A health savings account is part of a health insurance plan where an individual can make monetary, tax-deductible contributions to a savings account and use the money later to pay for medical costs, according to CNN Money. Money not used in any given year rolls over to the next year.
If an individual opens his own account, he deducts the money deposited to the account yearly on his taxes, explains Mayo Clinic. If the employer sets up the account, contributions by the individual are typically deducted from a paycheck before the income is taxed.
Money placed in an HSA is tax-free, and anyone can make contributions including the account holder and spouse, states CNN Money. An employer may also contribute to the account. If an individual takes money out of the account to pay for nonmedical costs, the money withdrawn is taxed and subject to a penalty fee.
An HSA is generally offered in conjunction with a high-deductible health care plan, states Mayo Clinic. A high-deductible plan generally contains low premiums, but an individual must pay a certain amount of money out of pocket for medical expenses before the health insurance triggers.
After the age of 65, an individual can withdraw the money from an HSA for any reason without penalty, states Medical Mutual. An individual can use his HSA to pay for dental and vision services, psychiatric treatments, COBRA premiums, and prescription drugs.