If you have a high deductible health plan (HDHP), you may be eligible to create a Health Savings Account. Also known as an HSA, this is basically a special savings account that is used to pay for medical related expenses. The primary benefit of this account is that you can make contributions (or deposits) into your account using pre-tax income. The drawback is that you can only use money in this account for medical-related expenses. The definition of medical related expenses is pretty broad; I have even heard that you can buy diapers with your health savings account.

The tax savings works like this: Say you make $50,000 in one year, and you want to contribute $2,000 to your health savings account (There are yearly contribution limits, make sure you aren’t contributing more than your limit). You deposit the $2,000 in your account and you write the whole $2,000 off on your taxes even if you haven’t spent a dime in medical related expenses that year. Your savings account grows tax free and rolls over from year to year, unlike a flexible spending account. When you need to make medical related expenses (doctor bills, deductible, medicine, etc), just use the money from your health savings account. Piece of cake!

After spending a couple hours reading through my health insurance documentation, I finally figured out how to start my health savings account. The one thing that would have been nice is if my health insurance company told me that I wasn’t setting up the health savings account through them or with them. I could go to any financial institution that I wanted and set the account up there. I did a search on Google for HSA accounts and found plenty of places to sign up. The one credit union I ended up with offered the account with a visa debit card and a 5% interest rate. The only drawback is that they start charging a $1/month fee after the first year. However, all I need in the account is $240 and the interest will cover the monthly fee the entire time.

My health savings account ended up being really easy to get started. I just filled out some forms online, clicked the "I agree" button, sent them a couple bucks to start the account off, and now everything is set up. I didn’t have to do anything through my Health Insurance to get the account set up. After setting up your health savings account, just be sure to get itemized receipts for every single purchase that you make with your account. Save these receipts in case you need to show that all your purchases were health related. I will have to research exactly what expenses are included in “medical related expenses” so that I can take maximum advantage of all the tax savings. It will be great knowing that I can pay for cough drops tax-free!

Author's Bio: 

Author, Tom Noonan is the creator of the Personal Finance website: http://www.CashCreditandLoans.com/health-insurance.php. He is a small business owner and knows what it is like to have to get your own Health Insurance.