An HSA a healthcare savings account - is medical and retirement planning savings account that can be used on a tax-advantaged basis. HSAs were created in Medicare Modernization legislation passed in December 2003. To be eligible for an HSA, a consumer must be covered by a high deductible health plan (HDHP).

By contrast, an HRA - a healthcare reimbursement account is an account maintained by an employer to be used to reimburse employees for qualified medical expenses. HSA accounts must be funded before theyre used, but HRAs dont need to be. Using an HRA, an employer can simply pay the medical expenses as theyre incurred.

HSA accounts belong to the individual employees and are fully portable; in other words, employees can take the accounts with them if they leave an employer. HRA accounts belong to the employer. Each employee gets an annual allocation of dollars and unused funds roll over from year to year as long as the employee continues in good standing. Typically, an employee forfeits the money in an HRA account if they leave the employer.

An HSA can be funded by either the employer or the employee (or, often: both). An HRA may only be funded by the employer.

All qualified contributions into an HSA are tax-free. If the employer contributes, then such contributions arent treated as part of the employees income, and are therefore tax-advantaged. If the employees makes contributions, these can be deducted from the employees income when tax returns are filed.

Heres the best part: not only are deposits into HSAs tax-free so are withdrawals. Any distribution from an HSA for qualified medical expenses is tax-free. HSAs are typically managed much like an IRA: that is, there are a variety of investment vehicles that the consumer can put his or her money into, so that it might compound and grow while its waiting to be used for medical needs. The specific investments available to a consumer vary depending on the company offering the HSA. As we said before, like an IRA a HSA belongs to the individual and is portable.

Consumers can make withdrawals from HSAs for non-medical purposes after the age of 65 but the withdrawals (aka distributions) are treated as income and taxed accordingly. Distributions for non-medical purposes made before the age of 65 are treated as an early distribution and subject to an early withdrawal penalty of 10% plus regular income tax.