Health Savings Accounts (HSA) can be used by individuals covered by a high-deductible health plan to save for health care costs on a tax-free basis, in an account that is similar to that of an individual retirement account (IRA).The HSA provides for a tax-sheltered account that can be used for paying routine medical expenses. In order to contribute, you may not be enrolled in Medicare part A or B, and you must not be a dependent of another taxpayer.

Deposits to this type of account can either be made on an individual basis or through an employer; despite the method of depost, health insurance premiums are lower for those contributing into an HSA. Contributions to an HSA plan may also be federally tax-deductible, depending on your filing situation.

Distributions from an HSA used exclusively to pay or reimburse qualified medical expenses of the account owner, his or her spouse, or dependents are not taxable. Distributions used for anything other than qualified medical expenses are taxable and subject to a 10% penalty. The penalty does not apply for distributions due to disability, reaching age 65, or death. Although customer satisfaction polls have varied, many HSA customers prefer such a system over traditional health benefit plans. (Having trouble sorting through your prescription drug coverage options? check out Getting Through The Medicare Part D Maze.)

The question was answered by Steven Merkel

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