of mutual funds, stocks, or bonds can help grow your balance over time. Review your investments regularly to keep them aligned with your needs.

How does having an HSA affect my tax filings?

HSA contributions may lower your taxable income, and you’ll need to report them on IRS Form 8889. Keep detailed records of all distributions to show they were used for qualified medical expenses.

Can I have more than one HSA at the same time?

Yes. You can open multiple HSAs, but your total contributions across all accounts must stay within the annual IRS limit. Some people keep older accounts open but contribute to a new provider with better features or investment options.