Get the Most Out of Your Health Savings Account
Readers share their tips for maximizing the benefits of these tax-advantaged savings accounts.
Health Savings Accounts are becoming increasingly popular savings vehicles for funding current and future medical expenses.
Although not everyone is eligible for an HSA (click here to see the IRS's eligibility requirements), they can provide some very attractive tax benefits. Indeed, HSAs are sometimes referred to as “triple tax advantaged” owing to the fact that contributions to HSAs aren't subject to tax; investment earnings and interest on the assets in the account aren't taxed from year to year; and withdrawals are tax-free, provided they're used on qualified health-care expenditures.
Morningstar's HelloWallet division recently looked at some data collected by one of the largest recordkeepers of health savings accounts in the country to explore whether employees were saving enough in their HSAs to cover their medical expenses. The findings of the study indicated that many employees use their HSAs in suboptimal ways.
We recently asked Morningstar.com readers for their tips for maximizing an HSA so it has a better chance of fulfilling its intended purpose: increasing one's buying power for future medical expenses. Below is a summary of their responses. To read the full discussion and weigh in yourself, please click here.
'Please; anybody who has these programs at work and does not participate, go sign up.'
Many readers noted that two of the biggest mistakes you can make with an HSA is not contributing to it all if you're eligible, or not contributing the maximum allowed if you're able. Saving as much as possible allows one to take the fullest advantage of the tax benefits provided by these plans. (HSA contribution maximums for 2015 are $3,350 for individuals and $6,650 for families. In addition, you may be able to contribute an extra $1,000 to these maximums if you're over 55. For 2016, the IRS said it is increasing the maximum for family contributions to $6,750, but the individual maximum will remain the same.)
"By contributing the maximum amount, investing the contribution every year in the appropriate mixture or stock and bond funds based on my age (treating this account like a relatively moderate/conservative investment account, and adjusting it yearly), and paying cash for my out-of-pocket medical expenses (while keeping receipts), my HSA has grown nicely," said DennisR. "My goal is to try and accumulate enough receipts that the bulk of the investment account can be withdrawn ‘triple tax free’ when the time comes."
These four tips were offered by laserguy: "1) Start early; 2) Max out contribution; 3) Invest in diversified stock index fund; 4) Pay expenses out-of-pocket." This reader added: "After starting with an MSA 15 years ago we have managed to build a six-figure HSA balance. Recently retired at age 70 and am now using these funds for medical expenses, which thankfully, are few. With the 'triple tax advantage' it is probably the best investment you will make.”
'To the extent allowed in my HSA, I have it invested aggressively.'
Some readers pointed out that another potential HSA pitfall is forgoing the option to invest if the account has an investment option.
"What continually surprises me is the very few people who understand the HSA," said Camaro68. "I am the only one I know of at work that invests the money in the account...some are shocked and don’t believe me that it is possible to trade/invest with this money...Regardless of our (sometimes) lengthy discussions, the end result is usually the same--they keep saying it is something they have to look into or read more about and never do. It's literally a couple clicks on two websites to put it into a mutual fund...you can't afford not to," this reader said.
Further, reader RothStar offers some helpful guidance to those in an employer-sponsored HSA with suboptimal investment options:
“What if you don't like the investment options in your employer-sponsored HSA? Or if the employer-sponsored HSA is not an investable account? Max it out anyway.” RothStar also notes that it's possible to open another HSA somewhere else, then transfer the assets from an employer-sponsored HSA into another HSA. "But don't skip the step of maxing out your employer-sponsored HSA. Otherwise, you lose the FICA exemption," this reader said. (For more on this, see this article.)
Indeed, high fees and lackluster investment options are drawbacks of some HSAs that can offset some of the tax benefits. That's why it's crucial to do your homework and invest with care, as self-employed vireoman suggests:
"Definitely shop around before choosing a bank to hold your HSA. I settled on US Bancorp due to a lack of fees and an array of simple investment options," said vireoman. "[I] put the maximum amount allowed into my account. I won't be investing any of the money until I'm done dealing with dental issues (and bills) and I have accumulated an appropriate amount. I don't want to be risking money that I might be needing in the near future."