# 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.

Source: https://www.walletprep.com/learn/hsa/ · Updated 2026-10-04 · Taxes

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.

## Key facts
- **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.

## 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.

- 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 saved: 29.66%

1. Her contribution skips federal income tax: $4,400 × 22% = $968.
2. Because it goes through payroll, it also skips Social Security and Medicare tax: $4,400 × 7.65% = $337.
3. 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.

### 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 |

## 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.

## 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.

## 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.

## Sources
- [IRS: Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans](https://www.irs.gov/publications/p969)
- [IRS: Rev. Proc. 2025-19, HSA limits for 2026](https://www.irs.gov/pub/irs-drop/rp-25-19.pdf)
- [IRS: Guidance on new HSA tax benefits under the One, Big, Beautiful Bill](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-on-new-tax-benefits-for-health-savings-account-participants-under-the-one-big-beautiful-bill)

_General education, not personalized financial, tax or legal advice. Figures are examples. Check current rates and limits before you act._