How Health Savings Accounts Can Multitask

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

Health savings accounts are essential for people who are covered by high-deductible healthcare plans. They can also be worthwhile investment vehicles for higher-income investors. In contrast with flexible spending accounts, which require you to deplete your money each year, money in an HSA rolls over from year to year.

The key reason to use an HSA if you're covered by a high-deductible plan is to earn tax breaks. You put in pretax dollars, your money grows tax-free, and withdrawals for qualified healthcare expenditures are also tax-free. It's the only triple-tax-advantaged savings vehicle in the whole tax code.

HSA money can be directed into the savings account where it will earn at least a little bit of interest. This is the right option if you’re using your HSA to cover your out-of-pocket healthcare expenses as you incur them. If you don't have many healthcare expenses and can afford to pay your expenses out of pocket, you can use the HSA to buy long-term investments like stock and bond mutual funds and exchange-traded funds.

The big drawback to HSAs is that many of the accounts have high costs--there might be administrative fees for the account, transaction fees to get the money invested or to use your debit card, or high fees on the investment choices. Read the fine print. If your plan is expensive, that can erode the tax benefits of the HSA.

Thanks for watching. I'm Christine Benz for Morningstar.com.