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Q&A: How HSA Contributions Stack Up

Comparing health savings accounts to taxable accounts

Morningstar Staff


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Health savings accounts, or HSAs, are playing an increasingly key role in the investment landscape. But knowing how to incorporate HSA contributions into an investment portfolio isn’t always clear.

This fall, we took questions from advisors about HSAs during an event that included Jeremy Glaser, editor of; Leo Acheson, a senior analyst with Morningstar Research Services LLC; and Christine Benz, director of personal finance. These questions ranged from determining the best HSA to whether contributing to an HSA should take priority over contributing to a 401(k). We also recorded this discussion from Nov. 16, 2017.

Here’s an excerpt of their chat about HSA contributions:

Glaser: Christine, I'd like to discuss how to use an HSA in a client's portfolio as part of an asset-allocation plan and exactly how much more can be gained from saving in this vehicle than others.

For illustrative purposes only.

Benz: I brought an illustration that stacks up HSA contributions, relative to a plain old taxable brokerage account, relative to a pre-tax 401(k). When we walk through those numbers—assuming that we are using a $6,750 contribution and that amount gets contributed for 30 years and earns a 4% interest rate, and the person is in the 25% tax bracket—the HSA, that person would have about $379,000 at the end of a 30-year period.

In contrast, because you are putting in after-tax contributions into a taxable account, you may experience some capital gains and income distributions along the way that you will in turn owe taxes on. And then in the end, when you pull the money out, if your investments appreciated, you would also owe capital gains taxes. That taxable account contribution stacks up to be about $261,000 after that 30-year period. That’s about $110,000 less than the HSA contribution.

Finally, let’s look at 401(k) contributions with pre-tax contributions. With the same amount and same interest rate earned, the after-tax amount would be about $284,000—also less than the HSA.

Looking at the tax benefits alone, the HSA comes out ahead of either contribution type.

Glaser: That’s a pretty significant advantage. Why shouldn’t every marginal savings dollar go into an HSA or should it? How do you think about it compared to other accounts?

Benz: That’s a good question. I would consider the fact that in contrast to a taxable account—where you can really do anything with your money—or a 401(k) plan where you have a lot of latitude in retirement to pull the money out for whatever you choose—the HSA is, in essence, a single-purpose vehicle. In order to earn the full tax benefits, you need to spend all of that money on qualified health care expenditures.

Another key reason to perhaps forego the HSA contribution in lieu of some of these other contribution types is the costs that can rack up. I think we expect HSAs will get better over time as we see more money flow into them. But for now, there are a lot of HSA accounts that are larded with various fees. So that’s another potential negative. Again, it depends on the specific account that a person is contributing to.

And then finally you want to think about the fact that the only way to take penalty-free withdrawals from that HSA for non-health care expenses is if you are post age 65. That stands in contrast to money that someone might have within an IRA for example where the penalty-free withdrawals can come out at age 59.5. And in a 401(k) or other company retirement plan the penalty-free withdrawals could come out as early as 55. So that’s another potential negative for HSAs. Of course, it's very specific to the individual. I think this is a something that advisors can really help their clients navigate—to determine whether the HSA is a good option.

Glaser: They also need to decide if the high-deductible plan is a good option. Many people still have a choice between a traditional and a high-deductible plan.

Benz: Absolutely. More and more we see that people are being forced into the high-deductible plan. They don’t have a choice. But it definitely pays to do analysis up front if you do have a choice between a high-deductible plan and another option, usually a PPO. You’ll really want to do a stress test on the PPO versus the high-deductible health care plan and look at the maximum out-of-pocket costs that would align with either choice. Also, factor in whatever the employer is doing. These days, a lot of employers incentivize their employees to choose the high-deductible health care plan over the PPO, you may be able to get some nice benefits by going the HSA route.

Glaser: Leo, there are a lot of HSAs out there. How should an advisor think about assessing these plans beyond just those tax benefits that Christine mentioned?

Acheson: The first thing to consider is how the investor intends to use the HSA. There are really two primary use cases: 1) a spending vehicle to cover current medical costs and 2) an investing vehicle to save for future medical costs, which would allow you to take better advantage of the tax benefits that Christine outlined. Looking at HSAs from a spending-vehicle perspective, there are two considerations—but one is more important than the other in my view. First, there are maintenance fees, the most common type of fee that you will encounter in HSA plans. There is a big difference in terms of what plans are charging. Some of them have no maintenance fee, some waive it after assets reach a certain threshold, and some don’t waive it in any case. The other consideration is the interest rate earned on a checking account. Currently, this rate is low, so it’s not much of a differentiating point. Meanwhile, if you are going to use an HSA as an investing vehicle, you'd want to consider the expenses of investing, which include maintenance fees, investment fees, and underlying fund fees. Moreover, investors should consider the breadth and quality of investment options that the plan offers. In our recent HSA landscape report, we take these considerations into account and detail which plans look the most competitive for use as a spending vehicle and for use as an investment vehicle.

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