As you're probably aware, a Health Savings Account is a tax-favored account used to pay for qualified medical expenses. HSA contributions are tax-deductible, or potentially pre-tax if made by an employer. It is always used in conjunction with a qualified High-Deductible Health Plan. The HSA is a custodial or trust account which must be opened with an IRS-approved custodian or trustee. From a less technical level, the HSA is a checking, savings or other type of investment account used for medical expenses, just with a lot of additional legal rules and tax benefits. Often, the money is deposited at a bank, credit union or other HSA approved custodian but also can be invested in stocks, bonds, mutual funds and a wide variety of other investment choices.

HSAs are designed to pay for day-to-day medical expenses on a tax-favored basis. HSA owners are given the control to decide what to buy, where to buy it, and how much to pay. HSAs also demand more personal responsibility in that HSA owners need to make these decisions, understand the HSA rules, and maintain receipts and other records to prove to the IRS that they acted within the rules. For an individual unable to afford traditional insurance, the High Deductible Health Plan and HSA combination may provide an affordable approach to insurance not possible otherwise. Many people that can afford traditional insurance also choose HDHPs and HSAs because the combination reflects a cost savings and provides more "pure insurance" rather than pre-paid medical.  These vehicles offer a number of advantages including tax-free distributions, tax-free earnings, tax-deductible individual contributions, pre-tax employer contributions, ability to roll over and transfer balances, and account ownership and control.  With the HSA comes some additional responsibilities to manage the account from a budgeting, spending, record-keeping and tax-reporting standpoint. In addition, the owner is charged with knowing or learning some complex rules to avoid tax ramifications and/or penalties.

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