What Is a Health Savings Account?

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.

man visiting doctor

How Health Savings Accounts Work

Between setting up an HSA and understanding its benefits, it’s important to consider the specifics of contributions. Here’s how they play into the overall utility and effectiveness of the account.


Health Savings Accounts have annual contribution limits set by the Internal Revenue Service (IRS). For 2024, the limits are $4,150 for self-only coverage and $8,300 for family coverage. Account holders aged 55 or older can make an additional catch-up contribution of $1,000 per year.

Tax Advantages

HSAs offer a triple tax advantage:

  • Contributions are tax-deductible, reducing your taxable income.
  • The growth of your investments within the HSA is tax-free.
  • Withdrawals for qualified medical expenses are tax-free, reducing your overall health care costs.

Qualified Medical Expenses

Qualified medical expenses are those that are primarily used to alleviate or prevent a physical or mental defect or illness. Examples of eligible expenses include:

  • Doctor visits and co-pays
  • Prescription medications
  • Dental and vision care
  • Mental health services

Nonqualified medical expenses, such as cosmetic procedures and gym memberships, are not eligible for tax-free HSA distributions.

Account Ownership

HSAs are individually owned, meaning you control the account even if you change jobs or health plans. This portability ensures that you can continue to use and grow your HSA throughout your life.

Eligibility for Health Savings Accounts

To qualify for a Health Savings Account (HSA), you must satisfy specific criteria. First, you must be enrolled in a high-deductible health plan (HDHP). For 2024, 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. These thresholds are adjusted periodically to reflect inflation.

Additionally, to be eligible for an HSA, you must not have any other health coverage. This includes enrollment in Medicare or possession of any other health plans that offer tax advantages. The intent behind this requirement is to ensure that HSAs serve those primarily reliant on a high-deductible plan for their health care needs.

Lastly, you cannot be claimed as a dependent on someone else’s tax return. This condition emphasizes financial and tax independence, disqualifying those who are considered dependents for tax purposes from opening their own HSA.

How to Open a Health Savings Account

Once you’ve decided to open a Health Savings Account, the next step involves choosing the right provider. Choosing wisely allows you to make the most of your HSA and maximize its potential.

Research HSA Providers

There are various types of HSA providers, including banks, credit unions, insurance companies, and specialty HSA providers. When selecting a provider, consider factors such as fees, investment options, and customer service.

Compare HSA Providers

Before opening an HSA, compare the offerings of different providers to find the best fit for your needs. Consider:

  • Fees: Some providers may charge monthly maintenance fees, transaction fees, or investment fees.
  • Investment options: Some providers offer a range of investment options, including mutual funds and individual stocks.
  • Customer service: Look for a provider with a strong track record of customer satisfaction and responsive support.
  • Account features: Features such as online access, mobile apps, and debit cards can make managing your HSA more convenient.

Opening an HSA

To open a health savings account, you’ll need to provide personal information, including your Social Security number and proof of HDHP coverage. You may also need to make an initial deposit and designate a beneficiary for your account.

Contributing to an HSA

You can contribute to your HSA through direct contributions, payroll deductions, or transfers from another HSA or IRA. Payroll deductions allow you to save pre-tax dollars, maximizing your tax savings.

How to Manage Your Health Savings Account

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

Understanding HSA rollovers and transfers is essential for effectively managing your funds and adapting to your financial needs or preferences.

Rollover Rules

You can roll over funds from one HSA to another once every 12 months without incurring tax penalties. Rollovers must be completed within 60 days to avoid taxation.

Transfer Rules

Transfers between HSAs can occur more frequently than rollovers and do not have the same 60-day requirement.

Reasons for Rollovers and Transfers

You may choose to roll over or transfer funds between HSAs to take advantage of better investment options, lower fees, or improved customer service.

Health Savings Accounts and Retirement

Integrating HSAs into your retirement strategy allows for greater financial versatility in later years, making them a strategic component of long-term financial planning.

Using HSA Funds for Retirement

HSAs can be a valuable tool for retirement planning. After age 65, you can use HSA funds to pay for nonmedical expenses without incurring a penalty, although you will have to pay income tax on these withdrawals.

Withdrawal Penalties and Taxes

Before age 65, nonqualified withdrawals are subject to a 20% penalty and income tax. After age 65, the penalty is waived, but you’ll still need to pay income tax on nonmedical withdrawals.

HSA and Medicare

Once you enroll in Medicare, you can no longer contribute to an HSA. However, you can still use your funds to pay for qualified medical expenses, including Medicare premiums and out-of-pocket expenses.


Health Savings Accounts offer significant tax advantages, helping individuals and families save pre-tax dollars and receive tax-free distributions for qualified medical expenses. To maximize the benefits of an HSA, research providers, compare fees and investment options, and consult a tax advisor or registered investment advisor.

By taking these steps, you can make informed decisions about your health coverage and better prepare for future medical expenses.

Frequently Asked Questions

What happens if I use HSA funds for nonqualified expenses?

If you use funds from your Health Savings Account (HSA) for expenses that are not qualified medical expenses, you will face tax implications. For individuals under the age of 65, these nonqualified withdrawals are taxed as income and are subject to an additional 20% penalty. After the age of 65, the 20% penalty no longer applies, but you will still need to pay income tax on the withdrawal.

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 any of your dependents claimed on your tax return. This includes expenses for your spouse and any dependents, even if they are not covered under your high-deductible health plan (HDHP).

How do I determine if a medical expense is qualified for HSA use?

To determine if a medical expense is qualified for HSA use, it must be a cost that is primarily for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any part or function of the body.

The IRS provides a detailed list of qualified medical expenses in Publication 502, which includes many types of medical care, prescriptions, and some medical devices. Expenses like cosmetic procedures or non-prescription drugs (except insulin) generally are not qualified. Always keep receipts and documentation for all medical expenses paid using funds from an HSA.

What should I consider when choosing investments within my HSA?

When choosing investments within your HSA, consider your risk tolerance, investment goals, and the time horizon until you might need to use the funds. Diversifying your investments to include a mix of stocks, bonds, and mutual funds can help manage risk and potential returns. It’s important to review these investments periodically to ensure they align with your changing financial goals.

How does having an HSA affect my tax filings?

Having an HSA affects your tax filings in several ways. You’ll need to report HSA contributions, which may reduce your taxable income. You must also keep detailed records of all distributions to ensure they were used for qualified medical expenses. These transactions are typically reported on IRS Form 8889, which helps track contributions, distributions, and your tax deductions.

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