What Is an HSA

If someone at work mentioned you can open an HSA because you're on a high-deductible health plan, but nobody explained what that actually means or whether it's worth doing, you're not alone. Health Savings Accounts come with a reputation for being complicated — but the core idea is straightforward, and once you understand the rules, an HSA can be one of the most flexible financial tools available to people with qualifying health coverage. This article explains what an HSA is, who can open one, how money goes in and comes out, and how it compares to a Flexible Spending Account (FSA).

What Is an HSA?

An HSA — Health Savings Account — is a personal savings account that lets you set aside money specifically to pay for medical costs. What makes it different from a regular savings account is that it comes with significant tax advantages, and the money in it belongs to you permanently, not to your employer or your insurance company.

An HSA is always paired with a high-deductible health plan (HDHP) — a type of health insurance with lower monthly premiums but higher out-of-pocket costs before coverage kicks in. The HSA is designed to help you handle those higher upfront costs without the tax hit you'd take using regular after-tax income. You can't open or contribute to an HSA without being enrolled in an HDHP.

Who Is Eligible to Open an HSA?

You can open and contribute to an HSA if you meet all of the following conditions at the time you make contributions:

• You are enrolled in an HSA-qualified High-Deductible Health Plan (HDHP)
• You are not enrolled in Medicare (Parts A, B, or D)
• You are not claimed as a dependent on someone else's tax return
• You are not covered by any other non-HDHP health insurance, with limited exceptions

This applies whether your HDHP comes through an employer or you purchased it yourself as a self-employed individual. If you buy your own coverage through the Health Insurance Marketplace and select an HSA-eligible HDHP, you can open an HSA through a bank, credit union, or other financial institution that offers them.

One common point of confusion: your employer doesn't have to offer an HSA for you to have one. As long as your health plan qualifies, you can open an HSA on your own.

The Triple Tax Advantage

HSAs are often described as having a "triple tax advantage," which means your money gets favorable tax treatment at three different points. Understanding each one helps explain why these accounts are valuable even for people who aren't putting away large sums.

1. Contributions go in pre-tax (or are tax-deductible)

If you contribute through payroll deductions at work, the money is taken out before federal income taxes are calculated — reducing your taxable income immediately. If you contribute directly on your own, you deduct the amount on your federal tax return. Either way, you're not paying income tax on money you put into the account.

2. The money grows tax-free

Many HSAs allow you to invest your balance in mutual funds or other investment options once your balance reaches a certain threshold. Any interest or investment growth in the account is never taxed, as long as it stays in the account.

3. Withdrawals are tax-free for qualified medical expenses

When you use HSA funds to pay for eligible medical costs, you don't owe any taxes on that withdrawal. No federal income tax, and in most states, no state income tax either. For a full list of what qualifies, see IRS Publication 502.

How Much Can You Contribute?

The IRS sets annual limits on how much you can put into an HSA. For 2025, those limits are:

• $4,300 for individual (self-only) coverage
• $8,550 for family coverage
• +$1,000 catch-up contribution if you are age 55 or older by the end of the year

These limits include contributions from all sources — your own contributions, any amount your employer puts in on your behalf, and any other contributions. You don't have to contribute the maximum; putting in even $500 or $1,000 a year still gives you tax savings and builds a balance you can use when health costs come up.

These figures come from IRS Revenue Procedure 2024-25, which sets the official 2025 limits.

What Can You Use HSA Money For?

HSA funds can be used tax-free for a wide range of medical costs — not just doctor visits. Qualified expenses include:

• Deductibles and copayments — the amounts you pay before and after your insurance kicks in
• Prescription medications
• Dental care, including cleanings, fillings, and orthodontia
• Vision care, including glasses and contact lenses
• Mental health services
• Certain over-the-counter medications and menstrual care products

If you use HSA money for something that doesn't qualify as a medical expense and you're under 65, you'll owe income tax on that amount plus a 20% penalty. The full list of eligible expenses is in IRS Publication 502.

A Concrete Example: How an HSA Works in Practice

Say you're single, enrolled in an HDHP, and you contribute $150 per month to your HSA through payroll — that's $1,800 for the year. You're in the 22% federal tax bracket.

Because that $1,800 goes in pre-tax, you avoid paying $396 in federal income taxes on it (22% × $1,800). In April you need new glasses and a dental filling — total cost $480. You pay directly from your HSA card. No taxes due on that withdrawal.

At year-end, you have $1,320 left in the account. That balance rolls over completely into next year. You don't lose a cent.

Unused Money Rolls Over — Every Year

One of the most important things to understand about an HSA: there is no "use it or lose it" rule. Whatever you don't spend stays in your account indefinitely. It rolls over from year to year, continues to grow if you've invested it, and remains yours even if you change jobs, switch health plans, or stop contributing.

Many people use their HSA as a long-term medical savings cushion, paying smaller expenses out of pocket now and letting the HSA balance build for larger costs down the road — including in retirement.

What Happens After Age 65?

Once you turn 65, the rules change in a useful way. You can still use HSA funds tax-free for qualified medical expenses. But you can also withdraw money for any reason at all without the 20% penalty. Non-medical withdrawals after 65 are simply taxed as ordinary income — similar to how a traditional 401(k) works. This makes a well-funded HSA a flexible supplement to retirement income.

Note that once you enroll in Medicare, you can no longer make new contributions to your HSA. But you can keep spending what's already in the account.

HSA vs. FSA: What's the Difference?

A Flexible Spending Account (FSA) is another type of tax-advantaged account for medical costs, but it works quite differently from an HSA.

• Eligibility: FSAs don't require an HDHP. HSAs do.
• Rollover: FSAs generally operate on a "use it or lose it" basis — most plans allow you to carry over only up to $660 (2025) or offer a short grace period. HSAs roll over completely, every year.
• Portability: An HSA belongs to you and follows you if you change jobs. An FSA is typically tied to your employer and you may forfeit unused funds if you leave.
• Contribution limits: FSA limits are lower (up to $3,300 for 2025 for health FSAs) and are set separately.
• Investing: HSA funds can often be invested. FSA funds generally cannot.

If you have access to both, there are rules about which ones you can use simultaneously — a question worth discussing with a tax advisor, since the answer depends on your specific plan types.

What You Should Do Next

If you're enrolled in an HDHP and you haven't opened an HSA yet, the first step is confirming your plan is HSA-eligible — your plan documents or HR department can tell you this. If you're self-employed, check whether your marketplace plan is labeled HSA-compatible.

Once you've confirmed eligibility, you can open an HSA through a bank, credit union, or financial institution that offers them. If your employer offers payroll-based HSA contributions, that's usually the most tax-efficient route. If not, direct contributions still qualify for a federal tax deduction.

Start with whatever amount fits your budget. Even a modest contribution reduces your tax bill and gives you a tax-free cushion for medical costs. For detailed rules on eligible expenses and contribution limits, see IRS Publication 969. For questions about how an HSA interacts with your specific tax situation, consult a qualified tax advisor.

Sources: IRS Publication 969 — HSAs and Other Tax-Favored Health Plans, IRS Publication 502 — Medical and Dental Expenses, IRS Revenue Procedure 2024-25 — 2025 HSA Contribution Limits