A health savings account (HSA) can be a practical part of your comprehensive money management strategy. HSAs provide a secure place to keep pre-tax money and let it grow tax-free. You can later use the cash in your HSA account for qualified health care expenses.
In addition to helping you save on medical costs, investing in an HSA can also benefit your finances in other ways. This article will provide an easy-to-understand overview of HSAs and why HSA contributions are worth incorporating into your budget or conscious spending plan. Finally, we give you an overview of your options in selecting an HSA.
What is an HSA account?
An HSA is a type of savings account where you can contribute money on a pre-tax basis, which you can subsequently use to pay for approved health care expenses. By spending pre-tax dollars from your HSA, you can ultimately save money on expenses like coinsurance, insurance copayments, and deductibles, reducing your overall medical bills.
However, to be eligible for an HSA, you must have a High Deductible Health Plan (HDHP). If you’re unsure whether your health plan qualifies, though, give your insurance provider a call. They’ll be able to tell you whether you have an HDHP and if you can pair an HSA with your account.
If you buy a health plan on the Health Insurance Marketplace, make sure to confirm that it’s labeled as HSA-eligible. HDHP plans usually only cover preventive care before the deductible. For 2023, the minimum deductible is $1,500 for individuals and $3,000 for families.
How do HSA accounts work?
When you contribute to an HSA, you have the chance to invest pre-tax dollars. This money can grow in your HSA without getting taxed, remaining in your account until you’re ready to use it for qualified medical expenses.
Essentially, it acts like a checking account and you’ll get a debit card you can use for those qualified medical expenses. The HSA money in the account balance then rolls over each year if it’s not spent and can earn interest, which also isn’t taxed. While there are annual contribution limits, they tend to be high: For 2023, individuals can put in up to $3,850 and families can put in up to $7,750 (company + employee).
What are the benefits of an HSA account?
The most obvious advantage of an HSA plan is that it can save you money on health care, which can be notoriously pricey in the United States. HSAs have financial advantages, too, including:
- Similar to Roth IRA or 401(k) retirement accounts, HSAs allow you to take a tax deduction that can lower your income on your tax return. The money you put into the HSA isn’t taxed and reduces your annual earnings, meaning lower taxable income.
- HSAs also offer tax benefits. Any investment gains made in an HSA, like interest, aren’t taxed. Withdrawals from the HSA likewise aren’t taxed if you use them for qualified health care expenses.
- HSA funds never expire, so they can become a valuable component of your retirement savings. If you withdraw your funds for non-eligible expenses before age 65, you’ll be subject to a 20% penalty, plus, you’ll have to pay income taxes on the money you withdraw. However, after age 65, the penalty disappears. That said, you’ll still have to pay income tax on money you withdraw and use for non-eligible expenses. (Note that Medicare premiums are considered an eligible expense.)
- Some HSAs allow you to invest and grow your money, for example, via mutual funds, stocks, and bonds. If you want to use this opportunity, make sure any HSA you open offers a broad array of investment opportunities, ideally low-cost funds. Also, check the administrative fees associated with investing.
How to choose the best HSA provider for you
Ideally, you’ll be able to qualify for HSA enrollment via your employer. That said, you can still leverage an HSA if you’re self-employed or a business owner. Regardless of your situation, there are a few things to consider when selecting an HSA, including:
- Fees: Account fees might include investment fees, annual fees for maintenance, monthly fees for paper statements, and transaction fees, among others. Ask for a full schedule of fees. Some providers forego fees if you maintain a minimum cash balance.
- Investment options: If you’re going to use your HSA to invest and grow your money, see which products are available. Options might include stocks, mutual funds, and bonds, among others.
- Accessibility: Your HSA should provide you with a debit card that you can use to access your funds. However, some HSA providers make it easier to manage your funds than others — for example, via mobile apps. When comparing HSA online portals, compare traits like online bill pay, mobile deposits, e-statements, and text banking.
- Insurance: If you opt for an HSA spending account, look for one with a federally insured bank or credit union (NCUA- or FDIC-insured). If the financial institution fails, you can get coverage for up to $250,000.
- Interest rates: HSAs can grow interest, similar to a normal savings account. Compare interest rates between accounts to see what you can expect.
Finally, consider customer service for the HSAs when shopping around. You should be able to assess this via interactions when doing research. For example, if you try to get a full schedule of fees, how long does it take to get a response?
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The best HSA accounts, by lifestyle
There is no one-size-fits-all HSA that’s perfect for everybody. For instance, a single person’s HSA needs may differ from a family’s. The great news is that there is a wide diversity of HSA options to suit different needs. Here’s a quick overview of the best health savings accounts.
Best no-fee HSA account
Lively has a noteworthy fee schedule and doesn’t ever charge for essentials like opening or closing accounts, transferring funds, or account maintenance fees. There’s no minimum balance required either. You also have the option to open a brokerage account with TD Ameritrade if you want to invest your HSA funds — no fees necessary.
Best HSA account for families
Further earns points for versatility, with three types of accounts: Premium, Value, and Select. This allows families to choose the option that fits their needs. Prices vary, with Further Value being the most cost-efficient (low fees of $1 per month). Further’s Learning Center creates transparency and makes it easy to discover HSA options.
Best investment HSA account
Fidelity offers varied HSA investment options, including bonds, ETFs, CDs, mutual funds, stocks, and more. You can manage your investments yourself or select a managed account. Fidelity also stands out for its low fees and accessibility. You can easily access your account via a mobile app or web platform.
Best no-minimum-balance HSA account
If you don’t want to stress about a minimum balance, HSA Bank is an option. However, there are other fees, such as for paper statements. HSA Bank also offers percentage-based investment fees. You can invest via TD Ameritrade or Devenir. Additionally, they offer flexible spending accounts (FSAs).
Best overall HSA account
The Fidelity HSA offers a good balance of security, transparency, and accessibility. There are no fees for basics like opening an account, overdrafts, or stopping payment. You can easily access your account via an online platform or mobile app. Plus, Fidelity’s deposits are FDIC-insured.
Fidelity also earns points for its comprehensive investment accounts. You can choose from a managed fund or handle your own investments. Additionally, U.S. ETF and stock trades are commission-free. You can also purchase fractional shares, giving you access to companies with pricier stock.
Take control of your financial future
Investing in a health savings account and leveraging the tax advantages is just one of the many ways you can make your money work for you. But just how much should you invest in an HSA? Drafting a conscious spending plan that’s tailored to your unique needs can help you figure it out.
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FAQs about HSA Accounts
Can I transfer my HSA funds to another HSA provider?
Yes, you can transfer your HSA funds to another HSA provider without penalty. However, you’ll need to follow certain rules and procedures to ensure that the transfer is a qualified HSA rollover and not a distribution.
What expenses are considered qualified medical expenses?
Qualified medical expenses include medical, dental, and vision expenses. They can include deductibles, copayments, prescriptions, and many other expenses related to your health care. You can find a complete list of qualified medical expenses in IRS Publication 502.
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