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

Originally published June 9, 2021 · Refreshed August 22, 2025

A Health Savings Account (HSA) is a tax-advantaged account that lets you set aside pre-tax money to pay for qualified medical expenses, and unlike similar accounts, the balance never expires. Money goes in tax-free, grows tax-free, and comes out tax-free as long as you spend it on qualified healthcare costs, which is why HSAs are often called the most tax-efficient account available to most Americans. You need a specific type of health insurance to open one, but if you qualify, an HSA can lower your healthcare costs now and double as a powerful retirement account later.

What is a Health Savings Account?

A Health Savings Account is a special savings account used specifically for healthcare-related expenses. A few features make it stand out from other accounts:

Who is eligible to use an HSA?

You’re generally eligible to open and contribute to an HSA if you meet two requirements:

A handful of situations disqualify you even if you meet both of those requirements. The most common ones:

What is a high-deductible health plan?

A High Deductible Health Plan (HDHP) is an insurance plan with a higher deductible and higher out-of-pocket costs than a traditional plan, in exchange for a lower monthly premium, often significantly lower. In practice, that means lower monthly payments but higher costs if you actually need care.

How do I know if my HDHP qualifies me for an HSA?

HSA-qualified health plans have to meet specific IRS requirements for minimum deductibles and maximum out-of-pocket costs for both individual and family coverage. Those thresholds are set by the IRS and adjusted for inflation each year, so check IRS Publication 969 or your plan documents for the current numbers rather than relying on a figure you saw somewhere else. This is one detail worth verifying directly.

One timing rule worth knowing: for any month you want to contribute to your HSA, you need to be covered by a qualifying HDHP on the first day of that month. However, once you’ve opened an HSA and made eligible contributions, you don’t have to maintain HDHP coverage to use money already in the account.

What counts as a qualified medical expense?

For your HSA withdrawals to stay tax-free, they have to go toward Qualified Medical Expenses (QMEs), healthcare-related items or services the IRS allows you to use HSA funds for. There’s a long list of eligible expenses, and the IRS updates it periodically, so it’s worth checking your HSA provider’s eligibility tool before assuming something does or doesn’t qualify.

Why use a Health Savings Account?

There are a few distinct reasons HSAs are worth prioritizing if you’re eligible.

Tax savings

Because qualified medical expenses come out of an HSA tax-free, it’s typically the most cost-effective way to handle healthcare costs. Many people compare the tax benefits to a 401(k), but an HSA actually goes further: you get a deduction on the way in, tax-free growth while the money sits invested, and tax-free withdrawals on the way out for qualified expenses, often called the “triple tax advantage.” If you contribute through an employer’s payroll deduction, you also avoid payroll taxes on those contributions, which isn’t the case with a typical pre-tax 401(k) contribution.

Portability

HSA funds don’t expire, ever. Unlike a Flexible Spending Account, unused money rolls over from year to year indefinitely. This is one of the most persistent misconceptions about HSAs: people assume they’re “use it or lose it” like an FSA, and pass up a genuinely useful account as a result. Because the funds never expire, you can use money you contribute this year on a medical expense next year, in fifteen years, or in retirement.

Retirement

Once you reach age 65, you keep the same tax advantages for qualified medical expenses, but you can also withdraw HSA funds for any expense the way you would from an IRA or 401(k), the only difference is that non-medical withdrawals get taxed as ordinary income at that point, with no penalty. Healthcare tends to be one of the largest expenses people face in retirement, which is why many financial professionals recommend treating an HSA as a supplemental retirement account rather than spending it down during your working years.

A worked example

Consider two couples, both about to retire at 65 with $1,000,000 in total retirement savings and an expected $300,000 in healthcare costs during retirement, taxed at a 25% effective rate.

The first couple has all $1,000,000 in a pre-tax 401(k). They pay their full effective tax rate on every dollar they withdraw (including the $300,000 they spend on medical care) for roughly $250,000 in total taxes on their withdrawals.

The second couple split their savings: $300,000 in an HSA and $700,000 in a 401(k). They use their HSA balance specifically for their $300,000 in medical expenses, which comes out completely tax-free, and pay tax only on the $700,000 they withdraw from their 401(k), about $175,000 in total taxes.

Same total savings, same total spending, but the second couple keeps an extra $75,000 simply by routing their medical spending through an HSA instead of a 401(k). A Roth IRA or Roth 401(k) doesn’t replicate this advantage, because you still pay tax on Roth contributions up front, regardless of what the money is eventually spent on.

How much should I contribute to an HSA?

A useful way to think about HSA contributions is in three phases.

Phase 1: Cover your annual medical expenses. At minimum, contribute enough to cover what you expect to spend on medical care this year. You’re going to pay for these expenses one way or another, so you might as well get the tax benefit. You can either estimate your annual costs and contribute throughout the year, or pay out of pocket and contribute (then reimburse yourself) as expenses come up.

Phase 2: Contribute as much as you can, and capture any employer match. If you can contribute beyond your immediate medical costs, do it, and if your employer offers any kind of HSA matching contribution, make sure you’re capturing all of it before prioritizing other savings.

Phase 3: Contribute the annual maximum. Once you’re covering current expenses and capturing any match, work toward maxing out your HSA contribution each year. This is where the account starts to function as a real retirement vehicle, especially if you invest the balance rather than letting it sit in cash.

A bonus strategy: don’t spend your HSA funds if you can avoid it. Since the money never expires, the ideal scenario is paying qualified expenses out of pocket when you can afford to, keeping the receipts, and reimbursing yourself from your HSA later, even years later. This “shoebox method” lets your HSA balance keep growing and investing in the meantime, while still preserving your right to a tax-free reimbursement whenever you need it.

Moving forward with your HSA

Healthcare is one of the most significant and least predictable expenses most people will face, both now and in retirement. An HSA isn’t a fix for the healthcare system, but for anyone who’s eligible, it’s one of the most efficient tools available for managing those costs, worth understanding and worth using deliberately rather than letting the balance sit idle.