Medical bills account for a significant percentage of bankruptcies in the United States. The Kaiser Family Foundation found that, in 2015, medical bills forced a million adults to file for bankruptcy. 25% of Americans ages 18-64 have reported problems paying medical bills. Only 7% say there has been no impact.
While we can’t prevent medical bills, we can plan for them and one tool in the toolkit is a Health Savings Account.
In this article, you will learn how this tax-advantaged investment account works, its benefits, drawbacks, and which companies are worth considering for your HSA.
Table of Contents
🔃Updated May 2023 with the 2023 values for the HSA contribution limits and HDHP minimum deductibles.
What is an HSA Account?
A Health Savings Account (HSA), which is outlined in IRS Publication 969, is defined as a type of savings account that allows you to set aside money to pay for qualified medical expenses. It’s designed for Americans who have a high-deductible health plan (HDHP) and you own the plan (not your employer or some other entity).
The big benefit is that your contributions to the HSA are not subject to federal income tax and, unlike a flexible spending account, your funds roll over year to year. If you don’t spend it, it stays in your account.
Not all medical expenses can be paid for with HSA funds, but the list of what you can use your HSA for is long. Here’s a link to the government publication for qualified medical and dental expenses.
What Benefits are There to Having an HSA?
One of the main benefits of having an HSA is that you can use pre-tax dollars to pay for qualifying medical and dental expenses. This means you’ll be reducing your taxable income and saving for medical expenses at the same time.
However, not everyone has medical expenses each year. This leads to the other benefit of having an HSA: saving for retirement. Many people use their health savings account as a way to pad their retirement savings balance.
This works because you’ll often have medical needs in retirement and the HSA can cover those. Since HSA funds carry over from year to year, you can invest money in your HSA now and not use it for many decades.
So, you can use your HSA as a savings vehicle to cover short-term medical expenses, and you can use your HSA as an investment vehicle to help secure you financially for your retirement years.
Bonus: If you want to use your HSA funds for non-medical expenses, you can do so. If you withdraw the funds before you turn 65, you’ll face a 20% penalty and have to pay taxes on the income. It’s a painful rate but the funds are accessible.
If you withdraw HSA funds for non-medical expenses after age 65, there is no penalty; however, you will still have to claim the money as income.
If you do use the money for qualified medical expenses, your withdrawals are tax-free.
What are the HSA Contribution Limits?
Just like with IRAs, the IRS has contribution limits for HSA accounts. For the year 2023, you can contribute $3,850 annually to your HSA if you have self-only insurance coverage.
If you have family coverage, you can contribute up to $7,750 to your HSA. For those of you turning 55 in 2023, you can contribute an extra $1,000 to your HSA account.
Note that these contribution limits may be affected by any employer-made contributions to your HSA.
Who Qualifies for an HSA?
To qualify to open an HSA, you need to be enrolled in a high-deductible health plan (HDHP) as defined by the government. For the year 2023, HDHPs have a minimum $1,500 annual deductible for individuals and a minimum of $3,000 in annual deductibles for families.
Your employer’s benefits center (or the Marketplace if you have a government health plan) can verify whether you have an HDHP.
If your employer offers an HSA plan, you can get your plan through your employer. They’ll take care of deducting your designated withdrawals from your paycheck.
You can, also, choose to open an HSA on your own. If you do that, you’ll want to check and see if your employer will work with you to put pre-tax dollars into the HSA plan that you choose.
If your employer won’t work with you to do that, you can still open your own HAS; but the dollars you contribute won’t be pre-tax dollars. They will, however, qualify for a tax write-off at the end of the year.
Pre-tax contributions to your HSA are the best choice, but you might be willing to take the post-tax write off if you find your independent HSA choice gains better earnings than the HSA plan your employer offers.
This leads us to the point of this article. Morningstar does an annual review of HSA plans to determine which are best for short-term saving (spending) purposes and which are best for investment purposes.
We’ve used their guide to show you what we think are the best HSAs for spending and for investing. We’ve formed our own opinions on what the best HSAs are, and they don’t entirely line up with Morningstar order.
What are the Best HSAs?
As we share what we think are the best HSAs, we’re going to separate them into spending HSA accounts and investing HSA accounts.
If you think you’re going to use most of the funds you saved in your HSA each year, you’ll want to look at the best spending HSA options.
If you’re contributing HSA funds to help pad your retirement, you’ll want to focus on the investing HSA options first.
