Check out our podcast on Health Savings Accounts. In this episode, Dough Roller’s founder Rob Berger calls them “one of the best tax-advantaged accounts”; he tells us why he has one and why you should too. For more episodes, click here or keep watching on our Youtube channel.
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These days, more and more consumers are moving to HSA-eligible health plans. To qualify for an HSA (health savings account), your health plan needs to have a minimum deductible of $1,350 for yourself or $2,700 for your family. If your health plan qualifies, using an HSA is a smart way to save on a tax-advantaged bases for health-related expenses.
When HSAs first arrived on the market, none of them were really very good. Many didn’t offer solid investing options at all. And some had high fees. They were basically a glorified savings account, albeit one that let you put in pre-tax money up to the annual limit. Now, though, HSA providers are catching up.
Now you can find HSAs geared more towards investing. This means your HSA can be similar to your 401(k) or IRA as a long-term investment that could provide significant gains. This is a solid strategy for HSA savers who don’t tend to have high out-of-pocket health costs each year.
Even if your employer offers an HSA through a particular provider, you can go out on your own to choose a provider that more closely suits your own needs. Typically, you can just fill out a form from your chosen provider, and your employer can still put pre-tax dollars into your HSA.
If for some reason your employer won’t do this, you can opt out of contributing pre-tax dollars to the employer’s HSA. Then, just contribute post-tax dollars to your chosen account, and take a tax write-off at the end of the year.
So it’s good to know that you can choose your own HSA provider. But which one should you choose? First, let’s talk about what to look for in a good HSA. Then, we’ll highlight a few of the best accounts available on the market today.
Two Ways to Use an HSA
Before we dive into what to look for in an HSA, let’s talk about the two primary ways to use an HSA. This is important because how you plan to use your HSA will define what makes a “good” HSA for your needs.
There are basically two ways to use an HSA: for spending or for investing.
You may do a combination of both throughout the year. But chances are you’ll lean more towards one or the other.
You’ll likely lean towards the spending end of the spectrum if you have lots of health expenses. This could be because you’ve got some chronic health problems to manage. Or it could just be because you have a couple of kids who have constant check-ups that require co-pays. Either way, if you plan to spend at least half of the money you put into your HSA within a year, look for a spending-related account.
What if you don’t have many healthcare expenses in a year? In this case, you can use your HSA as basically a supplement to your retirement savings. You can invest the money for the long term because you’re less concerned about potential short-term losses. Remember, if you ever get into a situation where you need to pull back to safer, spending-centric investments, you can always do that, too.
If this isn’t your first year using an HSA, you probably already know which direction you lean towards. But if this is your first year to use this type of account, you should look back at your healthcare expenses over the last year or so. And be sure to account for any upcoming major changes, such as a new baby on the way.
Once you know about how you plan to use your HSA, you can decide which account features are key for your needs.
What to Look for in an HSA
Just like you look for something different from savings accounts versus 401(k)s, you’ll want to look for features in your HSA based on how you plan to use it. Here’s what to look for in spending versus investing accounts:
- Fees: Fees are important either way, but with a spending HSA, you definitely want to spend as little money as possible out of your account each month.
- Interest Rate: With these types of accounts, you don’t have to invest in mutual funds or market investments. Instead, you can just opt for an interest rate. So a higher rate is better than a lower one, of course.
- Debit Cards: This isn’t a must-have, but it’s convenient. If you plan to use the money in your account often, being able to spend directly from the account on a debit card is nice. Just be sure you’re only using it for qualified HSA expenses so you don’t have to reimburse your account.
- Investing Options: Choosing an investing-focused HSA is similar to choosing an IRA. You want to have a good, varied menu of investment options so you can make the investing choices that make the most sense for your needs.
- Price: Investing HSAs will carry different fees than savings-oriented accounts. Be sure to understand both the account fees and the fees for underlying investments to get the most bang for your buck.
- Performance: Look at the historical performance of the HSA’s underlying funds to make sure that it’s done well in the past. Past performance isn’t always an indicator of future performance, but it can be helpful.
The Best HSAs for Both Categories
Since we’re dealing with two different categories here, let’s break down the HSAs in to the best options by category. First however, I want to address that one HSA is the best in both categories; the Lively HSA.
