A health savings account (HSA) is a tax-advantaged account that lets you set aside money specifically for medical expenses. It pairs with a high-deductible health plan and offers a rare triple tax benefit: your contributions lower your taxable income, the money grows tax-free, and withdrawals for qualified medical costs are also tax-free. No other account in the U.S. tax code offers all three at once.
How an HSA Works
You open an HSA through your employer’s benefits program or directly with a bank or financial institution that offers them. Money goes in through payroll deductions or personal contributions, sits in the account earning interest or investment returns, and comes out when you need to pay for medical care. The account is yours permanently. It stays with you if you change jobs, switch insurance plans, or retire. There’s no “use it or lose it” deadline like a flexible spending account (FSA).
To be eligible to contribute, you need to be enrolled in a qualifying high-deductible health plan (HDHP). For 2026, the IRS defines that as a plan with an annual deductible of at least $1,700 for individual coverage or $3,400 for family coverage. Your plan’s out-of-pocket maximum (the most you’d pay in a year before insurance covers everything) can’t exceed $8,500 for an individual or $17,000 for a family. Bronze and catastrophic plans are exempt from the out-of-pocket cap requirement. You also can’t be enrolled in Medicare or claimed as a dependent on someone else’s tax return.
The Triple Tax Advantage
The reason HSAs get so much attention in personal finance circles comes down to how they’re taxed, or rather, how they aren’t.
Tax break on contributions. If your employer deducts HSA contributions from your paycheck before taxes, those dollars reduce both your income tax and your Social Security and Medicare (FICA) taxes. If you contribute on your own with after-tax money, you claim the deduction when you file your return. Either way, every dollar you put in lowers your taxable income. You don’t need to itemize deductions to get this benefit.
Tax-free growth. Any interest or investment gains inside the account accumulate without being taxed. Many HSA providers let you invest your balance in mutual funds or other options once you reach a minimum cash balance, similar to a retirement account. The earnings stay tax-free as long as they remain in the HSA.
Tax-free withdrawals for medical expenses. When you spend HSA funds on qualified medical expenses, you pay no tax on the withdrawal. There’s no penalty and no waiting period. You can use the money the same day you contribute it, or let it sit for decades and use it later.
There is one difference worth knowing between payroll and personal contributions. When your employer takes contributions out of your paycheck pre-tax, you save on FICA taxes (7.65% for most workers) in addition to income tax. When you contribute on your own and deduct it on your return, you get the income tax break but not the FICA savings. If you have the option to contribute through payroll, it’s the more tax-efficient route.
What You Can Spend HSA Money On
The IRS defines qualified medical expenses broadly. The list includes doctor visits, hospital stays, surgery, dental work, vision care, prescription medications, mental health services, and physical therapy. It also covers items you might not expect: hearing aids, contact lenses and eyeglasses, fertility treatments, acupuncture, chiropractic care, breast pumps, crutches, wheelchairs, service animals, and even lead-based paint removal if medically necessary. Pregnancy test kits, bandages, and stop-smoking programs qualify too.
Prescribed medications are covered, including insulin. Over-the-counter drugs generally need a prescription to qualify. Weight-loss programs count only if a physician has diagnosed a specific disease that the program treats.
If you withdraw money for something that isn’t a qualified medical expense, you’ll owe income tax on the amount plus a 20% penalty. That penalty goes away once you turn 65, at which point non-medical withdrawals are taxed as ordinary income (similar to a traditional IRA distribution) but carry no extra penalty.
HSA Contribution Limits
The IRS sets annual caps on how much you can contribute. These limits are adjusted for inflation each year, so check the current year’s numbers before maxing out your account. Contributions from all sources count toward the limit, including anything your employer puts in on your behalf.
If you’re 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution. This amount is set by law and doesn’t change with inflation.
You have until the tax filing deadline (typically April 15 of the following year) to make contributions for a given tax year. If you were only enrolled in an HDHP for part of the year, your contribution limit is generally prorated based on the number of months you were eligible.
Using an HSA as a Retirement Tool
Because HSA funds never expire and can be invested, many people treat their HSA as a supplemental retirement account. The strategy is straightforward: contribute the maximum each year, invest the balance, pay current medical bills out of pocket if you can afford to, and let the HSA grow for decades. By the time you retire, you could have a substantial tax-free pool of money designated for healthcare costs, which tend to be significant in retirement.
After age 65, your HSA becomes even more flexible. You can still withdraw money tax-free for medical expenses, which now includes Medicare premiums, deductibles, copayments, and coinsurance. For non-medical spending, the 20% penalty disappears, and withdrawals are simply taxed as income, making the account function like a traditional IRA for general spending.
HSAs and Medicare
Once you enroll in Medicare Part A or Part B, you can no longer contribute to an HSA. Medicare isn’t a high-deductible health plan, so you lose eligibility the month your Medicare coverage begins.
There’s a timing wrinkle that catches people off guard. When you enroll in Medicare Part A, you receive up to six months of retroactive coverage dating back to your initial eligibility. That means if you were still contributing to your HSA during those months, you could face a tax penalty for contributing while covered by Medicare. The safest approach is to stop HSA contributions at least six months before you plan to enroll in Medicare.
You can still use the money already in your HSA after enrolling in Medicare. Withdrawals for qualified medical expenses remain tax-free, and the account continues to grow. You just can’t add new money.
How to Open an HSA
If your employer offers an HSA alongside its high-deductible health plan, that’s usually the easiest route. Payroll deductions happen automatically, and many employers contribute a set amount to your account each year as an added benefit.
If your employer doesn’t offer one, or if you’re self-employed, you can open an HSA with banks, credit unions, and investment firms that act as HSA custodians. Compare accounts based on monthly fees, investment options, and minimum balance requirements. Some providers charge a monthly maintenance fee of a few dollars, while others waive it once your balance hits a certain threshold. If you plan to invest your HSA funds, look for providers that offer low-cost index funds rather than limiting you to a basic savings rate.
Once your account is open, you’ll typically get a debit card linked to the HSA for paying medical expenses directly. Keep receipts for every withdrawal. There’s no time limit on reimbursing yourself, so you can pay out of pocket today and withdraw the equivalent amount from your HSA years later, letting the money grow in the meantime.