Unless you’ve been living under a rock, you’ve probably noticed that the U.S. health care policy is quite the political football in Washington lately. Given the numbers, it is easy to see why: More than 40 million Americans are currently without health insurance, and those who are lucky enough to be covered have been overwhelmed by rate increases that far outpace inflation.

In fact, a recent analysis by the Kaiser Family Foundation found that family premiums for group health insurance nearly doubled in the past decade. Even more troubling, these escalating costs come at a time when many working families are struggling just to make ends meet.

Although most of the headlines focus on things like the individual mandate and government-subsidized insurance exchanges, there is actually another, less-noticed government initiative that has been helping families save for health-related expenses since 2003: the health savings account (HSA). Like traditional individual retirement accounts (IRAs), HSAs provide a valuable income tax deduction for money saved to pay for medical bills, which is a significant benefit to those in a middle or high tax bracket.

In many respects, a health savings account is like an IRA on steroids. There are no income restrictions on HSA contributions, which, although limited to $6,250 per year for families, can be funded from both earned and unearned income. In addition, HSA distributions used for qualifying health expenses are income tax-free, so you never pay tax on the money.

However, before you rush off to take advantage of one of the best (legal!) ways to save money on your taxes, there is one major restriction that limits most people from contributing to an HSA: You must be enrolled in a high-deductible health insurance policy.

A high-deductible health insurance policy requires you to shoulder a larger portion of your health care expenses when you get ill. In order for a family to qualify for an HSA, the annual deductible on your policy must be at least $2,400. Therefore, you must be fully willing and able to fund minor medical costs on your own. High-deductible health insurance policies are designed to protect relatively healthy people from unforeseen, catastrophic medical emergencies that could quickly wipe out their net worth. The trade-off is a lower monthly premium and the ability to reduce your tax burden through the HSA.

Despite the significant tax benefits, the combination of a high-deductible health insurance policy with an HSA is not for everyone. For instance, people with chronic conditions, requiring frequent doctor visits and expensive medications won’t benefit from the burdens of a high deductible.

The market for HSAs is also not nearly as competitive as the one for IRAs. Although you can theoretically open an HSA anywhere, there aren’t that many financial institutions offering them, and those that do often charge miscellaneous fees and expenses. In addition, your investment options may be limited to low-yielding savings accounts that have a hard time keeping up with inflation.

HSAs are an intriguing option for those who are both healthy and have the means to fund them, but they are not a solution for everyone. If you’re considering an HSA, Pathway Financial Planning can help you determine if it’s the right option for you and assist in exploring other options as well.

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