The monthly cost to own a Lively HSA is $0. Account opening fee; $0. Account closing fee; $0. Debit card fee (up to 3 cards per account); $0. I hope you’re getting the idea here.
The account is also FDIC insured and it currently yields the following interest rate (depending on balance size):
- Less than $2,500 – 0.01% APY
- $2,500 – $4,999 – 0.01% APY
- $5,000 – $14,999 – 0.01% APY
- $15,000+ – 0.01% APY
And if you’re an investor, all accounts are attached to the TD Ameritrade platform. And as luck would have it, TD Ameritrade recently changed their fee structure, and all stock trades now cost $0.00. So whether you’re looking to save or invest with your HSA, how can you go wrong with Lively?
The Rest of the Best Spending HSAs
Using our metrics of maintenance fees, interest rates, and potentially a debit card, here are the best HSAs for spending:
BMO Harris Health Savings Account
The BMO Harris Health Savings Account has no minimum opening deposit and no monthly maintenance fee. You can get paper or online statements for free, and it comes with a BMO Harris Hsa Debit Mastercard so you can spend directly from your account.
The account does carry a $25 transaction fee if you move money over from a different custodian, and a $3 fee for non-BMO Harris ATM transactions. You do have to visit a branch to open an account, and the accounts earn a variable interest rate.
Affinity Credit Union HSA
This is another account with no minimum deposit or balance and no fees. You can add an Affinity Visa Debit Access Card to your account for more convenient spending. And the account earns a 0.25% APY.
Before you can apply for this HSA, you have to apply to be a member of Affinity Federal Credit Union.
First American Bank HSA
The First American Bank HSA has no monthly minimum balance or monthly fees. It comes with free mobile and online banking and a Mastercard debit card for convenient spending. It pays tiered interest rates based on your balance. The rates range from 0.09% APY to 1.00% APY. You can find the full list of rates and one-off potential fees here.
Besides these, there are plenty of other credit-union based HSAs that don’t charge any maintenance fees and that do offer some interest. Be sure to check out your local credit union options before you decide which HSA to use for your spending.
The Best Investing HSAs
For this ranking, we’ve relied heavily on the Morningstar report on the best HSAs. It came out in 2017, so we’ve verified the latest numbers for the highly-ranked investing HSAs listed there.
Health Equity has three different HSA options, one of which is geared towards mutual fund investments. You can choose to invest your money automatically for a higher account fee, or you can choose a self-driven account.
The self-driven account has no monthly service fees and an investing administrative fee of 0.033% per month. The auto-pilot account, which is the most hands off for investors, has a monthly service fee of 0.08% and an investing administration fee of 0.033%.
The account earned a high ranking from Morningstar for its plethora of mutual fund investing options, many of which have a strong performance historically.
The HSA Authority
Run by Old National Bank, The HSA Authority is one of the oldest names in the game. Once you get a $1,000 balance in your account, you can use it to invest. The account has an annual fee of $36, or $3 per month. This could be more or less than you’d pay with percentage-based fees, depending on your account balance.
You can invest your account here in mutual funds, which are load-waived. The HSA Authority has a decent list of underlying mutual fund options in which to invest.
SelectAccount: Potential for Both
The only account in Morningstar’s list that scored well in both the saving and investing categories was SelectAccount. This account gives you a few options for a savings account. For a higher account maintenance fee, you can get a higher interest rate each month, which also varies according to your account balance. You can also decide to transfer your savings account to an investing option, which costs just $18 per year.
Saving in Multiple HSAs
What if you don’t fit cleanly into one category or the other? Maybe your family is planning to contribute the maximum $6,900 to your HSA this year. You know your health expenses should be around $3,000, but you want to invest the remaining $3,900.
In this case, you could consider opening two different HSAs. This is allowed, provided your total HSA contributions for the year don’t exceed the annual limit.
You could put $3,000 into a no-fee account first, and use that account for spending. If you’re planning to spend the money within the year, it doesn’t even matter much if you earn any interest. But then you could put the remaining $3,900 in an investment-focused account to save for the rest of this year and beyond.
The advantage of this is that you don’t pay balance-based investment account maintenance fees on money that you’re just going to spend quickly, anyway.
This may not be the right strategy for you, but it’s worth considering if you need to take more of a combination approach to your HSA saving and spending.