Health savings accounts (HSA) are their own unique breed of an account by allowing a triple tax savings. Tax free going in, tax deferred growth and tax free going out, as long as it’s a qualified expense. They are unlike a 401K as well because you don’t need an employer sponsored account to hold the money. That’s right, you can transfer or rollover HSA money from an employer account to your own account, even while still employed.
Health Savings Account Rules
An HSA is a tax advantaged medical account that requires a high deductible health plan (HDHP). In exchange for a higher deductible, you usually get lower health insurance premiums and the account itself. It’s best to not compare it to other tax advantaged accounts like a 401k or IRA because the rules are that much different.
As of 2018…
Minimum deductible to count as HDHP – $1350 Individual, $2700 Family
Max individual contribution amount – $3450
Max family contribution amount – $6900
Contribution deadline is the tax deadline, April 15th of the following year
All Contributions carry over year to year
Contributions are pre-tax
Any growth or interest is tax deferred
Withdrawals are tax free when used for qualified expenses as defined by IRS publication 502
The money is YOURS and stays with you even when switching employers
Can NOT have health Flexible Spending Account (FSA) and HSA at same time
CAN have limited FSA (dental/vision) and HSA at same time
For a full list of rules see IRS publication 969
You Control HSA Money
The instant any money is put into your HSA, whether by you or your employer, is yours! That means those funds are immediately available for health expenses, transfers, rollovers and the like.
This also means you aren’t tied to your employers provided Health Savings Account. You can shop around for the best account provider on your own. And yes, you can have more than one HSA open at a time.
The real power of this is the ability to invest your HSA funds into the stock market. Often, your employer provided account has terrible investment options, if any at all. This encompasses all sorts of high fees and hoops to jump through just to manage your own money. Which is a shame because Health Savings Accounts are THE best retirement savings account. Remember the triple tax savings?
If electing for your own account provider, then there are two ways to transfer that money to your own account.
First is the rollover. This is a once per year option where you request funds to be withdrawn from your current provider. This usually entails you submitting a request and them sending you a check then leaving you 60 days to move that money into another HSA. If not deposited within 60 days then all tax advantages are lost on that money and it’s considered a non-qualified expense and all taxes will be due, including a 20% penalty fee.
Also, don’t forget to report this on form 8889. Don’t want any unwelcome visits from Uncle Sam.
The benefit to this though is your provider doesn’t usually charge any “admin fees”, making it the cheapest way to transfer your money.
HSA Trustee to Trustee Transfer
The next options allows for unlimited transfers. The trustee to trustee transfer is initiated by you, to your current HSA provider, to initiate a transfer from them to another Health Savings Account. Unlike the rollover, these usually incur an “admin fee” but in exchange you can do it as many times as you want and don’t have to report it on any forms.
The fees vary so widely from each account provider it’s best to check if this is worth it or not to you. This is truly the “hands-off” approach.
How to invest with your HSA
It’s important to note that each HSA account provider has their own rules about investing, so the rules will vary depending on your provider. It will be up to you to contact your provider and ask them if you can invest with your HSA.
Most require that you keep a minimum balance in your HSA before they allow you to invest it. This number can range from $0 to $1500+. It’s best to call instead of go in-person when inquiring about investing in your own HSA. Most banks only have one representative for investments in a wide area and they travel around to different branches. This was true for my KeyBank HSA.
Now for the reality, most investment options for HSA’s have terrible options. They are loaded with fees, high expense ratios, front loaded fees, back loaded fees, you name it. Luckily, as talked about before, we are in control of this money and therefore can use a rollover or trustee to trustee transfer to move the funds into a new HSA account of our choosing.
Using an HSA as a retirement account
Why go through all this effort? Because HSA’s are the BEST retirement account available. This is because of the triple tax savings. This is counter-intuitive from the normal advice of using HSA funds for medical expenses as they occur. The idea is to NOT use HSA funds when you have medical expenses. This is because we want the HSA funds to grow in the invested portion of our account letting compound interest do its work, then withdraw that money later on in life near retirement age.
When opting for this route, you’ll want to save all of your medical receipts. Preferably making digital copies of each one because paper won’t hold up well over 30+ years. We can do this because there is no time limit or deadline to reimburse yourself from your HSA.
This allows for HSA money to be used for non medical expenses, tax and penalty free. Of course you can always use the money later in life for health care costs or even withdraw it after age 65 for non-medical expenses penalty free (it will be taxable if you do this approach though).
Let’s not forget the actual cost of health care in retirement though. The average couple retiring today at age 65 will need $280,000 for health care and medical costs. Who knows what it’ll be in 10, 20, 30+ years.
The real power of using your HSA as an investment account is the flexibility it gives you in retirement. Higher than expected medical costs? Use your funds tax free. Lower than expected medical costs? Reimburse yourself with your saved receipts to pull money out of your health savings account tax and penalty free.
Best HSA investing account providers
We talked a lot about rolling over and transferring funds to another HSA account. Well which one is best? *Note: This is based on the best for investing and I am not affiliated with any of these companies.
Luckily the HSA Report Card keeps an updated list of the top 10 investor HSA’s along with reviews for each one.
Currently the ranking is:
- Saturna Capital
- HSA Authority
- HSA Bank
- Bank of Cashton
- Health Savings
- Health Equity
- Optum Bank
The top things to look for are:
- What is the minimum balance you need to invest?
- What are the investment options with the provider?
- What is the fee to open the Health Savings Account?
- What is the fee to invest with the HSA?
- What are the expense ratios for the stocks available to invest in within the HSA?
As an example, I ended up choosing Lively for my provider. This was based on a zero dollar minimum balance. Meaning I can invest all of the funds available. Lively uses TD Ameritrade for the investments. They had a lot of low cost ETF’s that interested me, specifically the SPTM at 0.03% expense ratio. Lively is free to open and only $2.50 a month to invest.
Each account provider will offer different stock options. I know some even have Vanguard funds, including my favorite VTSAX. It takes some digging but you can usually find what the options are by visiting their websites. If not from their websites, then their partners. Example being Lively uses TD Ameritrade, so by going to TD Ameritrades website I was able to find the investment options.
Should you spend or save your HSA?
This is ultimately the question you’ll need to ask yourself. If you are able to pay for your medical bills out of pocket or after tax and able to let your HSA grow with investments over many years. Then you will end up with the ultimate retirement account.
If you have high medical costs and money is tighter, then by all means spend your Health Savings Account now to allow some breathing room in your life.
The right choice is the one you make.