As the name suggests, a health savings account (HSA) is a type of savings account you can use to pay for qualified out-of-pocket healthcare expenses including deductibles and copays. HSAs are designed specifically to help people who have high-deductible health insurance plans (HDHPs), meaning not everyone can open one. Nevertheless, it's important to understand how such accounts work as the benefits are sometimes substantial—especially for those looking to save for future healthcare expenses.
Key Takeaways
- A health savings account (HSA) allows you to set aside money for qualified out-of-pocket healthcare costs, but you can only open one if you have a high-deductible health plan (HDHP).
- HSAs are triple-tax advantaged: contributions are made pre-tax (or are deductible), the balance grows tax-free, and qualified withdrawals are tax-free too (though NJ and CA don't follow this federal treatment).
- For 2026, you can contribute up to $4,400 (individual) or $8,750 (family) plus an additional $1,000 in catch-up contributions if you're aged 55+.
- Unused funds roll over indefinitely, the account is portable across jobs and into retirement, and required minimum distributions (RMDs) don’t apply.
- Watch out for some drawbacks; you'll need to save receipts for IRS verification, and non-medical withdrawals before age 65 trigger income tax plus a steep 20% penalty.
How a health savings account works
An HSA account is fairly straightforward, involving the following steps…
Opening an HSA
You can open an HSA account with any provider whether a bank, credit union, or investment firm offering one. You can also open an account directly through your employer if its benefits package provides the means to do so.
Funding an HSA
If you open an HSA through your employer, you can make pre-tax contributions via payroll deductions (similar to a 401k). If you open an HSA on your own, meanwhile, you can use after-tax dollars to make contributions into the account and then later claim them as deductions come tax time.
Watching money grow in an HSA
After opening a health savings account (HSA), you can decide how much money to contribute each year so long as you stay within government-mandated limits (more on those shortly) and then subsequently invest the account balance in various options such as mutual funds, stocks, or other investment tools depending on your provider. Although these investments may involve additional risks, they can potentially help you save more for retirement over time.
Making HSA withdrawals
When the time comes to use the funds, multiple options to pay for qualified out-of-pocket healthcare expenses include submitting for reimbursement, using an HSA debit card or paper checks, or making online bill payments through your provider.
2026 HSA contribution limits
The IRS establishes maximum annual HSA contribution amounts; for 2026, individuals and families can contribute up to $4,400 or $8,750 into an HSA, respectively. Those age 55+ can contribute an extra $1,000 above these thresholds via what’s known as “catch-up contributions.”
HSA advantages
Several reasons to open an HSA include:
The triple-tax advantage
The HSA Triple-Tax Advantage
No other account gets a tax break at every stage.
Stage 1
Contributions
Tax-deductible
Pre-tax via payroll, or deduct your own contributions at tax time.
Stage 2
Growth
Tax-free
Invested balance compounds without annual tax on gains, dividends, or interest.
Stage 3
Withdrawals
Tax-free
No tax on withdrawals used for qualified medical expenses — ever.
Why it matters
A 401(k) or Traditional IRA gives you a tax break going in. A Roth gives you a tax break going out. The HSA gives you both — plus tax-free growth in between.
Health savings accounts are generally triple-tax advantaged in that you can make pre-tax contributions (or claim tax deductions for after-tax contributions), with the amount in the account able to grow tax-free. You can also use the money to cover qualified expenses in the absence of taxes.
Note tax laws are a bit different for residents of New Jersey and California—the only two states not conforming to federal HSA tax treatment—meaning contributions made via employer payroll deductions, your own contributions, any matching employer contributions, and account earnings are all taxable in those two states. If you open and fund an HSA on your own, you can’t deduct your HSA contributions from your state taxable income and must report tax earnings.
Watch out — NJ and CA residents
Your HSA doesn’t get the same tax break at the state level.
New Jersey and California are the only two states that don’t conform to federal HSA tax treatment. If you live in either state, your HSA contributions and investment earnings are still taxable on your state return — even though they’re tax-free federally.
The federal triple-tax advantage still applies, so an HSA can still be worth it. Just don’t assume the state tax savings come along for the ride.
The ability to roll over unused funds indefinitely
Unlike with a flexible spending account, you don’t need to spend the balance in your HSA account every year as any leftover money automatically rolls over to the next one. In fact, HSA funds continue to do so on an annual basis and will remain in your account indefinitely until used. When you consider that retiree households spend almost $8,000 a year on healthcare expenses (according to U.S. Bureau of Labor statistics), it’s easy to see why this feature adds to the appeal of HSAs.
The portability of HSAs
A health savings account is also portable, meaning money in the account remains available for future qualified medical expenses even if you change health insurance plans, work for a different employer, or retire.
The flexibility regarding who can contribute
Want your neighbor to contribute to your HSA? It’s possible! The same goes for your parents, aunts, uncles, friends, or even strangers who decide to help you save for healthcare expenses.
The ability to avoid RMDs
When it comes to retirement savings, not all accounts are created equal. Unlike pre-tax 401(k)s and traditional IRAs where the government mandates minimum distributions (i.e., required minimum distributions (RMDs)) at age 73, HSAs offer a refreshing twist in that you can hold onto your funds for as long as you wish with no mandatory withdrawals looming over you.
The ability to add your spouse as a beneficiary
Similar to a retirement account or life insurance policy, naming a spouse as a beneficiary ensures your HSA funds are transferred smoothly and per your wishes. While you do in fact have the option to name others (e.g., children or friends) as HSA beneficiaries, they could be required to take a full distribution from the account upon inheriting it—considered a taxable event.
