The Health Savings Account

A Health Savings Account is the only account in the US tax code that can be tax-free on the way in, while it grows, and on the way out. Most people who have one use it as a checking account for this year's prescriptions, which is useful but leaves most of its value unused. This chapter explains who can open one, the 2026 limits, what the tax saving is worth, how investing the balance and keeping receipts can turn it into a long-term account, and the traps that cost people the benefit.

Who can contribute

You can put money into an HSA for any month in which all of these are true on the first day of the month:

• You are covered by a high-deductible health plan (HDHP) that meets the IRS rules. For 2026 its deductible must be at least $1,700 for self-only coverage or $3,400 for family coverage, and its in-network out-of-pocket maximum no more than $8,500 or $17,000.
• You have no other health coverage that pays before the deductible. A general-purpose health FSA counts as other coverage, including one through your spouse's job; a limited-purpose FSA for dental and vision does not. Dental, vision and some accident or disability coverage are allowed.
• You are not enrolled in any part of Medicare.
• Nobody can claim you as a dependent on their tax return.

A 2025 federal law widened eligibility from 2026: bronze and catastrophic plans bought on the Marketplace now count as HSA-compatible, telehealth covered before the deductible no longer disqualifies a plan, and some direct primary care arrangements are allowed alongside an HSA. IRS Publication 969 and the IRS's guidance on these changes have the details; check them before relying on a plan that did not qualify in earlier years.

The 2026 limits

For 2026 the most that can go into an HSA is $4,400 with self-only HDHP coverage or $8,750 with family coverage. From age 55 you can add $1,000 more. Three details catch people out:

• Employer money counts. The limit covers your contributions and your employer's together.
• The catch-up is per person. Two spouses aged 55 or older each need their own HSA to add their own catch-up amount.
• Partial years are prorated. If you are eligible for only part of the year, the limit is generally prorated by month. A last-month rule lets you contribute the full year's amount if you are eligible on December 1, but you must then stay eligible through the following December or owe tax and a 10% additional tax on the excess.

You can contribute for a year until the tax-filing deadline the following spring.

What the tax saving is worth

Money that goes in through your employer's payroll skips federal income tax and, for most people, Social Security and Medicare tax as well, a combined 7.65% on pay below the Social Security wage base. Money you deposit yourself is deductible on your tax return, which saves income tax but not payroll tax. Most states follow the federal treatment; California and New Jersey tax HSA contributions and growth.

Here is the federal income tax effect for a single filer contributing the self-only maximum.

On $85,000 of wages, federal income tax is $9,870. Contributing the full self-only amount through payroll lowers the wages reported for income tax to $80,600 and the tax to $8,902, a saving at the filer's 22.0% bracket. Through payroll, the contribution also avoids the 7.65% payroll tax. The tax bracket calculator shows your own bracket.

Spend it or invest it

Money in an HSA never expires. It stays yours if you change jobs, change plans or stop being eligible to contribute. That opens two ways to use it.

As a spending account. You pay this year's deductible, prescriptions, dental and vision costs from the account. You still get the tax saving on the way in, which is a real discount on care.

As an investment account. You pay current medical bills from your regular cash, keep the receipts, and invest the HSA in low-cost funds. Most HSA providers let you invest once the cash balance passes a threshold.

Investing $350 a month at 6.0% a year for 25 years, contributions of $105,000 grow to about $236,701. Spent on qualified medical costs, none of it is ever taxed. The 6% is an assumption, not a forecast; a mostly-stock fund can do better or worse, and the compound interest lessons on the Learn pages explain why the length of time matters more than the exact rate.

Receipts: reimbursement with no deadline

There is no time limit on paying yourself back. A qualified medical expense incurred after your HSA was opened can be reimbursed tax-free years or decades later, as long as you kept a record of it and did not deduct it or pay it from the HSA already. That lets the money stay invested in the meantime.

If you pay a $2,000 bill from your own cash and leave the same amount invested in the HSA for 20 years, it grows to $6,414. You can then withdraw the original amount tax-free against the old receipt and leave the growth for other expenses. Keep the receipt, the Explanation of Benefits and proof of payment in one folder or scanned file; the IRS can ask for them.

The strategy only works if you can afford to pay current bills from cash. Paying a medical bill with a credit card to keep the HSA invested defeats the purpose.

Fees matter more than in most accounts

HSA providers vary widely: some charge a monthly account fee, some offer only expensive funds, and some require a large cash balance before you can invest. Over decades, the difference adds up.

Starting with $5,000 and adding $350 a month for 25 years, the account ends near $296,555 at a 0.1% yearly cost and near $266,184 at 0.8%. The higher fee costs $30,371. You are not tied to your employer's provider: you can move the balance to another HSA by a trustee-to-trustee transfer as often as you like, while keeping payroll contributions going to the employer's account to keep the payroll-tax saving.

The rules for taking money out

• Qualified medical expenses (IRS Publication 502 lists them) are tax-free at any age, including for your spouse and dependents.
• Anything else before 65 is taxed as income plus a 20% additional tax.
• From 65, non-medical withdrawals are taxed as income with no additional tax, like a traditional IRA. Medical withdrawals stay tax-free.
• After 65, the HSA can pay Medicare Part B, Part D and Medicare Advantage premiums tax-free, but not Medigap premiums. Chapter 7 covers the Medicare timing rules that end your ability to contribute.
• At death, a spouse named as beneficiary can treat the account as their own; anyone else receives the balance as taxable income.