Health Savings Accounts (HSAs) Explained

What Is An HSA and How Does It Work?

By Matthew Frankel, CFP – Updated Nov 9, 2025 at 8:37 AM EST

Key Points

HSA funds are tax-free for qualifying medical costs and investable, boosting potential retirement savings.
Withdrawals from HSAs for non-health expenses post-65 are taxed, but no penalties are applied.
Eligibility to contribute to an HSA depends on having a high-deductible health plan.
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A health savings account (HSA) is a tax-advantaged investment account you can contribute to if you have a high-deductible health insurance plan. Employers often offer HSAs for employees, but you can also open your own if you qualify. HSA contributions are tax-deductible up to HSA annual limits, and money can be withdrawn tax-free to cover qualifying medical expenses.

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An infographic explaining what a healthcare savings account (HSA) is and how it works. — Image source: The Motley Fool

Money in an HSA can be invested and can be withdrawn for any purpose after age 65 without penalty. However, if the withdrawal isn't for a qualifying healthcare expense, you’ll be taxed at your ordinary income tax rate for distributions.

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Health savings accounts are intended to help people with high-deductible health insurance plans pay for medical expenses. They reduce out-of-pocket costs of medical care by allowing you to pay with pre-tax dollars. However, you can also invest your HSA money to save for retirement.

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HSAs are unique for several key reasons:

You’re eligible to contribute only if you have a qualifying high-deductible health plan.
Your employer can open an HSA for you (and contribute money on your behalf), or you can open your own and make contributions to it.
Money can be invested and can grow for as long as you’d like; there’s no requirement to withdraw funds at any point. With most other tax-advantaged accounts -- including 401(k)s and traditional IRAs -- you’re subject to required minimum distributions (RMDs) after age 73 (previously age 72).
HSA funds can be withdrawn tax-free at any age to cover qualifying medical expenses. With 401(K)s and IRAs, money can’t be withdrawn before age 59 1/2 without a 10% penalty unless you qualify for a hardship distribution -- and you’re always taxed at your ordinary income tax rate on 401(k) or IRA distributions.
Funds withdrawn for purposes other than covering HSA-eligible expenses are subject to a 20% penalty plus income taxes. This is double the penalty that applies for early 401(k) or IRA withdrawals. However, it applies only until age 65, after which you can withdraw funds from an HSA for any purpose. In this case, you’ll just pay ordinary income tax if the money isn’t used for healthcare.

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Data source: IRS.
Qualification	Self-Only Health Coverage	Family Health Coverage
Annual deductible (minimum)	$1,650 for 2025; $1,700 for 2026	$3,300 for 2025; $3,400 for 2026
Annual out-of-pocket costs (maximum)	$8,300 for 2025; $8,500 for 2026	$16,600 for 2025; $17,000 for 2024

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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