HSA disadvantages
HSAs: Advantages and Drawbacks
Advantages
- Triple-tax advantage Tax-deductible contributions, tax-free growth, tax-free withdrawals for qualified medical expenses.
- Unused funds roll over indefinitely Unlike an FSA, balances carry over year after year — build a healthcare nest egg for retirement.
- Portable across jobs and insurance plans The account is yours. Change employers, plans, or retire — your HSA goes with you.
- Anyone can contribute Parents, friends, even strangers can contribute to your account — subject to annual limits.
- No required minimum distributions Unlike Traditional IRAs and 401(k)s, you can leave HSA funds untouched as long as you like.
- Spouse can inherit the account smoothly A spouse beneficiary keeps full HSA tax treatment; other beneficiaries face a taxable distribution.
Drawbacks
- Strict eligibility requirements Must be enrolled in an HSA-eligible HDHP — no other coverage, no Medicare, not claimed as a dependent.
- Can’t pair with a regular FSA Opening an HSA blocks a standard FSA. A limited-purpose FSA (vision/dental) is still allowed.
- You have to track every expense Save receipts. If the IRS audits, you’ll need to prove withdrawals went to qualified medical expenses.
- Steep penalties for missteps 20% penalty plus income tax on non-medical withdrawals before 65. Excess contributions hit with a 6% excise tax.
As with any savings or investment vehicle, there are a few drawbacks to HSAs you should be aware of including:
Eligibility requirements
Not everyone can open an HSA. To qualify, you must be enrolled in an HSA-eligible high-deductible health plan (with no other disqualifying health coverage) that meets the IRS minimum annual deductible—$1,700 for individuals or $3,400 for families in 2026. The plan's out-of-pocket maximums (excluding premiums) also can't exceed $8,500 for individual coverage or $17,000 for family coverage. Beyond the plan itself, you can't be enrolled in Medicare, and you can't be claimed as a dependent on someone else's tax return.
You can visit the IRS website for a complete list of HSA qualification requirements.
The inability to have an FSA
When you open an HSA, the IRS will prevent you from having a flexible spending account (FSA)—though you can qualify for a limited-purpose FSA (if allowed by your employer) and in turn use this exclusively for vision and dental expenses such as dental cleanings, fillings, vision exams, contact lenses, lens solution/cleaner, and prescription glasses.
The need to track HSA expenses
Unlike an FSA—where purchases are vetted for eligibility up front—an HSA lets you withdraw money for anything, but only qualified medical expenses are tax- and penalty-free. Spend on something non-qualified and you'll owe income tax plus a 20% penalty (if you're under 65). Because the burden is on you to prove your withdrawals were for eligible expenses, it's important to save your receipts in case of an IRS audit.
Steep penalties
A few specific actions could potentially trigger HSA penalties. First, if you withdraw funds from your HSA for non-medical purposes, the amount withdrawn is subject to both income tax and a staggering 20% penalty (the penalty not applying to those aged 65+, though withdrawals for non-medical uses are still subject to tax). If you contribute more to your HSA than annual limits allow, meanwhile, you’re on the hook for a 6% tax on the same. For those with an HSA through their employer, any contributions via a company match also count towards the annual limit.
The bottom line on health savings accounts
Since some form of medical outlay is inevitable as you age, you can effectively regard an HSA as you would any other long-term savings account. Those with a high-deductible health plan should consider opening an HSA as a valuable complement to their overall savings strategy. That said, an HDHP isn't the right coverage for everyone—our insurance audit guide walks through when a high-deductible plan plus HSA makes sense and when richer coverage is the safer bet.
An HSA is also one of the most powerful tools when preparing for retirement, thanks to its triple-tax advantage — a way to build a dedicated, tax-free healthcare fund for your later years.
An HSA is one of several tax-advantaged health accounts — see how it stacks up against FSAs and HRAs in our guide to tax-advantaged health accounts.
Have questions about health savings accounts? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.
Reviewed for accuracy
Paul Muller, AEP®, CFP®
Founder and Relationship Manager at Vision Retirement, with 30+ years in the financial industry.
Read full bio →FAQs
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While the intention of each account is similar, the rules surrounding them are much different—the biggest being you can carry over unused HSA funds whereas FSA funds are generally of a “use it or lose it” nature, meaning you must use your entire balance within the plan year or lose the money you’ve contributed.
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This typically isn’t possible as IRS guidelines don’t consider such memberships qualified medical expenses. Some exceptions do exist, however, such as if a doctor prescribes a gym membership as part of a treatment plan for a specific medical condition.
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You can use an HSA for a variety of qualified medical expenses including, but not limited to, copays, deductibles, and coinsurance. HSAs can also cover costs related to surgery, x-rays, hospital care, ambulance services, and dental expenses (e.g., crowns, bridges for medical purposes, and dental reconstruction). Vision expenses, including prescription contact lenses and eyeglasses, are also eligible. You can visit the IRS website to view a more comprehensive list of qualified expenses.
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Several online tools can help you compare different HSA providers. Start with a comparison tool (e.g., HSA Search) and/or search “best HSA providers in 2026” on Google to find articles from reputable sources. Review sites such as Trustpilot and G2 provide valuable insights from users as well.
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Yes, you can indeed open multiple HSA accounts—especially if you change jobs or open accounts with different providers—though it’s often simpler to consolidate multiple accounts.
Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
