As always, I offer no credentials nor am I a financial advisor. I do offer to the reader my own research and opinions which should be checked with your accountant or tax advisor and your own investigation before taking any actions based on this post or the links it contains. Caveat emptor!
Inspired by @2003TIDE in my 529 Plans thread, I wanted to post the same kind of overview for HSA plans. Again, I'm not a financial advisor in any way so everything posted is based on my own research or experience. Caveat emptor!
What is an HSA?
The Bogleheads Wiki provides this definition: "A Health savings account (HSA) is a special account which is used in conjunction with a high deductible health plan. Contributions to the account are tax-deductible on the federal and most state tax returns, and withdrawals are tax-free if they are used for medical expenses. Unlike a flexible spending account (FSA), unused money remains in the account and can be invested; most accounts offer either mutual funds or brokerage accounts for investing."
The Bogleheads wiki on HSAs linked above has a GREAT overview of HSAs, how they work, Pros & Cons, what you can/can't do, etc.
Key points about HSAs
"The HSA is arguably the best tax savings vehicle available. Normally you have to either choose between a tax break now (traditional) or tax break later (Roth). With an HSA, you get both, also called "triple-tax-free": (1) you get a tax deduction the year you contribute, (2) the earnings grow and compound tax free as long as you want, and (3) when you withdraw, you don't pay any taxes on principal or earnings. The only catch is the withdrawals must be used for medical expenses."
How to use HSAs
The best usage for most healthy families is to cash flow your occasional medical visits and let your HSA grow year after year while invested in a reasonably cheap index fund or funds. Don't use it as a day trading account or for other active trading. Remember this is to pay your healthcare costs in retirement.
If you use the HSA for current expenses, at least one year's deductible should be considered as part of your emergency fund (and invested very conservatively) while you invest the remainder as if it were part of your 401k or IRA. The idea is that you will use these funds in retirement to pay for healthcare needs at that time.
PROS
This is a list of custodians that might be worth transferring to if your employer-provided HSA plan isn't great. I make no guarantees about any of these custodians listed here but the listed ones are those that our own research has suggested might be worthwhile if your HSA investment options or fees aren't great. For example, for our own HSA, we currently transfer to Lively because several years ago they offered a much lower fee and better total market index fund than my employer's plan. Now the plans are about equal as of January 2020 but we continue to do this for simplicity's sake. The process: I have all HSA contributions into my employer-provided plan completed by mid year and then do a custodian to custodian transfer for everything from my employer plan to Lively. It's a simple online form and typically happens in July. Some of the custodians/administrators below were not available or didn't have great options when we setup my Lively account. Within Lively, I use the TDA trading platform to invest (long-term) in Vanguard's Total Stock Market Index ETF (VTI) with no expenses. Fidelity began offering what looks to be a fantastic plan in late 2018.
Links to HSA reviews and resources
TideFans Personal Finance
[These links are also now under Personal Finance in the secondary navigation menu near the top.]
Inspired by @2003TIDE in my 529 Plans thread, I wanted to post the same kind of overview for HSA plans. Again, I'm not a financial advisor in any way so everything posted is based on my own research or experience. Caveat emptor!
What is an HSA?
The Bogleheads Wiki provides this definition: "A Health savings account (HSA) is a special account which is used in conjunction with a high deductible health plan. Contributions to the account are tax-deductible on the federal and most state tax returns, and withdrawals are tax-free if they are used for medical expenses. Unlike a flexible spending account (FSA), unused money remains in the account and can be invested; most accounts offer either mutual funds or brokerage accounts for investing."
The Bogleheads wiki on HSAs linked above has a GREAT overview of HSAs, how they work, Pros & Cons, what you can/can't do, etc.
Key points about HSAs
- You must have a HDHP (High Deductible Health Plan)
- Contributions are tax-deductible for federal & state in most cases (reduces your taxed net income). CA & NJ state tax monsters are not included in this statement.
- Withdrawals are tax-free if used for medical expense (in the year of contribution or anytime later)
- Contributions can be invested
- Investment returns & dividends are not taxed as they grow and compound.
- Contributions can be transferred from your employer's HSA plan (wherever your HSA contribution is deposited into your HSA account each payday) to a better/cheaper manager like Lively.com or others.
