A health savings account (HSA) is a tax-advantaged account that lets you set aside money specifically for medical expenses. You contribute pre-tax dollars, the balance grows tax-free, and withdrawals for qualified medical costs are also tax-free. That triple tax benefit makes it one of the most powerful savings tools available, but you need to be enrolled in a qualifying health insurance plan to open one.
Who Can Open an HSA
To be eligible, you must be covered by a high-deductible health plan (HDHP). For 2025, that means your plan’s annual deductible is at least $1,650 for individual coverage or $3,300 for family coverage. Your plan’s total out-of-pocket costs (deductibles, copays, and coinsurance, but not premiums) also can’t exceed $8,300 for an individual or $16,600 for a family.
Beyond the insurance requirement, you can’t be enrolled in Medicare, claimed as a dependent on someone else’s tax return, or covered by a non-HDHP plan like a traditional employer plan or a general-purpose flexible spending account (FSA). If you meet all these criteria, you can open an HSA through your employer’s benefits program or directly with a bank or financial institution that offers them.
How Contributions Work
You, your employer, or both can put money into your HSA up to an annual cap. For 2025, the limit is $4,300 for individual coverage and $8,550 for family coverage. If you’re 55 or older, you can contribute an extra $1,000 per year as a catch-up contribution. One important detail: employer contributions count toward that same annual cap. So if your employer puts in $1,000 toward your individual plan, you can only contribute up to $3,300 yourself that year.
Contributions made through payroll deductions come out before federal income tax and FICA taxes (Social Security and Medicare), which lowers your taxable income immediately. If you contribute on your own outside of payroll, you deduct the amount on your tax return instead. Either way, you reduce what you owe in taxes for the year.
The Triple Tax Advantage
HSAs are sometimes called “triple tax-free” because they offer benefits at three stages. First, contributions reduce your taxable income in the year you make them. Second, any interest or investment gains inside the account grow without being taxed. Third, withdrawals used for qualified medical expenses come out completely tax-free.
No other account works this way. A traditional 401(k) gives you a tax break on contributions but taxes withdrawals. A Roth IRA taxes contributions but lets withdrawals grow and come out tax-free. An HSA does both, as long as the money goes toward medical costs. This makes it especially valuable if you can afford to let the balance grow over many years rather than spending it down each year.
What You Can Spend It On
The IRS defines “qualified medical expenses” broadly. The obvious ones include doctor visits, hospital services, prescription drugs, dental care, and vision expenses like glasses, contacts, and eye surgery. But the list goes well beyond that. Over-the-counter medications like pain relievers, cold medicine, allergy treatments, and stomach remedies all qualify. So do sunscreen, first aid kits, menstrual care products, and COVID-19 testing kits and protective equipment.
Other qualifying expenses that catch people off guard include acupuncture, chiropractic care, fertility treatments, hearing aids, breast pumps and lactation supplies, smoking cessation programs, psychiatric care, physical therapy, and even transportation costs to get to medical appointments. Weight loss programs qualify if they’re treating a specific medical condition diagnosed by a doctor. Cosmetic procedures generally don’t qualify unless they address an injury or deformity.
You can also use HSA funds to pay your health plan’s deductible, copays, and coinsurance for medical, dental, vision, and prescription coverage.
What Happens With Non-Medical Withdrawals
If you take money out for something that isn’t a qualified medical expense, you’ll owe income tax on the withdrawal plus an additional 20% penalty. That’s a steep hit. On a $1,000 non-medical withdrawal in the 22% tax bracket, you’d lose $420 between taxes and the penalty.
The rules change at age 65. After that, the 20% penalty disappears. You’ll still owe regular income tax on non-medical withdrawals, which effectively makes your HSA work like a traditional retirement account at that point. The same penalty waiver applies if you become disabled. For qualified medical expenses, withdrawals remain completely tax-free at any age.
Your Money Stays With You
Unlike a flexible spending account, where unspent funds typically expire at the end of the year, HSA balances roll over indefinitely. There is no “use it or lose it” deadline. Money you contribute in your 30s can still be sitting in your account decades later, growing tax-free.
The account also belongs to you, not your employer. If you change jobs, get laid off, or retire, your HSA and every dollar in it stays yours. You can leave the money with your current HSA provider or move it to a new one. The cleanest way to transfer is a trustee-to-trustee transfer, where your old provider sends the funds directly to your new one. There’s no limit on how many of these transfers you can do in a year, and you avoid any risk of taxes or penalties. The alternative is receiving a check, but that route limits you to one rollover per 12-month period, and you must deposit the check into another HSA within 60 days or face taxes and a 20% penalty if you’re under 65.
Investing Your HSA Balance
Most people use their HSA like a checking account, depositing money and spending it on medical bills throughout the year. But many HSA providers also let you invest your balance in mutual funds, index funds, or other options, similar to a 401(k). This is where the long-term wealth-building potential comes in.
Providers typically require you to keep a minimum cash balance before investing. A common threshold is $1,000 in your cash account; anything above that can be moved into investments. The specific minimums and investment options vary by provider, so it’s worth comparing if your employer doesn’t lock you into one. Investment gains grow tax-free inside the HSA, which compounds significantly over time. Someone who maxes out their HSA contributions for 20 or 30 years and invests the balance could accumulate a substantial fund for medical costs in retirement, when healthcare spending tends to spike.
Reimbursing Yourself for Past Expenses
One of the lesser-known HSA strategies: there’s no deadline for reimbursing yourself. If you pay for a medical expense out of pocket today but leave your HSA funds invested, you can withdraw the money to reimburse yourself years later, as long as the expense occurred after you opened the account. The key is keeping your receipts. The IRS doesn’t require you to withdraw funds in the same year you incur the expense, which means you can let your investments grow and pull the money out tax-free whenever it’s convenient.
This makes record-keeping essential. Save receipts, explanation-of-benefits statements, and any documentation showing what you paid and when. If the IRS ever questions a withdrawal, you’ll need proof that it matched a legitimate medical expense that occurred after your HSA was established.
HSA vs. FSA
- Rollover: HSA funds roll over year after year with no expiration. FSA funds generally must be used within the plan year, though some employers offer a small grace period or let you carry over a limited amount.
- Ownership: You own your HSA regardless of employment. An FSA is tied to your employer, and you typically lose unspent funds when you leave.
- Contribution limits: HSA limits are higher than FSA limits, and HSAs allow catch-up contributions after age 55.
- Investment: HSA funds can be invested for long-term growth. FSA funds cannot be invested.
- Eligibility: HSAs require enrollment in a high-deductible plan. FSAs are available with most employer-sponsored health plans regardless of deductible level.
For people who have predictable, moderate medical expenses each year and want to pay for them pre-tax, an FSA can still be useful. But for anyone comfortable with a higher deductible who wants a savings and investment vehicle that lasts a lifetime, the HSA is the stronger tool.