Which health savings account (HSA) offers the best deal? The answer depends in part on how the account will be used.
Most people use the money from an HSA to pay for occasional medical costs immediately or over time. But some use an HSA as a savings account for anticipated medical costs far in the future.
How to use your HSA in retirement
Either way, it’s a good idea to shop around. Banks, credit unions, insurance companies and other financial institutions — referred to as “administrators” or “custodians” — offer HSAs and each has its own policies and fees.
What is a health savings account?
A health savings account, or HSA, is exactly what its name implies: It’s a financial account that can be used to save money for future medical expenses that your insurance won’t cover. It can also be used to set aside money for retirement.
In order to contribute to an HSA, you must have a high deductible health plan, health insurance that requires you to pay more out of pocket in exchange for lower monthly premiums.
Annual contributions to HSAs are limited. For 2019, singles can contribute up to $3,500 and those with family coverage can set aside up to $7,000.
Still, HSAs offer several key tax benefits:
- Tax-deductible contributions that lower your tax burden
- Money in your HSA grows tax-free
- Withdrawals are tax-free as long as they’re used to cover qualified medical expenses, like acupuncture and eye exams.
“With health savings accounts, you get triple tax benefits,” says Dan Mathews, a private wealth manager based in Overland Park, Kansas. “It’s really the holy grail of savings accounts.”
With HSAs, you won’t pay taxes unless you break the rules. Withdrawals used to cover non-qualified medical expenses and other costs trigger a 20 percent tax penalty, plus your income tax rate.
How a health savings account works
An HSA works differently from a flexible spending account (FSA). With FSAs, you lose access to your unused tax-free dollars at the end of each plan year. That’s not the case with health savings accounts. Funds continue to roll over year after year, and unlike retirement accounts like traditional IRAs and 401(k)s, there are no required minimum distributions, or rules regarding the age you have to start taking withdrawals. When you turn 65, you can use any remaining funds in your HSA to cover medical costs and other miscellaneous expenses, without penalty (though you may have to pay taxes for withdrawals covering non-medical expenses).
Indeed, HSAs provide a lot of flexibility. The accounts often come with debit cards, Mathews says, and you can make withdrawals at any time. They’re also portable, so if you change jobs or retire, you’ll still have access to your HSA.
With HSAs, you have the option of going with whatever your employer or insurance plan offers. You can also do your own research and choose an account on your own.
If the latter seems more appealing, here’s what you may want to focus your research on.
Factors to consider before choosing your HSA
There are benefits to setting up your HSA through your employer or going with the provider recommended by your health plan. With an employer-sponsored HSA, for example, your company can easily make contributions and you can specify the amount of money from your paycheck that you want to go into your account, says Stephen Neeleman, founder and vice chairman of HealthEquity. If you have an individual HSA, you may have to transfer funds over from your employer-sponsored account. In the process, you may incur fees.
If you’re concerned about convenience, another option is to go with an HSA provided by your bank or credit union. That way, you’re managing your HSA and checking or savings account through the same financial institution. Shopping around is best, however, to make sure you find the account that’s the best fit for you.
Some HSAs have a monthly fee. Others have per-transaction charges or combinations of fees. Some charge a fee to open an account, obtain, replace or renew a debit card or transfer money from a savings account to an investment account. Always ask for a complete schedule of fees and find out what is included in a bundled fee.
HSAs may also have so-called “behavioral fees,” triggered by circumstances such as an overdraft or an insufficient funds deposit. These fees are typical of other types of bank accounts as well.
Some HSAs are only savings accounts while others feature an investment option. Those who want to invest should consider the types of investments that are available. Most custodians offer a mix of diversified mutual funds and some have brokerage options for more sophisticated investors, Mathews says.
Savings accounts are insured, up to certain limits, by the Federal Deposit Insurance Corp., which protects savers if a bank shuts down. Investment accounts don’t have this protection.
Like standard savings accounts, with HSAs, there’s often an opportunity to earn interest. But given the current interest rate environment, yields these days are not particularly high. Through health savings accounts that are available nationwide, it’s possible to earn as much as 2 percent APY, but interest rates generally are fairly low.
HealthEquity gives account holders the chance to earn a higher yield through one of its products, but there’s no FDIC insurance, Neeleman says. You’ll have to consider whether that’s a risk worth taking.
HSAs often don’t require a minimum balance, but some administrators waive fees if the account has at least, say, $3,000 or $5,000. Ask whether the waiver is based on a minimum savings balance or a combination of a savings and investment balance.
Purpose of the account
Before choosing an HSA, it’s also important to consider how you’re going to use it. Do you plan to use your HSA as a short-term spending account for medical expenses as they arise? Or do you plan to focus on saving and investing so that the funds in your HSA can be used in the distant future?
How you intend to use your HSA will ultimately determine which factors matter most in terms of cost and investment options.
Best health savings accounts
It doesn’t hurt to research and find out how health savings accounts are assessed and evaluated.
In late 2018, Morningstar ranked 10 of the largest HSA plans accessible to individuals. According to their report, The HSA Authority ranks as the best HSA plan for spenders and investors.
Here are other top HSA plans for individuals from the list.
You may also want to check out HSASearch, a tool that can help you easily compare HSAs.
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