A person enrolled in a high-deductible health coverage plan can open a Health Savings Account, advises Kiplinger. Contributions to this account are tax-free and must be used to pay for medical expenses.
As of 2015, opening an HSA requires a health plan with a deductible of $1300 or more for individual insurance and $2600 for family insurance, states Kiplinger. Some high-deductible plans, such as those with separate deductibles for prescription drugs, are not eligible for HSA accounts.
A person with an HSA-eligible health plan can open an HSA account at a brokerage firm or bank and can contribute up to $3,350 per year, while those with family plans can contribute a maximum of $6,650, according to Kiplinger. Contributions are made before tax is taken out, and money can be withdrawn for medical expenses, including deductibles, co-pays, prescriptions, and vision and dental care, tax-free.
Individuals who have signed up for Medicare may no longer contribute to an HSA, advises Kiplinger. However, they can continue to withdraw funds to pay for medical expenses at any age. A person who withdraws funds for nonmedical expenses faces tax liabilities, including income taxes and a 20 percent tax penalty, according to Bankrate. Those who are over age 65 and qualify for Medicare, however, are exempted from the tax penalty, but not the income tax.