How can I choose the right HSA account?
Well, if you spend the right amount of time researching the types of HSA accounts closely, it can result in the difference, over a lifetime, of literally thousands of dollars of extra money. It all comes down 3 things:
(1) minimizing fees,
(2) maximizing interest aka APY, and
(3) maximizing investments
“HSA accounts are a very under-researched corner of the market. Investors have few resources available to help them navigate the hundreds of plan providers that exist. HSA accounts have recently grown in popularity, but the lack of resources has likely contributed to their underutilization as a savings vehicle despite their valuable tax benefits.”
-2017 Health Savings Account Landscape, Moningstar
–https://corporate1.morningstar.com/ResearchLibrary/article/813893/2017-health-savings-account-landscape/
There is a nice article that you can read (http://www.morningstar.com/lp/hsa-landscape) on reviewing and selecting an HSA account based on one of two primary needs:
(1) Using an HSA as a spending vehicle to cover current medical expenses, or
(2) Using an HSA as an investment vehicle to save for future medical expenses.
Keep in mind that you can withdraw your HSA money for NON-MEDICAL reasons without any penalty after you are 65 years old. It will still be taxed though!
Essentially, what this means, is that if you plan to invest within your HSA account, it can effectively become another type of 401(k) or Traditional IRA account. This means that the money will go into the account tax-free and is later taxed when you take the money out!
So, assuming there aren’t any major medical issues until you’re 65, an HSA should be treated like another 401(k) account. Another thing to keep in mind is that as long as you keep your receipts from your medical expenses, you can reimburse your medical bills much later down the road. This can be 10-15 years down the road, after your HSA account has grown in value with the market! Of course, this all bears on whether or not you can afford to pay for medical bills out-of-pocket, after taxes, today, without tapping into the HSA account. This is not always very easy to do.
Wait a minute. Who can plan for not having any medical emergencies until they’re 65 years old? Beats me! I know I can’t. But that doesn’t mean the investment opportunity should be dismissed all together.
Now, if you withdraw the money prior to age 65 (for non-medical purposes), there is a 20% penalty for this. That is a huge penalty! It should be avoided at all costs. Of course, the primary point of an HSA is for medical purposes after all.
As a result of all this, I believe that some major consideration should go into selecting an HSA account in order to maximize the potential impact on the savings aspect for retirement. If you can invest the money, why not do it? Just be careful though, because one thing I’ve discovered is that every single time you offload money into an investment vehicle from your HSA account, you’ll be slapped with a $25 fee. Even if you’re transferring just $100 over to an investment account, it’s still $25, or 25%! A general rule of thumb with investing is that you should avoid paying high transactional fees. The total fees should be less than 1% of the overall transaction. On top of the $25 transaction fee to transfer money into an investment account (like TD Ameritrade), you have to pay a commission fee for buying a particular stock or security. This is typically around $7-10!
The downside is that it can be a real headache to research all of the HSA brokers out there. And there are a lot of options out there now that HSAs have been around for several years. If you’re looking to maximize the investment portion of your HSA account, my advice is to establish a base amount of money over several years first. These transaction fees can be pretty high, especially when you’re transferring small amounts of money…
Once you transfer money out of your HSA account and into an investment account, or if your HSA account includes investment choices already built into it, it’s really important that you have a good selection of funds to purchase. I can’t reiterate this point enough. For example, you might find an HSA account that offers no transaction fees to do the investments, but the investments themselves (often limited, unless you have a TD Ameritrade or other large broker account!) will have high administrative/management fees, along with high expense ratios. That’s right, it’s often an double-whammy when it comes to fees.
One study done by AARP back in 2011 showed that 71% of participants thought that they didn’t pay any 401(k) fees – something that simply isn’t true.
https://www.aarp.org/work/retirement-planning/info-02-2011/401k-fees-awareness-11.html
A few options are listed below:
-Elements Financial
https://www.elements.org/personal/savings/health-savings-account/
-Health Equity (received high rankings
https://healthequity.com/learn/hsa/
-Select Account
https://www.selectaccount.com/
-Lively (recommended at a co-worker’s spouse’s workplace)
https://livelyme.com/individuals-and-families/
Along with these accounts, the following article has been a really helpful resource:
https://20somethingfinance.com/best-hsa-account/
I recognize that everyone’s needs are different when it comes to choosing an HSA account. For some people, the investment part of an HSA won’t mean very much. I can see this being the case if you don’t plan on putting much money into the account, or maybe if you’re thinking you’ll be using your HSA regularly to pay for medical expenses. For others, the simple conveniences of having a debit card, maybe access to an additional Checking or Savings Account through an HSA would be important. Some HSA accounts offer automated receipt submittals, they have an app for your phone, etc.
My only word of caution would be to, please, look out for the fees.
I believe an HSA account should empower people to get ahead in life through leveraging the tax-advantaged savings aspect. If the fees are too high, the tax advantages go out the window. Please be careful with this. I know there are a lot of places that have high fees and they will readily take advantage of you, whether you know it or not. You may look at the fees as being a small thing today, but if you take into account the growth that could have been realized by not paying those small fees over the course of 10, 20, or 30 years, the difference can add up to thousands of dollars!