Structured very similarly to IRAs, HSAs are separate accounts to which you make before-tax contributions which can generate returns on a tax-favored basis. When the funds are needed for a qualified medical expense, they can be accessed tax free. If you don’t use the funds for medical purposes, they can be left to accumulate year after year. Later, they can be used to supplement your retirement income.

An HSA must be accompanied by a high deductible health insurance plan (HDHP). Essentially, these are like most other plans except the deductibles are much higher, in the range of $4000 to $10,000. Of course, that means the insurance premium is much lower than a regular plan. The HSA-HDHP plan works best when you take the savings in premium payments and put them into your HAS as part of your contribution. Then, you can use your HSA funds to pay your deductible. It becomes a self-fulfilling plan aided by tax savings.

The contribution level for 2012 is $3100 for singles and $6250 for families. Employers can make tax-deductible contributions on behalf of their employees. Because you paying directly for medical services, you are more likely to be much more conscious of the costs of services provided which will encourage doctor shopping. Most people with HSAs are amazed at how much they can control costs when they are in charge of the payments, stretching their health care dollars further than if they were under a standard insurance plan.