Health Savings Account (HSA)
What it is
A Health Savings Account is a US tax-advantaged account paired with a high-deductible health plan (HDHP). It's the only account in the US tax code that's tax-free on all three legs: contributions are deductible, growth is tax-free, and qualified withdrawals (for medical expenses) are tax-free. After age 65, non-medical withdrawals are taxed as ordinary income — making the HSA function like a Traditional IRA for non-medical purposes plus the medical tax-free benefit on top.
The HSA is a wrapper. Once the balance is high enough (most administrators require a $1,000–$2,000 cash buffer), the remainder can be invested in mutual funds, ETFs, or other qualified investments — same as an IRA.
Who can open one
US individuals enrolled in a qualifying high-deductible health plan (2025: minimum deductible $1,650 single / $3,300 family; maximum out-of-pocket $8,300 single / $16,600 family) who are not also covered by other non-HDHP health insurance, Medicare, or claimed as a dependent on someone else's tax return.
How contributions work
The 2025 contribution limit is $4,300 for individual coverage and $8,550 for family coverage, plus a $1,000 catch-up for those 55+. Contributions can be made up to the tax filing deadline of the following year. The limit is prorated if the holder is not HDHP-covered for the full year (unless they remain covered through year-end under the last-month rule).
Contributions can come from the employee directly (deduct on Schedule 1) or via payroll deduction through a Section 125 cafeteria plan (avoids FICA tax as well, on top of income tax). Employer contributions count toward the same combined limit.
Tax treatment
Three-leg tax advantage:
- Contributions: tax-deductible (or pre-tax via payroll). Payroll contributions also avoid 7.65% FICA tax.
- Growth: tax-free. No tax on dividends, interest, or capital gains inside the account.
- Withdrawals for qualified medical expenses: tax-free at any age.
Non-medical withdrawals before age 65 are taxed as ordinary income plus a 20% penalty. After age 65, non-medical withdrawals are taxed as ordinary income only (no penalty) — at this point the HSA behaves like a Traditional IRA for non-medical use.
No Required Minimum Distributions apply.
How withdrawals work
Qualified medical expenses include doctor visits, prescriptions, dental, vision, hearing aids, medical equipment, and many over-the-counter items (since the CARES Act of 2020). The IRS Publication 502 has the authoritative list.
Receipts for qualified expenses can be reimbursed from the HSA in any future year — there's no time limit. This enables a strategy where the holder pays medical expenses out-of-pocket while letting the HSA balance grow tax-free for decades, then reimburses themselves in retirement.
After age 65, the HSA can be used for Medicare premiums (Parts B, D, and Medicare Advantage), long-term care insurance premiums (within IRS limits), and any other qualified medical expense — all tax-free.