How I Learned to Stop Worrying and Love HSAs
HSAs (Health Savings Accounts) are a lot like Peter Sellers’ parts in Dr. Strangelove: they can play multiple major roles and not a lot of people today know about them. Is that fair, Mr. Sellers?
HSAs were created in December 2003, and by mid-2016 an estimated 18.2 million HSAs held over $34.7 billion. As the healthcare system changes in the U.S., you may begin to hear about HSAs in various proposals. If you’ve read my previous post on account types, you’ll know HSAs are in front of the Tax Window, but they have a few special benefits not covered in that post:
Benefits of HSAs
The first major benefit of HSAs is their tax treatment. HSAs are sometimes called ‘triple tax exempt.’ Not only can your contributions to HSAs lower your taxes, but any growth in the account is untaxed, AND any withdrawals you make to cover qualified health expenses are tax-free!
A second major benefit is ‘portability.’ So far HSAs may sound similar to Flex Spending Accounts (FSAs), another option for paying for healthcare and lowering taxes. FSAs are usually offered through an employer’s available insurance, and deduct employee contributions from taxes. Since FSAs are through your job (like a 401k), if you leave your current job you will likely lose your FSA access as well. HSAs are similar to IRAs: you can keep your same HSA even if you leave your current job.
The third major benefit of HSAs is the ability to invest your savings for future healthcare expenses. FSAs don’t let you keep any money you don’t spend that year. If you put aside $2,000 this year in your FSA, but only spend $1,000, you lose that remaining $1,000. An HSA allows you to roll over the unused funds for any future health costs. Most HSA custodians also allow you to put part of your balance into mutual funds or ETFs (exchange traded funds), which have higher long-term expected growth than cash savings. This can be greatly helpful for younger savers as they look ahead to future health costs such as dental work, fertility treatments, or long-term care.
Conditions for HSAs
While they have all the benefits listed above, HSAs are only offered to people with compatible health insurance. HSA-compatible plans will usually have high deductibles (at least $1,300 for individuals) and out-of-pocket maximums ($6,550 for individuals), and may not be available through all employers or exchanges. You are allowed to open and own an HSA without compatible insurance, but you cannot contribute to your HSA unless you’re covered by a compatible plan.
Like IRAs, HSAs have annual contribution limits. If your insurance plan only covers yourself, you can contribute up to $3,400 in 2017; if your plan covers yourself and your family, you can contribute up to $6,750. Account holders older than 55 and not yet retired can contribute an additional $1,000 per year. Some employers may offer to contribute to your HSA as part of your benefits package, and these count towards your annual limit. So if your insurance covers yourself, and your employer puts $300 this year into your HSA, you can only put in another $3,100 before reaching the total limit of $3,400.
How I set up my HSA
I first got an HSA in 2012 through my employer. The cash savings and mutual fund investments were run through Wells Fargo, and therefore only offered Wells Fargo products. I contributed the annual maximum for a few years, then started researching where the best saving and investment options were for HSAs. HSA Search is a great resource for those looking to open an HSA, as are Finance Buff’s articles comparing HSA providers.
Ultimately I transferred from Wells Fargo to Elements Financial, which allows me to invest any funds over $2,500 in a linked TD-Ameritrade account without fees (there is a fee to transfer between Elements & TD, so I try to transfer only once or twice a year). A helpful step-by-step guide for opening an Elements HSA can be found here.
HSAs can be a great tool, especially as you save towards future health costs. This post is meant to be a quick overview, but please ask any questions in the comments.
Have fun putting your money to work!