Health Insurance Medical Savings Account

A health savings account (HSA) helps you keep your health insurance premiums down while taking responsibility for saving, and paying, for your own health care needs. Contributions to an HSA offer you significant tax advantages, even if you don't regularly make use of your contributions. As a bonus, HSA funds can also double as retirement savings.

How It Works

• An HSA is a savings or investment account, which health care consumers, and their employers, contribute funds to pay for medical expenses. The HSA is paired with a high-deductible health insurance plan, and you use HSA funds to pay for your out-of-pocket medical expenses. An HSA must be set up through a "trustee" approved by the Internal Revenue Service (IRS). Banks, insurance companies and other financial services providers can act as HSA trustees. While it is possible to withdraw money from an HSA to pay for non-medical expenses, you will be assessed a 20 percent early withdrawal penalty if you do so while you are under age 65.

Deductibles

• Your health insurance plan must be considered a "high-deductible" plan by the IRS. As of 2011, a plan that qualifies for pairing with an HSA must have a minimum annual deductible of $1,200 for individuals, or $2,400 for a family. IRS policy caps the maximum out-of-pocket costs for HSA eligible insurance policies at $5,950 for individual coverage or $11,900 for family plans.

Tax Advantages

• According to IRS "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," money that you contribute to your HSA is tax deductible. If your employer contributes to your plan, that money isn't counted toward your taxable income. Neither are your withdrawals, providing that you use the funds for medical expenses, prescribed medicines or approved health care premiums. Any interest earned on the money in your HSA account is likewise not taxable.

Retirement Savings

• Once you turn 65, the law no longer restricts your HSA withdrawals to medical needs. Instead, you can withdraw HSA funds for any purpose, and you won't have to pay the penalty. However, you must pay income tax on HSA withdrawals that you use to pay non-medical expenses. As Amanda Gengler of CNN Money reports, if you plan to use your HSA as a retirement benefit, and you have other financial resources that you can use for medical expenses, you may want to invest your HSA funds in higher-risk investments such as mutual funds.