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What Is a Health Savings Account? How It Works, Tax Benefits, Drawbacks and More

If you have a high deductible health plan, an HSA can help you pay for some medical expenses.

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A health savings account, also known as an HSA, can help you pay for healthcare costs with pretax dollars -- whether that’s an unexpected emergency room trip or over-the-counter medication. Your employer may contribute to this account, and you can also contribute after-tax dollars to your HSA, which may be useful if you’re preparing for a large, upcoming health expense. 

This tax-advantaged account has some limitations, though. To qualify, you must have a high-deductible health insurance plan -- also called an HDHP -- and you cannot contribute more than the yearly limit.

Whether you’re considering an HSA or already have one, here’s what to know about this type of health savings account.

What is a health savings account?

HSAs are a type of health savings account designed to help you pay for medical expenses. Paired with a high-deductible health insurance plan, these tax-advantaged accounts let you contribute pretax dollars (or deduct contributions from your taxes) towards eligible medical expenses. 

An HSA offers a unique way for individuals to manage their healthcare costs -- you can invest this money to grow it over time, roll over any unused funds and even contribute money after taxes. However, since you have to enroll in a high-deductible health care plan to qualify, the benefits of an HSA may not always outweigh the health care plan’s high deductible costs. 

What is a high-deductible health plan?

A high-deductible health plan has a higher deductible than a traditional health insurance plan, meaning you could pay more out-of-pocket before you reach your plan’s deductible. After reaching your deductible, you typically pay copays for health services and your insurance covers the balance (though plan stipulations may vary).

For 2023, a HDHP is a healthcare plan with a deductible of $1,500 or more for an individual and $3,000 or more for a family, according to the IRS. Out-of-pocket health expenses for an HDHP can’t exceed $3,850 for individuals and $7,750 for families. An HDHP often costs less per month than a traditional plan, making it an attractive option to save money. However, you could pay more with a HDHP if you have frequent doctors’ appointments or multiple family members needing health services throughout the year.

It’s important to consider whether lower monthly premiums are worth the steep deductible based on your finances and health. Be sure to factor in the costs of copays and the out-of-pocket maximum when deciding between plans.

How does a health savings account work?

You’re eligible for a health savings account if you have a high-deductible health insurance plan. If you have a HDHP through your employer, you can make pretax contributions into your account through payroll. If you have a marketplace plan or can’t contribute through your employer, you can make post-tax contributions and deduct eligible contributions on your tax return

Once funded, you can use your HSA to pay for eligible medical expenses like doctor visits, prescription drugs, dental care and vision care. You’ll generally receive an HSA debit card you can use to make purchases.

Some common eligible expenses include:

  • Doctor visits
  • Hospital stays
  • Prescription drugs
  • Over-the-counter drugs
  • Dental and vision care
  • Many other qualified expenses, outlined by the IRS

For 2023, an individual can contribute up to $3,850 for an individual plan or $7,750 for a family plan. You can then use these funds to pay for qualifying medical expenses until you hit your deductible and your insurance starts covering some of these costs. If your employer contributes to your HSA, these contributions don’t count toward your individual contribution limit. 

Withdrawals from your HSA are tax-free if you use the funds for eligible medical expenses. If you use your HSA funds for non-medical expenses, you’ll owe a 20% penalty in addition to federal and state taxes on the money you withdrew.

Pros and cons of a health savings account

An HSA can offer a unique blend of savings and tax benefits, making them a good option for some. But since you must enroll in a high-deductible health plan to qualify, the benefits of an HSA won’t always make financial sense. But they’re not right for everyone. Here are some of the pros and cons of an HSA.


  • Tax savings: HSAs allow you to contribute pretax dollars to pay for medical expenses, reducing your taxable income and potentially lowering your tax bill.
  • Flexibility: You can use your HSA funds for various eligible medical expenses. You may even be able to use it to pay for qualified medical expenses for your family -- even if your high-deductible health plan doesn’t cover them.
  • Long-term savings: Any unused funds in your HSA roll over yearly, allowing you to build a nest egg for future healthcare expenses.
  • Investment options: Some HSAs allow you to invest your funds, giving you the opportunity to grow your savings and potentially earn more money.
  • Portability: Your HSA is yours to keep, even if you change jobs, retire or become eligible for Medicare.


  • Must have a HDHP: To be eligible for an HSA, you must have a high-deductible health insurance plan. This means you’ll have a higher deductible to meet before your insurance kicks in, which could result in higher out-of-pocket costs than a traditional healthcare plan. HDHPs do generally have lower monthly premiums though, so weigh your options when choosing the right insurance plan.
  • Limited use of funds: You can only use your HSA funds tax-free for qualifying medical expenses, such as doctor visits, hospital stays, and prescription drugs. If you use your HSA funds for non-medical expenses, you’ll pay a 20% penalty in addition to federal and state taxes.
  • Limited investment options: Depending on your HSA provider, your investment options may be limited. This could curb your ability to grow your savings and earn more money.
  • Upfront costs: Some HSA providers charge setup fees, annual fees and other administrative costs, which could eat into your savings.

How do I open a health savings account?

To open a Health Savings Account, follow these steps:

  1. Enroll in a high-deductible health plan: This is a requirement to open an HSA. When you view plans in the health insurance marketplace, you can see if they are HSA-eligible.
  2. Choose a financial institution: If you receive an HSA through your employer, you likely won’t have to worry about this step. But if you’re enrolled in a marketplace high-deductible health plan, shop around at banks, credit unions or specialized HSA providers to find the right health savings account provider for you.`
  3. Gather required information and documents: This may include your Social Security number, proof of HDHP coverage, and ID.
  4. Fill out your application: Complete the HSA application form with your chosen financial institution.
  5. Set up contributions: You can contribute to your HSA account through payroll deduction, automatic deposits, a lump sum deposit or a combination of the three. 
  6. Start using your HSA: Use the funds in your HSA account to pay for qualified medical expenses and enjoy the tax benefits of an HSA.

What are the tax benefits of an HSA?

A Health Savings Account has tax benefits that can help you save money on your healthcare expenses. If you contribute pretax through your employer, these contributions can lower your taxable income, potentially reducing your tax burden.

If you make post-tax contributions directly, you can typically deduct them on your tax return. You do not need to itemize your return to claim HSA contributions. 

Additionally, any interest earned on your HSA funds is not taxed. And, even if you contribute pretax dollars, your HSA withdrawals aren’t taxed if you use them for eligible medical expenses.

The bottom line

HSAs are tax-advantaged health insurance savings accounts that you can use to pay for qualified medical expenses. To be eligible, you must also have a high-deductible health plan, which may come with a lower monthly premium and higher out-of-pocket costs.

If you’re enrolled in an HDHP, an HSA can offer tax benefits, pretax or tax-deductible contributions, no taxes on accrued interest and tax-free withdrawals for qualified medical expenses. Your HSAs funds also roll over every year, which can help you grow a long-term health savings account. However, withdrawals not used for medical expenses may be subject to taxes and penalties.

Lizzie Nealon is a contributor for CNET and Bankrate. Lizzie earned her bachelor's degree in political science from Clemson University. At Clemson, she co-founded a campus publication called the Sensible Tiger that made news and politics digestible to college students. This experience instilled her passion for helping audiences navigate complex personal finance topics. She enjoys partially completing New Yorker crosswords, finding the best local restaurants and reading biographies in her free time.
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