Health Savings Accounts: Choosing the Right One

October 02, 2019 by First Federal Bank

Blocks with the letters HSA are arranged on three stacks of coinsHealth Savings Accounts have a wealth of benefits. They can help you save on taxes, aid in bolstering your retirement fund and earn tax-free interest on your savings. Thanks to this trifecta of benefits, Forbes contributor John Goodman claims that no other savings vehicle can top an HSA. However, different HSAs are tailored to different needs. In order to maximize your savings, consider these tips for choosing a plan that suits your lifestyle.

Understanding HSAs

The first major benefit of an HSA is that your contributions are tax deductible, up to a certain yearly limit — $3,500 for singles and $7,000 for families, as of 2019. The money in your HSA can then grow, free of taxes, as long as you keep it in the account. When it’s time to pay for healthcare expenses, you won’t have to pay income taxes on your gains.

Since there’s a yearly limit on how much tax-free money you can contribute to an HSA, it’s best to start young. If you’re 55 or older, you can contribute an additional $1,000 dollars annually, as a catch-up contribution.

To use an HSA, you have to choose a plan that meets certain requirements. As of 2019, it must have a minimum annual deductible of $1,350 and a maximum out-of-pocket amount of $6,750. Even if your plan meets these standards, check with your insurance brokers or employer to see if your plan is HSA compatible. As with any tax-advantaged account, you can face penalties if you withdraw the money for non-healthcare-related purposes before you turn 65. Once you reach age 65, you can withdraw your HSA funds tax free, regardless of whether you’re using them for medical expenses.

Accounts for saving

If you’re healthy enough to avoid medical costs or wealthy enough to pay out of pocket, consider an HSA that’s geared towards saving. These accounts will have investment options, offering both actively managed and index funds, alongside the ability to invest in core asset classes. It’s ideal to find an HSA that allows first-dollar investing, although most HSA providers require you to keep $1,000-$2,000 in your account before you can invest it. You should also opt for an account that charges low fees and offers a good interest rate.

Accounts for spending

Many people choose to use their HSA like a checking account that’s strictly for paying medical bills. If you plan on spending your HSA money regularly, your account won’t carry a high balance for long periods of time. Therefore, you shouldn’t prioritize getting an HSA with investment options and a good interest rate. Instead, look for an account that offers no monthly fees — even if it means sacrificing interest entirely. According to Mila Araujo, a contributor to The Balance, you can easily pay $50 in annual fees for an account that earns interest. However, since you keep a relatively low balance, you may only earn $2 dollars in interest. That means you could’ve saved more money by choosing a fee-free, no-interest account. However, many HSAs offer a fee waiver if you maintain a certain minimum balance.

When managed to suit your needs, an HSA can be a powerful investing tool. To learn more about choosing the right HSA for your needs, talk to your insurance provider and a financial advisor.

Categories: Saving Money, Budgeting, Insurance