How to make the most of a pretax health savings account. By Thomas M. Anderson, Contributing Editor July 31, 2006 Joe Bailey, a 48-year-old retired Sallie Mae executive from Shavertown, Pa., makes it a point to haggle over the bill at his doctor's office. When he needs to fill prescriptions, he asks the pharmacist about cheaper generic alternatives. And Bailey's hard-won savings go even further because he uses his tax-free health savings account to pay for his medical expenses. RELATED LINKS Health Savings Account Answers In Search of Health Coverage Health Insurance for College Grads More than three million Americans already use HSAs, and a number of employers are offering them to employees in conjunction with high-deductible health-insurance policies to encourage smart consumer choices. You can contribute pretax dollars to an HSA, and withdrawals are tax-free when you use the money for medical expenses. Use the money for anything else and you'll owe taxes plus a 10% penalty, unless you're 65 or older. You can also open an HSA on your own -- as long as you have high-deductible health insurance -- and get a tax deduction for your contributions, regardless of whether you itemize deductions. To qualify for an HSA in 2006, your health plan's deductible must be at least $1,050 for an individual or $2,100 for a family. An HSA is a better deal than the more familiar flexible spending account because there is no "use it or lose it" rule; you can roll over the money from year to year. Your employer might even kick in money to your account. Advertisement But to get the most out of an HSA, it pays to follow a few simple strategies. Many banks and insurance companies offer HSAs, so pay attention to setup, administrative and investment fees that can whittle away at your account's tax-free earnings. Access to your money is often by check or a debit card tied to the account. Some firms offer a credit card for times when medical bills exceed the HSA balance. Don't use the credit option, which typically costs 9% to 12% in interest. Instead, work out a payment plan with the health-care provider. Bargaining may "freak them out," says Bailey, but it works. He saved 10% on a routine dental cleaning just by asking for a discount. Most HSA-compatible health plans require you to meet your deductible before they cover prescription-drug costs. So sign up for a drug-discount card that covers your medications.