What is an HSA and how does it work?
An HSA lets people with a high-deductible health plan save for medical costs with no tax going in, growing or coming out.
New to this?
A health savings account (HSA) is a savings account for medical bills. You can only open one if your health plan is a high-deductible health plan (HDHP), meaning you pay a big first chunk of bills, the deductible, before insurance helps. It matters because HSA money skips taxes going in, while it grows, and coming out for medical costs.
Read first
Myth
If I don't spend my HSA money by December, I lose it.
Truth
That's the rule for an FSA, a different account. HSA money rolls over every year and stays yours when you change jobs. You can even invest it and let it grow without tax.
Worth memorizing
- 1
You need a high-deductible health plan.
Only people covered by a qualifying high-deductible plan, and no other general health coverage, can put money into an HSA.
- 2
The tax break works three ways.
Money goes in before tax, grows without tax, and comes out tax-free for qualified medical costs. In the example, Priya saves $1,305.
- 3
The money is yours to keep.
Unused money rolls over every year and stays with you when you change jobs. Nothing is lost at year end.
If you have a high-deductible plan, I'd open an HSA and put in what you can, even a little. If your budget can handle small medical bills, I'd pay those from regular cash and let the HSA grow in a broad index fund.
Do this today
Check whether your health plan is HSA-eligible in your benefits portal or plan documents. If it is, set a payroll contribution for this year, even $50 a paycheck, and make a folder for medical receipts.
Practice
1 of 3
Which of these do you need to contribute to an HSA?
Only people covered by a qualifying high-deductible health plan, with no other general health coverage, can contribute.
2 of 3
You are in the 12% federal bracket and put $2,000 into an HSA through payroll. About how much federal income tax do you save?
$2,000 × 12% = $240 in federal income tax. Through payroll you also skip $153 of Social Security and Medicare tax.
3 of 3
What happens to HSA money you don't spend by December 31?
HSA money never expires. It rolls over each year and stays with you if you change jobs.
Tips
Contribute through payroll
Payroll contributions skip Social Security and Medicare tax as well as income tax. Money you deposit yourself only skips income tax, which you claim when you file.
Keep your deductible in cash
Hold enough cash in the HSA to cover your plan's deductible. Invest the rest only if you can leave it alone for years.
Save every medical receipt
You can reimburse yourself years later for costs paid after the HSA was opened. Keep each receipt in a folder so you can prove it.
Count employer money toward limit
Money your employer adds counts toward the yearly limit. Subtract it before you set your own payroll amount, or you may go over.
A worked example: the real cost of a full HSA
Priya is single, has a self-only HDHP and is in the 22% federal bracket. She contributes the full $4,400 through payroll this year.
- Her contribution skips federal income tax: $4,400 × 22% = $968.
- Because it goes through payroll, it also skips Social Security and Medicare tax: $4,400 × 7.65% = $337.
- She saves $968 + $337 = $1,305, so the $4,400 in her HSA costs her only $3,095 of take-home pay. State tax savings, if any, come on top.
- Contributed through payroll+$4,400
- Federal income tax saved (22%)−$968
- Payroll tax saved (7.65%)−$337
- Real cost to Priya=$3,095
- Total tax saved$1,305
- Share of contribution saved29.66%
Try your numbers
Reference
Investing $300 a month in an HSA, assuming 6% a year
| Year | You put in | Growth | Balance |
|---|---|---|---|
| 1 | $3,600 | $101 | $3,701 |
| 10 | $36,000 | $13,164 | $49,164 |
| 20 | $72,000 | $66,612 | $138,612 |
| 30 | $108,000 | $193,355 | $301,355 |
6% a year before inflation is an assumption for illustration. Investment returns vary and can be negative. Assumes no withdrawals.
Common mistakes
Going over the limit
Your contributions plus your employer's must stay under the yearly limit. Excess contributions face a 6% tax each year until you take them out.
Throwing away receipts
Tax-free reimbursement years later only works if you can prove the expense. Save each receipt, ideally as a scan, with the date and amount.
