An HSA, or Health Savings Account, is a type of tax-advantaged savings account that is designed to help individuals with high-deductible health insurance plans (HDHPs) save for medical expenses. It lets you contribute money on a pre-tax basis (with income you haven’t paid taxes on yet) to pay for medical expenses like dental work, vision care, prescriptions, or medical treatments and examinations. The funds can be used for deductibles, copayments, coinsurance, and other health care expenses, but not for insurance premiums.

How does an HSA work?

An HSA lets you contribute money on a pre-tax basis to spend on medical expenses. It lets you save for your health care and reduce your taxable income at the same time.

Similar to a 401k, the HSA is owned by the employee of a company and can be funded by both the employee and employer. The unique advantage of HSAs is their triple tax advantage. Contributions are tax-deductible, earnings within the account are tax-free, and qualified withdrawals for medical expenses are tax-free as well.

Here’s how it works

  1. You can make contributions to your HSA, and your employer can also choose to make contributions for you. The funds come out of your paycheck and get deducted from your taxable income for the tax year.
  2. Like a retirement plan, the money in your account can be invested in traditional assets like stocks, bonds, mutual funds, and ETFs. There are no taxes on earnings and 100% of your profits can get reinvested.
  3. When you withdraw money from your HSA at any age, there are no taxes if you use it to pay for qualified medical expenses.

Since the funds in your HSA can be invested with tax-free compounding, it helps you build more capital for larger medical expenses. If you have money leftover in your account, you can start taking withdrawals in retirement, starting at the age of 65 (more on withdrawal rules further down below).

What health care expenses are eligible?

Most medical expenses like visits to the doctor, prescriptions, vision care, and dental work are all eligible to be paid for by your HSA.

Here are some additional expenses that your HSA could cover:

  • First aid supplies and medical equipment, such as bandages, ointments, wheelchairs, and crutches.
  • Health monitoring supplies, like blood pressure cuffs and glucometers.
  • Feminine hygiene products, like tampons and pads.
  • Eye exams, glasses, and contact lenses.
  • Complimentary treatments, such as massages, acupuncture, and chiropractor visits.
  • Drug addiction treatments.
  • Fertility and maternity services, like IVF and breast pumps.
  • Medical expenses for your children and other qualified dependents, even if they’re not on your health plan.
  • Home improvement costs to accommodate a certain medical condition.

As long as you use your HSA funds to pay for eligible medical expenses, withdrawals from your account are completely tax-free.

Who is eligible for an HSA?

Workers with high-deductible health plans, also referred to as HDHPs, are eligible to open an HSA if they have no other health coverage, are not enrolled in Medicare, and are not a dependent as reported on any other individual’s tax return.

For employees: Many employers who offer a high deductible health plan also help their employees with enrolling in HSAs. Most employers who provide this option will also choose to make contributions to employees’ plans. However, unlike a 401k, there is no employer matching requirement that states employees must also make contributions in order to receive employer contributions.

For the self-employed: If you’re self-employed, you can open one for yourself at major banks and brokerages like Fidelity, or even at local credit unions.

How do you get a high-deductible health plan?

An HDHP is a type of health insurance plan that typically has lower monthly premiums but higher deductibles compared to traditional health insurance plans. 

To qualify as an HDHP, the plan must meet the minimum deductible requirements set by the IRS, which are redefined each year. For 2023, the minimum deductible is $1,500 for individuals and $3,000 for families. This means that you must pay for eligible medical expenses out of pocket until you reach the deductible before the insurance coverage begins.

There’s also an out-of-pocket spending limit, which, for 2023, is $7,500 for individuals and $15,000 for families.

HSA contribution limits and deadlines

Contribution limit for 2023

For 2023, you can contribute up to $3,850 as an individual, and up to $7,750 as a family. If you’re 55 years of age or older, you get an additional $1,000 in catch-up contributions. Both employee and employer contributions count towards this limit. Overcontributions to your HSA can be hit with a 6% tax on the excess amount.

Contribution deadline

The deadline to contribute to your HSA is the federal tax filing deadline, which is normally April 15th each year unless the date falls on a weekend or holiday.

HSA withdrawal rules

As mentioned earlier, withdrawals from your HSA to pay for qualified medical expenses are tax-free. However, if you withdraw from your account to pay for something other than a qualified medical expense, you will be hit with a 20% penalty tax, plus income taxes.

Once you reach the age of 65 or become disabled, you’re allowed to withdraw from your HSA without the 20% penalty, even if you’re not using it to cover qualified medical expenses. However, the withdrawal will be taxed as ordinary income.

HSA pros and cons


  • A wide range of expenses are counted as qualified medical expenses. You can view the full list here.
  • Other people can make contributions to your HSA. Not only can your employer choose to make contributions to your account, anyone else who wants to contribute to your account for you can do so on your behalf.
  • Contributions are tax-deductible. Money that gets contribute to your HSA are deducted from your taxable income for the year.
  • Earnings are tax-free. Like most retirement accounts, your HSA funds can get invested into traditional assets, and profits are compounded tax-free.
  • Even though you contributed on a pre-tax basis, withdrawals are also tax-free if you use the funds to pay for qualified medical expenses.
  • The money in your HSA is yours and not tied to any one health insurance plan or employer. Your HSA funds are in your own bank account. Even if you switch employers or health insurance plans, your funds are always yours.


  • You must have a high-deductible health plan, which can put more financial strain on you to come up with the higher deductible when you have a large medical bill.
  • There’s a 20% penalty for withdrawals made before the age of 65 if you use the funds for anything other than a qualified medical expense. You’ll have to pay this tax in addition to ordinary income tax.
  • The eligible withdrawal age (when you can withdraw without penalties) is 65 years of age, which is higher than the eligible withdrawal age of most other retirement plans, which is 59½ years of age.