Health Savings Accounts (HSA) are the only accounts I know of that offer triple tax advantages: your contributions are made pre-tax, they grow tax free, and when you withdraw them for medical purposes you pay no tax. With the advantages inherent in these accounts, many people open them and use them as an extra investing account to further lower their tax burden.
What is an HSA?
An HSA is a type of savings account to pay for medical expenses for people who choose a high-deductible health insurance policy either through work or on their own. If you sign up through your employer, they may match part of your contributions or make bonus contributions if you exhibit healthy lifestyle choices (not smoking, exercising, etc.). As I mentioned, your contributions come out of your paycheck before taxes and can grow tax-free over time. Any monies you use for approved medical care can be withdrawn tax free as well.
Note: High deductible is defined as a deductible of at least $1,400 for individuals and $2,800 for families. High-deductible plans are usually the least expensive option offered by an employer, so you have the potential to save every month on premiums versus an HMO or PPO.
One interesting facet of a Health Savings Account is that if you retire and decide you have too much saved for health care, you can withdraw money for any reason and simply pay income taxes. In this instance, it’s like a 401k or traditional IRA withdrawal when you’re retired.
What are the contribution limits?
The amount you can contribute to an HSA is relatively low. For individual policies, the max is $3,650 (2022); for family coverage, you can contribute up to $7,300. Those over 55 years of age can add in another $1,000 as a catch-up contribution. Note that these limits are for the total contribution; if your employer adds $800 to your individual account, a single person can contribute only $2,850.
Why would people use it for investing?
Unlike a flexible spending account, the money you save in an HSA does not have to be spent by the end of the year. This means your account may grow to tens of thousands of dollars or more. Most HSA accounts allow you to invest that money after you’ve reached a dollar threshold. Many offer stock and bond funds (either mutual or exchange traded funds) similar to what you might find in your retirement plan.
What to watch out for
I’ve had HSAs in the past and I was never really impressed by the investment opportunities for two reasons: fees and low contribution allowances. Make sure you can pay your healthcare deductible too.
Fees. Quite often, you will pay a management company to run your HSA similar to how you are paying for a company to manage your retirement plan. They may charge a flat fee that’s reflected in a slightly higher-than-normal fund expense ratio. Naturally you want a plan with very low or no fees and low-fee investment options that won’t drain your savings over time.
Low contribution allowances. In a world where you can save up to $20,500 in a retirement plan, the HSA limits seem inordinately low, even if you have a family. While it can build up over time, it requires you to keep a high-deductible insurance plan for years. Although they are offered at many companies, you may wind up in a job where you are forced back into a PPO or HMO.
Can you pay the high deductible? One other thing to evaluate before you sign up for an HSA. If something happened to you, would you be able to pay the healthcare deductible? HSAs allow out-of-pocket maximums as high as $7,050 for an individual and $14,100 for a family. Look closely at the plan you’re considering to fully understand how much you could be spending this year.
Who might these be good for?
I’ve always considered young people and upper-income workers to be best suited for an HSA. On average, young people are healthier and may be able to save a large amount of money without ever having to touch their account. On the other hand, young people make less so they may not need another investment vehicle if they aren’t maxing out their retirement plan already.
Upper-income people have the opposite problem. They may have maxed out all possible tax-free savings options and – even with these low contribution limits – may find HSAs appealing. The advantage here is that they can max out their contributions and often pay for health care out of pocket, again allowing their accounts to grow.
What happens when you leave your job?
When I’ve had HSAs in the past, the balance was usually in the hundreds of dollars range. When I moved into a job that didn’t offer HSAs, I simply used the HSA credit card to pay for health care until the money was gone.
If you have a large balance in your plan, you can roll that over to another HSA provider. However, be careful. Fees for your company plan may have been lower due to the number of people participating. When you are no longer employed there, you may have to pay more. Some people have seen fees in the 1% to 2% range, and that doesn’t include the fund’s expense ratio.
In 2018, Fidelity started providing a no-fee HSA to the general public. You can take advantage of this if you choose to roll your funds into Fidelity after leaving a job. There are still fees on the fund options, but Fidelity has many low-fee funds from which you can choose.
I receive nothing from the companies I write about. I simply mention Fidelity because they are one of the few truly no-fee options available. Naturally, you should investigate roll-over options on your own and make the best choice for you.
HSAs can benefit your investing portfolio. Just make sure to research them carefully before choosing one. Don’t let the financial benefits persuade you to choose a health care plan that won’t work for you or your family.
Photo by Anna Shvets