Investing money you need soon
If your deductible is due next month, that money belongs in cash. Investing it risks selling after a drop to pay a bill.
Going deeper
A health savings account (HSA) is a savings account for medical costs that you can open only if you have a high-deductible health plan. Money goes in before tax, grows without tax, and comes out tax-free when you spend it on qualified medical care.
Who can open one
You must be covered by a high-deductible health plan (HDHP), have no other general health coverage, not be enrolled in Medicare, and not be claimed as someone else's dependent. For 2026, an HDHP has a deductible of at least $1,700 for self-only coverage or $3,400 for family coverage.
How much you can put in
For 2026, the limit is $4,400 with self-only coverage and $8,750 with family coverage. People 55 and older can add $1,000 more. Employer money counts toward the limit.
The triple tax advantage
Contributions lower your taxable income, growth is not taxed each year, and withdrawals for qualified medical expenses are tax-free. No other common account gets all three.
It is yours for life
There is no deadline to spend the money. The balance rolls over each year and stays with you if you change jobs or plans.
How an HDHP and an HSA fit together
A high-deductible plan usually has lower monthly premiums, but you pay more of your care yourself before coverage starts. The HSA is where you set money aside, tax-free, to pay that deductible.
For 2026, a qualifying plan also caps what you pay out of pocket in a year at $8,500 for self-only coverage or $17,000 for family coverage. Starting in 2026, bronze and catastrophic plans offered on the Marketplace count as HSA-eligible, even if you buy the same plan directly from the insurer. Also starting in 2026, being in certain direct primary care arrangements no longer blocks you from contributing, and you can pay those monthly fees from your HSA tax-free. A plan can also cover telehealth before you meet the deductible without costing you eligibility. Check with your plan or HR if you are unsure.
What the money can pay for
Qualified medical expenses include deductibles, copays, prescriptions, dental work, glasses and contacts, and many other costs listed in IRS Publication 969. Regular health insurance premiums generally don't count.
Spending on anything else before age 65 means income tax plus a 20% additional tax. After 65, you can take money out for any reason and pay only income tax, much like a traditional IRA.
Spend it now or invest it
You can use the HSA like a debit account for medical bills as they come. That still saves tax on every dollar you run through it.
If you can pay medical bills from your regular budget, you can instead invest the HSA in a broad index fund and let it grow. Later, you can reimburse yourself for those old bills, tax-free, as long as you kept the receipts. Investments can lose value, so keep at least your deductible in cash.
How to open and fund one
If your employer offers an HDHP, it usually offers an HSA too, often with payroll contributions and sometimes a company deposit. If not, you can open one at a bank, credit union or brokerage that offers HSAs. Compare monthly fees and investment choices.
You can contribute for a year until the tax filing deadline the next spring. Most states follow the federal tax rules, but a few, including California and New Jersey, tax HSA contributions.
Questions people ask
What is the difference between an HSA and an FSA?
An FSA is offered only through an employer and works with many health plans, but most of the money must be spent within the plan year. An HSA needs an HDHP, is owned by you, and rolls over forever.
Can I use my HSA for non-medical expenses?
Yes, but before age 65 you pay income tax plus a 20% additional tax on the amount. After 65, you pay only income tax, like a traditional IRA withdrawal.
What happens to my HSA if I change jobs?
It goes with you. You can keep it where it is or move it to another HSA provider. You can only keep adding money while you have an HSA-eligible plan.
Can I still contribute after I go on Medicare?
No. Once you are enrolled in Medicare you can't add new money, but you can keep spending what is already in the account.
Printable worksheet with answer key, free for classrooms. Lesson plan for this unit.
Sources
- IRS: Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
- IRS: Rev. Proc. 2025-19, HSA limits for 2026
- IRS: Guidance on new HSA tax benefits under the One, Big, Beautiful Bill
Updated October 4, 2026. General education, not personalized financial, tax or legal advice. Figures are examples. Check current rates and limits before you act.
Terms on this page
Related lessons
Get your money plan by email
One step each morning: what to do, why it comes in that order, and one small thing to try. About 5 minutes. Then one short note a week. Free, unsubscribe anytime.