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Finding the Best Health Savings Account

Written by Kevin L. Matthews II
Updated on 5/10/2018

What is a health savings account?

The health savings account (HSA) was established in 2003 to allow individuals and families to make tax-deductible contributions to pay for medical expenses tax-free. The IRS requires that you meet the following criteria to be eligible to participate in an HSA:

  • You are covered under a high-deductible health plan (HDHP), on the first day of the month.
  • You have no other health coverage except what is permitted.
  • You aren’t enrolled in Medicare.
  • You can’t be claimed as a dependent on someone else's tax return.

How does an HSA work?

Contribution limits. For 2018, you can deposit up to $3,450 for an individual and $6,900 for a family. This is an increase from 2017 of $50 and $150 respectively.

Adults 55 and over (not age 50 like retirement accounts) are allowed to do catch-up contributions of $1,000 bringing the total limit to $4,450. You can contribute automatically to your HSA directly through payroll deductions.

Paying for expenses. Once the account is set up, you should receive a debit card or checks that you can use to make qualified health-related expenses.

Eligible expenses. The IRS defines these qualified expenses as “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body.”

You can also use your HSA for mental health and premarital counseling services as well. You may not use your HSA for general health like vacations and vitamins.

Benefits and disadvantages of HSAs

HSAs are becoming increasingly popular. According to leading HSA firm Devenir, there were more than 20 million HSA accounts holding nearly $37 billion by the end of 2016. This was a 22 percent increase from 2015 to 2016 and the average HSA balance is $14,971 per account holder.

The main advantages of the HSA concentrated is the tax benefits.

“HSAs are a wonderful investment vehicle, given their triple tax-advantaged benefit,” said Autumn Campbell, senior planning analyst at The Planning Center, a financial planning firm.

  1. Money goes in tax-free and can grow tax-free.
  2. Any money taken out for qualified expenses is also tax-free.
  3. Once you’re 65, the money can also be used for non-qualified expenses without a tax penalty, although there will be income taxes on the amount withdrawn.

HSAs aren’t perfect however.

“One of the disadvantages is that low-income and many middle-income individuals and families cannot afford to pay high deductibles and coinsurance payments, even with a Health Savings Account,” said Sabina Smailhodzic, CFP®, a financial planner with Journey Financial Management in Bowling Green, Ky.

This can also be seen in how the tax benefits affect people in different income brackets.

“An individual in the 10% income bracket will save 10 cents in income taxes by contributing $1 to a Health Savings Account, whereas an individual in the 35% income tax bracket will save 35 cents in income taxes for a $1 contribution,” Smailhodzic added.

The best health savings account for you: HSA vs. FSA

A flexible savings account is a type of account offered by employers to help workers pay for out-of-pocket health care expenses with pretax dollars.

Unless you have a qualifying high-deductible health plan, an FSA might be your only option, which makes this decision easy for you.

However, you might find yourself eligible for both types of accounts. It’s really up to you which account suits your needs best. With an FSA, you are required to use the funds in your FSA in the year they are contributed.

If you do not, the money may be forfeited, unless your employer offers the option to roll over a certain amount into the next plan year.

For that reason, “FSAs work best when expected expenses are reliable and a high-deductible plan is unavailable or inappropriate,” Campbell said.

If you’re looking for a health expense account that is more flexible, an HSA might be your best bet. Not only can you use your HSA funds to cover out-of-pocket health expenses, but the account is also a type of investment account, meaning you can use an FSA as an additional means of tax-advantaged investing.

The contribution limits are also different, as the FSA allows only $2,650 versus $3,450 for the HSA.

Lastly, FSAs are generally not portable, meaning if you lose your job or quit, you cannot take the money with you unless you elect to continue under COBRA after your last paycheck. Even so, your employer may charge an additional 2 percent fee for this service.

The best health savings accounts

As HSAs have grown in popularity, there has been a growing number of options to choose from. Below, we have compiled three of the best HSA accounts. To earn a spot on this list, we included HSAs that are available nationwide and an APY of 1.00% or higher.

But these factors are just the starting point for comparing HSAs. Choosing the best HSA for investing will depend on the investment funds that are available and their underlying fees. In some cases, an index fund may be an option for your HSA. Index funds are generally known for being less expensive; and lower expenses can help predict your investment success.

InstitutionRatesMinimum to openMonthly Account Fee
Connexus Credit Union2.00% ($15k+), 1.50% ($5k-$14,999.99), 1.00% ($500-$4,999.99), 0.50% ($100-$499.99)$0$2
Evansville Teachers Federal Credit Union1.86% ($500+)$0$0
Interior Federal Credit Union1.61% ($25k+), 1.36% ($15k-$24,999.99), 1.11% ($5k-$14,999.99), 0.86% ($2k-$4,999.99), 0.61% (Up to $1,999.99)$0$0
nbkc bank1.01% (Up to $1m), 0.50% ($1m+)$0$0
The Adirondack Trust Company1.00%$1$4
Elements Financial1.00% ($10k+), 0.50% ($2.5k-$9,999.99), 0.25% ($100-$2,499.99)$100$4
Lake Michigan Credit Union1.00% ($5k+), 0.50% (Up to $4,999.99)$0$0
First Technology Federal Credit Union1.00%$0.01$0
SYC   |     |   Comment #1
The 2018 maximum contribution limit for a family is $6,850, not $6,900 as stated in this article. IRS had lowered it from $6,900 to $6,850 in late March.
goldsheet   |     |   Comment #2
Played musical chairs with MSA/HSA over the years from USAA to State Farm to HSA Bank to Alliant Credit Union. Alliant was great until they dropped the rates. Transferred to Connexus - great customer service, easy transfer, and enjoying my 2% APY
goldsheet   |     |   Comment #7
Update: Moved again when Fidelity Brokerage HSA became available,
Eric   |     |   Comment #3
Any way to update this article to include monthly account fees for each of the HSAs listed? Often these accounts have high fees. Another useful addition would be if the HSAs listed allow investment into equities.
RJM   |     |   Comment #4
Im with LMCU. Just under $15k but planning on investing all but $1000. They charge $30 a year to let you pick a number of index funds. Probably going to invest it over 4 months.

Have to leave $1000 in cash.

This year I ****ed up & bought the wrong plan. So I wont be able to add $4450 and shield taxes on it.

Do any of the above have better deals for investing?

Not thrilled with the stock market valuations but its going to be there for 10+ years so I should be ok. Have to do better than 1%.
RJM   |     |   Comment #5
Fidelity Brokerage now has a no fee HSA.

Because I can buy stocks, funds and their money market fund, the non insured one, pays double what Lake Michigan Credit Union pays. 2.1% versus 1.0%, I figured the transfer made sense as I already have 2 accounts at fidelity. Regular and IRA.

I was charged $35 for LMCU to process the transfer but I should make up for that in interest alone in short order.
Fidelity was a bit slower than i would have liked, the money hit my account friday after the close.

I may take my chances with some beaten down stocks before year end, hopefully for a bounce in the first quarter. Then on the first I can add some more money for 2019.

I never did invest in any of LMCU available stock funds.

I believe the contribution limits for 2019 are $3500 for a single and $7000 for a family. Plus $1000 catch up if you are 55+.
DOA   |     |   Comment #6
New Year Resolution For 2019:

Transfer HSA to Fidelity Brokerage. Zero Custodion Fees and many investment options available, including brokerage CD’s.

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