An HSA is a Health Savings Account. While paired with an insurance plan, it is not health insurance. Rather, its more like a specialized savings account you can open with most banks. These savings accounts allow you to log in, check your balance, make deposits and withdrawals, just like a normal account. Most come with debit cards or a checkbook to use for payments.
What separates this account from regular savings account is the tax advantages that come along with it. At the end of the year you will receive a tax form stating exactly how much you have deposited into the account. That amount will be tax deductible. You do not pay federal income taxes on it!
While there are other differences, that is the main thing that separates an HSA from a regular savings account. Sure you can pay medical expenses from an ordinary account, but you won’t be able to deduct your contributions to it from your taxes.
There are some other restrictions. You can take the money out of your HSA at any time to pay for whatever you want. However, if you do so and it is not for medical expenses, you will pay taxes on the amount spent for non-medical costs as well as an additional 20% penalty. So its important to only put in there what you intend to use for health care.
It doesn’t matter when you deposit money into an HSA. Some people wait until they get a medical bill, then transfer the amount over into their HSA. This allows them to keep their money liquid until they actually need it to pay a medical related bill.
Others will keep a significant amount of money in a health savings account. Its peace of mind and it ensures that you will not spend it on other things, and it reduces your taxes. For people who are long term health cost savers, some banks allow you to actually keep your savings in stocks and bonds. That option is somewhat risky, but it allows for the possibility of a good return on your savings – as if the tax savings isn’t enough.