- The 2020 max is $3550 for individual plans and $7100 for family plans. This includes any employer matching
- Medicare recipients contribution limit is $0 but your medicare premium can be paid with HSA funds.
- HSA's are sometimes called "stealth IRAs" because they are pre-tax, w/d are tax free, earnings aren't taxed
- There are no income restrictions restricting contributions
"The HSA is arguably the best tax savings vehicle available. Normally you have to either choose between a tax break now (traditional) or tax break later (Roth). With an HSA, you get both, also called "triple-tax-free": (1) you get a tax deduction the year you contribute, (2) the earnings grow and compound tax free as long as you want, and (3) when you withdraw, you don't pay any taxes on principal or earnings. The only catch is the withdrawals must be used for medical expenses."
How to use HSAs
The best usage for most healthy families is to cash flow your occasional medical visits and let your HSA grow year after year while invested in a reasonably cheap index fund or funds. Don't use it as a day trading account or for other active trading. Remember this is to pay your healthcare costs in retirement.
If you use the HSA for current expenses, at least one year's deductible should be considered as part of your emergency fund (and invested very conservatively) while you invest the remainder as if it were part of your 401k or IRA. The idea is that you will use these funds in retirement to pay for healthcare needs at that time.
PROS
- Tax deductible
- Tax-free w/d if used for medical
- Money remains in account year after year (unlike FSA which must be used in current year)
- Employers may match some contributions
- Funds can be invested
- Funds can be transferred to an external / better custodian if your employer's HSA custodian is high cost or not flexible enough
- You can be reimbursed in future years for current year expenses
- You must be in an HDHP
- If your medical costs are high, HSAs may not be a good idea
- HSAs are relatively new
- If you cash-flow your current medical expenses and want to be reimbursed later for those expenses (i.e. expense occurs in 2020 but you wait until 2040 to be reimbursed), you need to keep up with receipts & proof of your medical expenses.
- HSAs do not enjoy the same favorable treatment upon death of the HSA holder.
- If the HSA holder dies before being reimbursed for expenses there may be some negative tax consequences of not getting reimbursed before date of death. However, the long growth of tax-free earnings generally makes this worth the "risk."
This is a list of custodians that might be worth transferring to if your employer-provided HSA plan isn't great. I make no guarantees about any of these custodians listed here but the listed ones are those that our own research has suggested might be worthwhile if your HSA investment options or fees aren't great. For example, for our own HSA, we currently transfer to Lively because several years ago they offered a much lower fee and better total market index fund than my employer's plan. Now the plans are about equal as of January 2020 but we continue to do this for simplicity's sake. The process: I have all HSA contributions into my employer-provided plan completed by mid year and then do a custodian to custodian transfer for everything from my employer plan to Lively. It's a simple online form and typically happens in July. Some of the custodians/administrators below were not available or didn't have great options when we setup my Lively account. Within Lively, I use the TDA trading platform to invest (long-term) in Vanguard's Total Stock Market Index ETF (VTI) with no expenses. Fidelity began offering what looks to be a fantastic plan in late 2018.
- Fidelity offers HSAs for employers and, as of November 2018, individuals
- Health Savings Administrators offers 22 Vanguard funds
- The HSA Authority is highly rated by Morningstar. One of the oldest HSA administrators.
- HSA Bank offers a TD Ameritrade brokerage option which offers commission-free trades on over 100 ETFs (excluding Vanguard)
- Lively offers a TD Ameritrade brokerage account which offers commission-free trades on over 100 ETFs (excluding Vanguard). No fee to invest.
Links to HSA reviews and resources
- Bogleheads Health Savings Account wiki
- Clark Howard's HSA Guide
- Doughroller's The Best HSAs in 2020
- Morningstar’s 2019 assessment of the HSA landscape (PDF - may be free)
- 3 Tricks for Getting the Most Out of Your HSA by Christine Benz (2017) | Morningstar ($$$)
- Key Takeaways From Our 2018 Checkup on HSA Plans by Leo Acheson (2018) | Morningstar ($$$)
- 2019 Rankings of 11 Top HSA Providers | (2019) Morningstar ($$$)
TideFans Personal Finance
[These links are also now under Personal Finance in the secondary navigation menu near the top.]
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