What Is a Medical IRA? Explaining Health Savings Accounts

While many people search for the term “medical IRA,” the account they are seeking is officially known as a Health Savings Account, or HSA. An HSA is a tax-advantaged savings account for healthcare expenses, offering tax benefits for money that is contributed, grown, and withdrawn for medical needs. The funds in an HSA belong to the individual, not an employer, and are completely portable, meaning the account stays with you if you change jobs. The balance also rolls over from year to year, allowing it to grow over time.

Eligibility for a Health Savings Account

To contribute to an HSA, you must be enrolled in a qualifying High-Deductible Health Plan (HDHP), which is a health plan with a higher deductible than traditional insurance. For 2025, an HDHP must have a minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage. These plans also have a maximum for total annual out-of-pocket expenses, which in 2025 is $8,300 for self-only coverage or $16,600 for family coverage.

In addition to having an HDHP, several other requirements must be met to be eligible.

• You cannot be enrolled in Medicare Part A or B.
• You generally cannot be covered by another health plan that is not an HDHP, as this would provide disqualifying coverage. Exceptions exist for vision, dental, or disability insurance.
• You cannot be claimed as a dependent on someone else’s tax return.

Eligibility is determined monthly, and you must meet these requirements on the first day of the month to contribute for that month.

Funding and Contribution Rules

The amount of money you can contribute to your HSA each year is limited by the IRS and adjusted annually. For the 2025 tax year, an individual with self-only HDHP coverage can contribute up to $4,300. For those with family HDHP coverage, the annual contribution limit is $8,550. These limits include the combined total of money contributed by both an individual and their employer.

Individuals age 55 or older are permitted to contribute an additional $1,000 annually, known as a “catch-up contribution.” If both spouses in a married couple are over 55, they must have separate HSA accounts to each make their own catch-up contribution. This provision allows those nearing retirement to accelerate their healthcare savings.

Contributions can be made through pre-tax payroll deductions from an employer, which reduces your taxable income. Alternatively, you can make direct, post-tax contributions and then claim a tax deduction when you file your annual income tax return. The deadline for making contributions for a tax year is the tax filing deadline, typically April 15th of the following year.

Using Your HSA Funds

HSA funds can be withdrawn tax-free to pay for Qualified Medical Expenses (QMEs), which are broadly defined in IRS Publication 502. These include costs such as doctor’s co-pays, prescription drugs, dental treatments like fillings and crowns, and vision care. QMEs also cover expenses for hospital services, long-term care, and medical equipment.

The process of paying for these expenses is straightforward. Most HSA administrators provide a debit card linked directly to the account, which can be used at the point of service. Another option is to pay for medical costs out-of-pocket with personal funds and then reimburse yourself from the HSA. This method requires keeping detailed records and receipts to prove the expense was qualified in case of an IRS audit.

Using HSA funds for non-medical purposes has tax consequences. If you are under age 65, withdrawals for non-qualified expenses are subject to both ordinary income tax and a 20% penalty. After age 65, the 20% penalty no longer applies, but the withdrawal is still treated as taxable income, similar to a distribution from a traditional IRA.

Tax Reporting for Your HSA

All HSA activity must be reported annually to the IRS on your federal income tax return using Form 8889, Health Savings Accounts. This form is used to calculate your HSA deduction for direct contributions, report distributions from your account, and determine any taxes and penalties owed for improper withdrawals. This form attaches to your Form 1040.

To complete Form 8889, you will need information from two documents sent by your HSA custodian. The first is Form 5498-SA, which reports the total contributions made to your account for the year. You typically receive this form in May because it must include any contributions made up to the April tax deadline for the prior year.

The second document is Form 1099-SA, which is sent if you took any money out of your HSA. It reports the gross distribution amount, and it is your responsibility to use Form 8889 to show the IRS whether those funds were used for qualified medical expenses and are therefore tax-free.