What is a health savings account (HSA) and how does it work?

You can use tax-free savings to pay for medical expenses.



Elissa Suh

Elissa Suh

Senior Editor & Disability Insurance Expert

Elissa Suh is a disability insurance expert and a former senior editor at Policygenius, where she also covered wills, trusts, and advance planning. Her work has appeared in MarketWatch, CNBC, PBS, Inverse, The Philadelphia Inquirer, and more.

Updated|5 min read

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Key takeaways

  • Use an HSA to pay for eligible medical expenses

  • HSAs give you the potential for tax-free savings

  • Contribution limits for 2022: $3,650 for individuals and $7,300 for families

  • You need a high-deductible health plan (HDHP) to qualify

A health savings account (HSA) is a medical savings account with tax advantages and investment opportunities. You can use it to pay for certain medical expenses that might not be covered by your health insurance, like crutches or fertility treatment.

An HSA is also a personal savings account that might allow you to invest the money into stocks and bonds. Think of it like a traditional IRA — a retirement savings account with pre-tax contribution benefits — but the money can only be used to pay for medical expenses. HSAs also come with their own contribution limits and withdrawal rules like an IRA does.

A health savings account’s multipurpose benefits can be appealing, but there are drawbacks, including how the money can be invested and used. You’ll also need a high-deductible health plan (HDHP). We’ll discuss what that is, how the HSA works, and more.

How an HSA works

Contributions to a health savings account come with tax benefits. You can usually make pre-tax payroll deductions, which will lower your taxable income. If you’ve opened an HSA on your own and are unable to use your pre-tax dollars, you can still contribute and get a tax benefit; you can deduct after-tax contributions from your taxable income.

Your health plan provider will issue you a debit card or checks to pay for qualifying expenses. (We’ll get more in depth on that later.) These can be for yourself and anyone included in your plan, like a spouse or dependents.

Any unused funds in your HSA will roll over to the next year, unlike the money in a flexible spending account, which you lose if you don’t spend. The money in your health savings account also stays and moves with you if you retire, change employers or health insurance.

Learn more about deductibles in health insurance.

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Investing with an HSA

An extra component of a health savings account is the ability to invest. Your money can be invested into stocks, bonds, and mutual funds, but usually not alternative investments. Your earnings will grow tax-deferred until you withdraw them. We’ll talk about withdrawals next.

Some people use HSAs to stash extra retirement savings, since you can use the money for qualifying expense if something medical comes up, and once you are 65 years old you can use the money for anything else.

HSA withdrawals

You are allowed to withdraw funds to use them for qualified medical expenses, just make sure to save the receipts. If you’re under 65 and withdraw money from the account and use it for something other than a qualified medical expense, you will pay income taxes and a penalty. In this regard, withdrawing money from an HSA works similarly to individual retirement plans like an IRA.

If you’re 65 and older, non-medical expense-related withdrawals will incur only taxes, but not fees.

Penalties and taxes

You will pay any penalties when you file your tax return. The penalty is 20% of the amount of what you spent on non-qualfied expenses. You will also need to self-report these expenses this to the IRS with form 8889 to prevent a potential audit in the future.

What can I use my HSA for?

You can only use the HSA to pay for qualified medical expenses. The IRS designates these as the costs of diagnosis, cure, mitigation, treatment, and disease prevention. You can find the full list on the IRS website.

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Eligible expenses

Your payments cover medical services and preventive care, not just by physicians and surgeons, but dentists, optometrists, and mental health professionals, too.

Other HSA qualifying expenses include:

  • Acupuncture

  • Chiropractor

  • Fertility treatments

  • Alcoholism and drug addiction treatment

  • Smoking-cessation programs (but not products)

  • Weight loss programs

  • Eye glasses and contact lenses

  • Long-term care services for chronically ill individuals, and a limited amount of long-term care insurance premiums

  • Abortion

  • Birth control pills

  • Sterilization, like vasectomy

  • Car expenses, like gas, parking fees, and tolls, when used for medical-care and qualifying services

  • Nursing homes

  • Wigs

Ineligible expenses

Not all medical expenses qualify. The big ones to remember are over-the-counter medications without a doctor’s prescription and payments for future medical expenses — so you can’t prepay for copays that you'll be billed for later.

As a general rule, anything that promotes your general well being, as opposed to treating a specific ailment, cannot be covered by your HSA.

Here’s are some medical expenses that are not covered by HSAs

  • Controlled substances

  • Non-prescription drugs

  • Vitamins and supplements

  • Gym memberships or other health club dues

  • Household help

  • Life insurance premiums

  • Funeral expenses

  • Nicotine gum and patches

  • Teeth whitening

  • Hair transplants

Qualifying for an HSA

You must have a high-deductible health plan (HDHP) to open an HSA account. For 2021 this is a health plan with a minimum deductible of $1,400 for individuals or $2,800 for families. This will remain unchanged in 2022.

Additionally, if you are enrolled in Medicare, covered by someone else’s health insurance, or if someone can claim you as a dependent on a tax return, then you do not qualify for an HSA.

Your healthcare provider will let you know if your plan qualifies for an HSA. If not, you can open one on your own. Health savings accounts may come with maintenance fees, whether you have one through your health insurance provider or create your own.

Contributing to an HSA

With an HSA, others are permitted to make contributions to your account. That means employers, family members, and others can also fund your account.

You can also transfer money to your HSA with a one-time rollover from an IRA. Just make sure to stay within contribution limits set by the IRS.

For 2022, the HSA contribution limits are: | Who | How much | |---------------|----------------------------------------------------------------| | Individuals | $3,650 | | Families | $7,300 | | Age 55 and up | $1,000 catch-up contributions |

Catch-up contributions refer to additional contributions you can make on top of the regular limits.

The contribution phase-outs for HSAs begin when you enroll in Medicare (typically age 65), at which point you can no longer put money into the account.

Should I get an HSA account?

One thing to consider before getting an HSA is whether you want to get a high-deductible health plan, since it is a qualifying requirement. HDHPs have lower have lower monthly health insurance premiums, but at the cost of a higher deductible. This means you’ll have to pay more in out-of-pocket expenses before your health insurance plan will start covering them. While an HSA might have its benefits, it might not be worth signing up for a high deductible plan just to get one.

One of the benefits of an HSA is the ability to invest your money. But the investment options might not be as flexible as those offered by typical retirement plans, either work-sponsored or individual. HSAs can help boost your savings, but might not be robust enough to help you stay afloat during retirement due to its low contribution limits.

As of 2022, individuals can contribute $3,650 per year to an HSA, compared to the 2022 contribution limit of $10,500 for 401(k) plans. (In 2021, the HSA limit was $3,600, and the 401(k) limit was $19,500.)

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Senior Editor & Disability Insurance Expert

Elissa Suh

Senior Editor & Disability Insurance Expert

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Elissa Suh is a disability insurance expert and a former senior editor at Policygenius, where she also covered wills, trusts, and advance planning. Her work has appeared in MarketWatch, CNBC, PBS, Inverse, The Philadelphia Inquirer, and more.

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