A couple years ago my wife and I decided to drop my employer sponsored health care plan and buy our own individual health care plan. The cost was very similar, but we had a better choice of doctors, which was important to us. When we changed plans, we opted for a high deductible health insurance plan. One of the benefits of using a high deductible health care plan is the opportunity to open a health savings account (HSA), which is a tax advantaged savings account for health care expenses. There are a lot of benefits for using them, but I made a huge error when I opened our high deductible health care plan – I forgot to open an HSA!
I decided to rectify that error and open an HSA, which I did right before the tax deadline this year. If you have an high deductible health insurance plan, I highly recommend opening an HSA as soon as possible – you will save a lot of money on taxes, and you have the opportunity to use the plan as another way to invest.
How an HSA Works
First of all, not just anyone can contribute to a health savings account – you must first have a qualifying high deductible health insurance plan. “High deductible” is defined as having a deductible of $1,200 for an individual, or $2,400 for a family. Once you have that in place, you are eligible to contribute to an HSA. Once your HSA is open, you can contribute up to the individual or family limit each year (see chart below for contribution limits).
In some ways, an HSA is like an IRA. Your contributions are tax deductible (like a Traditional IRA), regardless of your income limits, and your withdrawals are tax free (like a Roth IRA), provided they are made for qualifying health care expenses. Non-qualified distributions before age 65 are subject to a penalty. Non-qualified withdrawals after age 65 can be made penalty free, but you must pay taxes on the withdrawals (like a Traditional IRA). These tax rules allow some people to use HSAs as an investment vehicle, similar to having another Traditional IRA.
Your contributions can be maintained in a health savings account in a variety of funds, including an interest bearing account similar to a savings account (though sometimes with better interest rates), or you can invest your funds in stocks, bonds, or other investments. Some HSA’s can even be linked to a brokerage account where you can invest your funds more easily.
Related topic: Compare Flexible Spending Accounts and Health Savings Accounts.
HSA Contribution Limits
Here are the HSA contribution limits for 2013 and the last few years:
Tax Year Individual Family Catch-Up Contributions (age 55 and over)
2013 $3,250 $6,450 $1,000
2012 $3,100 $6,250 $1,000
2011 $3,050 $6,150 $1,000
2010 $3,050 $6,150 $1,000
What to Look for in an HSA
Here is where the fun starts – HSAs are available from a wide variety of banks and credit unions, but they aren’t always advertised. To further complicate things, some banks and credit unions actually outsource their HSAs to third party companies, but they brand it under their name in order to keep as much business under one roof as possible (in turn, they usually receive a small kick back from the company that actually runs the plan).
Watch out for high fees. Many HSAs carry high monthly fees, and shopping around can save you a lot of money.
Determine your needs. If you are planning on using your HSA for the immediate tax break and plan on using it to pay for your health care in the present, then you want to look for quick and easy access to your funds. If you plan on using your HSA as another retirement fund, then your needs may be different, and you would want to look for an HSA that offeres access to investments that meet your needs.
Where to Research HSAs
The single best resource I’ve found for researching HSAs is this awesome thread at FatWallet. The thread goes back almost 7 years, so keep this in mind if you visit the forum. I started at the second post in the thread, which lists a bunch of HSA providers and information about their plans. This is kept more or less up to date, and includes information such as rates, fees, account minimums, and other relevant information. If you want to get more recent info, visit the links, or skip to the end of the thread.
Where I Opened My HSA
I’ll be the first to admit, there is no perfect solution when it comes to HSAs. If my primary bank, USAA, offered Health Savings Accounts, I probably would have gone with them. They don’t offer them, so I contacted my local bank (where I have a business savings account) about opening an HSA through them, and my account manager told me the HSAs they offer are actually through a third party. I can go with the convenience of the local branch, or, I can choose to link my HSA to an account where I can better invest my funds and have more opportunity for growth.
Right now my family is healthy and we don’t have many health related expenses. So my goal was to fund my HSA to the limit, then invest the funds until needed. Hopefully I will be able to leave the money in the HSA for years and let compound interest ork its magic. If we need the funds for a major medical expense, then we can tap into them at that point.
I Chose HSA Bank for my Health Savings Account
I did a lot of research, and after comparing HSA providers, I decided to open an account with HSA Bank.
Pros and cons of HSA Bank: There are quite a few fees at HSA Bank (see list of interest rates and fees), but they aren’t outside of the norm when compared to many other HSA providers. The key is to look at your needs and evaluate the HSA on a case by case basis. Thankfully, most of the fees at HSA Bank are avoidable with a little planning and if you maintain a minimum balance. They also offer online access, unlimited check transactions, and a debit card for making payments on qualified expenses, which is convenient.
Interest rates and investments. HSA BAnk also offeres fairly good interest rates on funds held within the savings account which are currently comprable to many online savings accounts. They also allow you to connect your HSA to a TD Ameritrade account, giving you easy access to investments.
When I looked at my needs and compared HSA Bank to some of the other top options, I decided that I could avoid all monthly fees at HSA by maintaining a minimum amount in my account, and I would be able to invest some of the funds in a self-directed HSA Investment Account with TD Ameritrade where our contributions will hopefully grow until we need them.