The Best Health Savings Account for Investors

Editor's note: We have published new research and enhanced our methodology. Read our evaluation of the best HSA providers of 2022.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Those enrolled in a high-deductible healthcare plan and who are under age 65 are eligible to invest in a health savings account, or HSA. Joining me today to discuss the tax benefits of these plans and to share the best health savings account provider for investors is Megan Pacholok. Megan is an analyst with Morningstar's multi-asset funds research team.

Nice to see you today, Megan.

Megan Pacholok: It's great to be with you, Susan.

Dziubinski: Now we hear that health savings accounts are said to have unparalleled tax benefits for investors. How so?

Pacholok: That's right. HSAs have a triple tax advantage, meaning that money enters an HSA tax-free, grows tax-free, and then can be withdrawn tax-free as long as it's spent on qualified medical expenses. HSAs are different from 401(k)s, IRAs, and 529s because in all of those vehicles money is either taxed on the way in or on the way out, and that's not the case with HSAs.

Dziubinski: How much can you contribute to an HSA every year, and how does that compare to some of the other tax-deferred investment vehicles out there?

Pacholok: In 2022, those covered by an individual high-deductible healthcare plan can contribute up to $3,650, while those covered by a family plan can contribute up to $7,300. Those limits are much lower than employee contribution limits on 401(k)s. For instance, next year, those will be $20,500 for those under 50 and $27,000 for those over 50.

Dziubinski: Megan, if an investor decides to use their HSA as an investment account, what should they be looking for in terms of best practices?

Pacholok: We have a couple of best practices for HSAs as an investment account. The first being offering an investment menu that includes core asset classes, all the while limiting overlap, making it simple and easy for an investor to navigate that lineup. Another is including investment strategies that earn Morningstar medals, which we think improves the quality of investments available.

The next one is not requiring investors to keep money in their spending account before investing. That really allows for first-dollar investing and it doesn't hold an investor back by keeping money in a spending account that they don't necessarily want or need to, and all the while keeping their total costs low. When we say total costs or total fees low, we're really referring to the underlying fund fees, maintenance fees, and investment fees that an individual could be charged in relation to their HSA.

Dziubinski: Morningstar recently updated its HSA rankings. Which HSA came out on top for those investors who want to use their HSAs as investment vehicles?

Pacholok: This year Fidelity is the sole provider that earned a High assessment for their investment account. They do earn a High price and investment threshold assessment, which means that their fees are attractive and they're not requiring individuals to keep money in a spending account in order to invest.

Dziubinski: How can someone who's using their HSA as an investment vehicle know whether their employer is really giving them a good HSA option for that?

Pacholok: That's a great question, Susan. Individuals looking to compare their employer-sponsored account as well as retail offerings that they can open on the side should look at the same factors that we evaluated in our report; whether the investment menu is sensible and easy to navigate, how strong the investment strategies available are, whether or not the provider imposes that investment threshold and the total price.

Dziubinski: Megan, if investors are, say, unsatisfied with what their employer-sponsored account is offered as far as an investment vehicle goes, what can they do about it?

Pacholok: An individual can actually have more than one HSA open. So, if they're unsatisfied with their employer-sponsored account, they can open a supplemental retail account HSA. If their employer offers an employer contribution, they would need to make regular contributions to their workplace account, receive that contribution, and then periodically shift those assets into their extra retail HSA. An account transfer is not taxable as long as the money is staying within the HSAs, but some providers do charge a transfer fee, which they should keep an eye out if they're looking at that. This tactic is a little bit more of a hands-on management when it comes to looking at your HSA, but sometimes the cost savings could be worth it.

Dziubinski: Well, Megan, thank you so much for your time today. HSAs do have these terrific tax benefits and using them as investment vehicles really allows us as investors to make the most of those benefits. We appreciate your time.

Pacholok: Thanks, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.