A health savings account is a triple-benefited tax-advantaged account used for medical expenses and retirement savings.
This guide reviews IRS guidelines to break down how HSAs work, their benefits, and what you should know before setting up an account.
Continue reading to learn more about HSAs.
What is an HSA?
A health savings account – or HSA – is a tax-advantaged savings account that can be opened alongside a high-deductible health insurance plan (HDHP).
An HSA allows individuals to save pre-tax dollars to pay for medical expenses, including doctors visits or your plan’s deductible.
HSA contributions can be invested allowing you to increase the value of your savings over time.
How does an HSA work?
To make contributions to an HSA, you must meet the following criteria:
- Enrolled in a high-deductible health plan.
- Cannot be enrolled in another health plan, including Medicare.
- Cannot be a dependent on another person’s tax return.
Contributions made to an HSA use pre-tax dollars made through a payroll deduction or directly to your account.
You and your employer can contribute to an HSA. Individual investors can use an HSA to invest in stocks, bonds, and ETFs.
Like a Roth IRA, your savings will grow tax-free. Withdrawals used for qualified medical expenses are tax-free, making HSAs a triple-benefitted account.
Funds invested in an HSA can be rolled over from year-to-year. Just like saving for retirement, if you start saving in your HSA in your 20s, those funds can grow over time and be used for medical expenses later in life.
To use your funds, you can request a debit card for your account or reimburse yourself. Taxes and penalties apply to non-qualified medical expenses so be sure to keep detailed records of how your funds are used.
HSA Contribution Limits
In addition to meeting eligibility requirements, investors are limited in the amount of money they can contribute to an HSA each year.
In 2025, individuals enrolled in a high-deductible health plan can contribute up to $4,300. The maximum deductible for the HDHP is $1,650 while the maximum out-of-pocket limit is $8,300.
Families enrolled in a HDHP can contribute up to $8,550. The maximum deductible for family coverage is $3,300 while the maximum out-of-pocket limit is $16,600.
If both spouses have individual HSAs, they can contribute up to the family limit. HSAs are eligible for catch-up contributions.
If you are 55 years old or older you can contribute an additional $1,000 above the contribution limit.
Excess contributions are assessed a 6% tax. If you lose your job or are no longer enrolled in a HDHP you are not eligible to continue making new contributions.
While you can still use the funds already saved for qualified medical expenses, new contributions may incur a penalty.
Some employers may contribute to your HSA as part of your benefits package. The limit is still the same regardless of who makes the contribution.
If your employer gives you $500 toward your HSA you are only able to contribute $3,800.
HSAs can only be used to cover qualified health-related expenses:
| Expense | Qualified |
|---|---|
| Deductible | Yes |
| Doctor Visit Copays | Yes |
| Prescriptions | Yes |
| Dental (excluding cosmetic procedures) | Yes |
| Vision | Yes |
| Psychiatric Treatment | Yes |
| Insurance Premiums | No |
| Gym Memberships | No |
| Over-the-Counter Medications | No |
There are some exceptions. If you’re unemployed or on COBRA, you can use your HSA to cover your premium.
While gym memberships are typically excluded, if you obtain a Letter of Medical Necessity, membership fees may be eligible.
Pros & Cons
While an HSA comes with some great tax benefits, there are a few things to be mindful of before investing.
Pros
- Triple-tax benefited: contributions, growth, and withdrawals are all made tax-free, making an HSA an important tool in a tax savings strategy.
- Investment account: HSAs opened with brokerage firms can be invested in stocks, bonds, and ETFs.
- Funds rollover from year-to-year: you can invest and grow your savings for future use.
- Move between jobs: if you leave your employer, your account stays with you.
Cons
- Requires a HDHP: depending on your personal medical needs or employer benefits, you may have a health plan that excludes you from contributing to an HSA.
- Use limits: you’re limited in how much you can contribute and how funds can be used.
HSA vs. FSA: What’s the difference?
If you haven’t heard of an HSA before it’s easy to confuse with other health savings accounts like flexible savings accounts or FSAs.
While both accounts allow you to save for medical expenses, there are some key differences to be aware of.
| Criteria | HSA | FSA |
|---|---|---|
| Eligibility | Must be enrolled in HDHP | Available with many employer-sponsored plans, not just HDHPs |
| Account Ownership | Owned directly by individual | Managed by employer |
| 2025 Contribution Limit | $4,300 for individuals and $8,550 for families with $1,000 contribution catch-up for those 55 or older | $3,300 per employee or $6,600 per household with no catch-up option |
| Funds Rollover | Yes | Don’t rollover and unused funds are forfeited at the end of the year |
| Withdrawals | Tax free for qualified expenses; taxes and penalties applied for non-qualified expenses made before age 65 | Not eligible for non-medical use |
| Investment Options | Designed for long-term savings and can be invested in stocks, bonds, mutual funds, and ETFs | Designed for short-term expenses and cannot be invested |
How to Set Up a Health Savings Account
Setting up a health savings account can be done by individuals, usually online. Follow these steps to set up an account:
- Confirm eligibility with an HDHP.
- Choose a qualified HSA provider (banks, credit unions, and brokerage firms offer accounts).
- Complete a new application and verify your identity with a driver’s license and Social Security Number.
- Fund your account with a payroll deduction or direct cash contribution.
- Invest contribution in stocks, bonds, mutual funds, or ETFs.
- Obtain a debit card to use your account for qualified medical expenses.
When looking for a provider, make sure it aligns with your financial goals. While banks and credit unions offer HSAs these act as traditional savings accounts.
You’ll earn interest on your savings, but unless you open an account with a brokerage firm, you won’t be able to invest your savings in appreciating assets.
Is an HSA a good idea?
An HSA can be a good way to maximize tax savings while investing in the future. It allows you to invest in appreciating assets that can grow tax free.
While HSAs are designed to cover medical expenses, once you hit age 65, you can make withdrawals for non-medical expenses penalty free.
Depending on your personal needs, an HSA might not be a good idea. It requires a high-deductible health plan which can come with higher out-of-pocket expenses.
Compared to other retirement savings accounts, the contribution limit for HSAs is much lower and comes with a penalty if you overfund your account.
If you’re eligible for an HSA and don’t have high medical expenses, an HSA is another way to invest and can help you grow your nest egg for retirement.
Research different HSA providers to determine if opening an account is right for you.
FAQs
What is HSA insurance?
HSA insurance is a savings account that allows you to pay for out-of-pocket medical expenses when paired with a high-deductible health plan.
Can I rollover my HSA to another account?
Yes, you can rollover your HSA funds to another provider. You can do this to consolidate funds or take ownership over your account.
What is an HSA card and what can I use with it?
An HSA card is similar to a debit card and can be used to pay for qualified medical expenses such as a prescription or a trip to the doctor.
Can I withdraw money from my health savings account?
You can withdraw money from your health savings accounts. Withdrawals made for qualified medical expenses are tax-free while non-qualified withdrawals are subject to income taxes and a 20% penalty.
