How Does a Health Savings Account (HSA) Work?

Updated: Jan 21, 2016 6:13 PM UTC | Originally published: May 20, 2014

To be eligible for this nifty tax-advantaged plan you must also be enrolled in a High Deductible Health Plan (HDHP). Translation: Your health insurance plan — whether you have a plan through work or on your own - must have an annual deductible of at least $1,250 for an individual and $2,500 for a family. You can tap the HSA to pay for your deductible if you don't want to cover those costs out of your own pocket. Your HDHP might also carry a higher maximum annual out-of-pocket limit than you would have on a "regular" plan. In 2014 the max you would pay in medical costs if you hold an HDHP is $6,350 for an individual and $12,700 for a family plan.

If you can handle the higher deductible and higher annual max, the combination of a high-deductible health plan and an HSA can help you to build up savings to cover the inevitable out-of-pocket health care expenses you're likely to run into during retirement.