If you’ve noticed the cost of healthcare has been increasing, you’re not alone. In 2016, the cost of healthcare for a typical American family of four covered by an average employer-sponsored preferred provider organization (PPO) plan is $25,826, according to the Milliman Medical Index (MMI). As the cost of care has skyrocketed, so has the popularity of Health Savings Accounts, also referred to as HSAs. Originally created as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, HSAs offer a tax-advantaged financial account to save specifically for medical out-of-pocket expenses. Let’s review some important aspects of HSAs. (For more, see: Healthcare Documents You Need In Place Right Now.) How They Work HSAs offer a tax-advantaged financial account to save specifically for medical out-of-pocket expenses. Who can contribute to an HSA? You must already be participating in an HSA-qualified high-deductible health plan (HDHP) in order to be eligible to use an HSA. You may not be enrolled in Medicare or in any other health insurance plan. For 2016, an HDHP is defined as having a minimum annual deductible for family coverage of $2,600 and $1,300 for self-only coverage. How much can you contribute each year to an HSA? For 2016, you can contribute $6,750 if you have family HDHP coverage and $3,350 if you have self-only coverage. If you are at least age 55, you may contribute an additional $1,000 annually. Unlike IRAs and Roth IRAs, no income limitations exist in order to contribute to an HSA, which makes them a helpful planning tool for higher-income individuals and families. Why is an HSA described as tax-advantaged? The HSA has been referred to as having triple tax advantages. This is because HSA contributions are made pre-tax (deductible if contributions are made directly or excluded from income if contributed by an employer on behalf of the employee), the contributions can be invested and accumulate tax-free and upon distribution, the withdrawals are tax-free as long as they are used for “qualified medical expenses”. How can an HSA fit into my retirement plan? For most people planning for retirement, healthcare expenses are a non-negotiable expense. As the cost for healthcare expenses increase, an HSA can provide a source of tax-free dollars to fund this large budgeted expense. Since HSAs allow you to carry forward any unused funds each year, if funded consistently over a period of years, it is possible to accumulate a significant source of tax-free funds which can be used first before tapping into other taxable accounts such as IRAs and retirement plans. Furthermore, HSAs can pay not only for medical and dental expenses, but also for Medicare premiums and even long-term care insurance up to certain limits. If used correctly, HSAs can be a highly tax efficient additional source of funds for meeting medical expenses in retirement. (For more, see: How to Use Tax Mapping to Cut Taxes in Retirement.) Are there situations where an HSA might not be a good choice? HSAs should only be considered when there is good reason to move to a high deductible health insurance plan. Since illness is unpredictable, it is sometimes hard to budget accurately for healthcare expenses. For those who have higher medical expenses or unpredictable cash flow, a combo HDHP/HSA may not always be the best choice. Decisions about healthcare should never take a back seat to the desire to save on a tax-advantaged basis. What are additional benefits of an HSA? Unlike Flexible Spending Accounts (FSAs), contributions to an HSA are not "use it or lose it" by year-end. In other words, as referenced above, your contributions accumulate and are not in danger of forfeiture. If your goal is to build a tax-free account for use in future years, you might choose to pay for some of your medical expenses out of pocket, allowing some of your HSA funds to grow untouched. Also, an employer-sponsored HSA is portable, meaning it stays with you when you change employers or leave the workforce. Notably, an HSA is not subject to required minimum distribution rules like certain retirement accounts so you are not required to make withdrawals at a certain age.