Best Spending HSAs
If you’re planning on spending the majority of your HSA funds during the year, you’ll want to choose an HSA account that allows quick access to your money yet still pays interest. The Morningstar report lists these three HSA as the best spending HSAs in 2019:
🏆 Lively – Best Overall
Lively lets you open an HSA that you can set up personal or employer contributions. You’ll earn interest rates on your Lively HSA savings account which, unfortunately, due to extremely low rates from the Fed, is 0.01% APR.
They offer debit cards for quick access to funds (you can get up to three) and a customer service chat line if you need any help.
Other information about Lively HSAs includes.
- Monthly Cost: None
- Account Minimum: None
- Fees: None
- FDIC Insured: Yes
- Debit Card: Yes, Free
Our comprehensive review of the Lively HSA has more detailed information.
Fidelity HSA
The Fidelity HSA will park your money in a high-yield savings account until you need it for medical expenses or you transfer it to an HSA investment vehicle.
Current rates for your Core Position (savings) account in your Fidelity HSA start at 0.82% APR. If you put the money in a Fidelity Money Market Account, you’ll earn a higher rate: currently 1.22% APR.
Here is some other information about the Fidelity HSA.
- Monthly Cost: None
- Account Minimum: None
- Fees: None
- FDIC Insured: Yes
- Debit Card: Yes, Free
Fidelity is a well-known investment firm with lots to offer in its HSA savings product.
The HSA Authority
The HSA Authority offers HSA accounts via its parent company: Old National Bank. Like the others, The HSA Authority offers a great HSA savings/spending product as well.
- Monthly Cost: None
- Account Minimum: None
- Fees: None
- FDIC Insured: Yes
- Debit Card: Yes, Free
You can open your account online. Additionally, you can make one-time deposits or automatic deposits online or make them in person at any Old National Bank location.
Note: Morningstar recommended The HSA Authority for investing your HSA too. While they do offer great terms on their investing HSA accounts, they do charge a $3 per month ($36 annual) fee.
The set fee (as opposed to other banks, which often charge in terms of percentage of assets) means you won’t pay more just because you’ve saved more.
Learn more about The HSA Authority
Saving/Investing HSAs
If you don’t plan on using your HSA funds soon, you can invest the money for long-term growth instead. Contributing to HSA funds (even if you don’t need them right away) can set you up for a plusher, financial position during retirement.
Here are some of the top investing HSAs according to Morningstar and our research.
Lively
Lively isn’t on the Morningstar list of top investing HSAs–they chose The HSA Authority as their second-highest choice; however, we think Lively has a lot to offer in this area. Lively has partnered with TD Ameritrade to help you invest your HSA monies if you want.
Be sure to look over TD Ameritrade’s fee information before transferring your Lively HSA funds for investing purposes.
For the most part, Lively’s partnership with TD Ameritrade means you can invest with no minimum balance and no online trading fees. Combined with the great features on the saving/spending account, we think Lively is a nice choice for all your HSA goals. Lively has SIPC insured accounts as well.
Fidelity
On the investment side of things, Fidelity offers great features as well. They have no minimum balance to start investing your HSA funds; however, certain funds might have minimum balance requirements.
As far as investment choices, Fidelity has created targeted investment funds just for HSA accounts. They have fixed-income funds such as short and intermediate bond funds.
They offer small, medium and large-cap equity funds. You can also choose from international funds, healthcare funds and more.
You can, also, invest in mutual funds, individual stocks, ETFs and more. Additionally, Fidelity has lower-risk investing options such as Certificates of Deposit. Fidelity charges zero fees for many online trading transactions, too. Fidelity HSA investments are SIPC insured up to $500,000.
Bank of America
Bank of America offers a great option if you want to invest your HSA monies too. They ranked third on Morningstar’s 2019 list.
One thing to note about Bank of America HSAs is that they charge a $2.50 per month maintenance fee, and they have a $1,000 minimum balance requirement if you want to invest.
For this reason, I wouldn’t recommend them to hold your HSA monies in a spending account, but the fees are quite reasonable for investing.
Bank of America offers a wide variety of SIPC-insured investment options for HSAs, including several Vanguard funds. Check out the BOA terms and conditions on investing for the complete schedule of fees.
Learn more about Bank of America HSA
Summary
If you have a high deductible health plan, don’t neglect to research HSA options for yourself. HSAs can be a great savings vehicle if you’re paying a lot of out-of-pocket medical costs. You just might find a nice way to increase your net worth too.
Mel says
Jim, Does this mean if we switch to HSA this year with my husband’s employer, that we should add these funds into our networth calculations? Thanks as always!
It’s really up to you how you want to treat the HSA balances when it comes to your net worth calculations. I don’t include ours because it’s not “our money” in the sense that I can’t do whatever I want with it.