What is an HSA?

A health savings account is a custodial account that individuals covered by high-deductible health insurance plans can set up to pay medical expenses. The contributions to a HSA come out of an individual's pay on a pre-tax basis. Any interest the account earns is tax-deferred, and the funds can be withdrawn tax-free at any time to pay medical co-payments, deductibles and other expenses.

Only an individual with a health insurance plan that has a deductible exceeding the threshold set every year by the Internal Revenue Service is qualified to set up a health savings account. In 2014, the health insurance deductible had to be at least $1,250 for individual coverage or $2,500 for family coverage for a person to be eligible to use a HSA.

The IRS also limits how much an individual can contribute to an HSA every year. In 2014, a person with individual coverage could contribute up to $3,300, while a person with family coverage could contribute up to $6,550. A person over the age of 55 could contribute an extra $1,000.

People can open HSAs through an employer or directly with a bank or other financial institution, and they typically have direct access to the account through a debit card. It is up to the individual to correctly report HSA contributions and the use of funds on an individual federal income tax return every year.