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Why HSAs Can Be a Great Investment Tool

Sometimes it takes a while for someone to know a good thing, even when it’s staring them in the face. Dorothy in The Wizard of Oz had to go all the way to the Emerald City and back to Kansas to realize there’s no place like home.

The same can be said for financial products. Health Savings Accounts have been around for more than a decade, but with all the buzz around them you’d think it was the latest and greatest. According to Devenir Research, HSA assets crossed the $30 billion threshold. The number of accounts rose to 16.7 million, a year over year increase of 25% for has assets and 22% for accounts for the period of December 31, 2014 to December 31, 2015.

There’s some new thinking about HSAs. "I’m noticing that financial planners and advisors are starting to talk up HSAs as part of retirement advice they are providing their clients," says Roy Ramthun, president and founder of HSA Consulting Services.

Greg Geisler, Ph.D., an associate professor of account at the University of Missouri-St. Louis, in an article for the Journal of Financial Planning, contends that a HSA could be better than an employer-matched 401k, primarily because the tax savings on many employees’ contributions to a HSA increases wealth by more than an employer match on the same employees’ 401k contributions. Now that’s something to think about.

If you want to reap the benefits of an HSA on your 2015 taxes, you have until April 18, 2016 to open and fund your account.

If you’re not real clear about HSAs, it’s a tax-advantaged savings account designed to be used only in conjunction with a High Dollar Deductible Plan (HDHP) based on guidelines set by the IRS. There’s a three-prong plus when it comes to health savings accounts. You get a pre-tax or tax deduction contribution going into the account, tax-deferred growth on the earnings and income tax free when spent on HSA-eligible expenses. A HDHP paired with a health savings account can cost much less in monthly premiums compared to traditional health insurance. If you want to reap the benefits of an HSA on your 2015 taxes, you have until April 18, 2016 to open and fund your account.

If you’re thinking that you want to consider a HSA for the 2016 tax year, there’s good news. The annual contribution limit for singles is $3,350 and the family is $6,750. Participants age 55 or older can make $1,000 of additional catch-up contributions. To be eligible to open an HSA your health plan should have a minimum deductible of $1,300 for singles, $2,600 for families, and for out-of-pocket expenses, it’s $6,550 for individuals and $13,100 for families.

"For those who qualify, a health savings account is a great way to save for future medical expenses because contributions reduce your taxable income and distributions from an HSA used for qualified medical expenses are tax-free," says Benjamin Sullivan, a certified financial planner and portfolio manager with Palisades Hudson Financial group. "When used properly, a health savings account provides the owner with the best benefits of both a traditional IRA and a Roth IRA."

Editor's Note: To find an HSA with the best interest rate, please refer to our HSA rate table.

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anon456   |     |   Comment #1
Couple things to consider:
(1) In order to get an HSA, you have to have a high-deductible plan. That's fine if you're young and healthy, but if you need to see the doctor or get medical services even somewhat often, you'll pay through the nose for medical services until you hit your deductible (the FULL, ridiculous chargemaster rates) making the small amount you put aside in an HSA a joke (on my current plan, it's about $240 just to step in and see a doctor if you have a cold instead of a flat $30 or what have you, and every little thing is through-the-roof prices for the first $4500). Of course your premiums are (a bit) less as well, but you have to really consider the amount of times you will likely need to see a doctor or have medical services done in deciding if you really want a high deductible plan.

Also, many people on HSAs tend not to seek needed treatment because it's so expensive on those plans, jeopardizing their health to try to save money. Health must come first.

That said though, if you are very healthy, and at this point in your life it makes sense to have a high deductable plan, you should certainly take advantage of an HSA.

I currently am on a high deductible plan with an HSA, but probably will soon switch to a normal plan (with lower medical costs) as I find myself getting older and using more medical services.

(2) If you have or want an HSA, currently, the most common option is an HSA bank account. There ARE a few places that will let you take your HSA funds and invest them (tax free) into investment options (such as a few Vanguard fund choices, or others), but beware of these companies. All of them DO charge fees (what I consider to be high, as I don't like fees), and often require that only part of your funds can be invested (ie, say you have $10,000.... that you must keep $5,000 in a "normal" bank account, which -- with them -- pays almost no interest, but then you could invest the other $5,000 in the stock market, with fees to invest). I think for some people that really want to do this, it might make sense, but keep in mind that (a) they usually offer limited investment options (some more than others, but it's not unlimited what you can invest in), (b) they almost always require that you CANNOT invest 100% of your HSA funds -- that you leave a certain portion as cash (to which they pay almost no interest at all) and (c) they, of course, charge fees (including a percentage from what I've seen) for your investments.

(3) The HSA bank account option... this is the boring, most common option. The most important thing is to MAKE SURE THERE ARE NO FEES ASSOCIATED WITH THIS. If it's just a normal bank account, you DO NOT want to pay fees, which will completely eat into whatever you have. Most of the major banks that offer HSAs pay both low interest rates AND have fees to have the account. Steer clear of these because you're just throwing money away. There are a number of open credit unions that offer HSA accounts with no fees (I opened an account at one specifically for my HSA a couple years ago and have been very pleased) and while the interest rate isn't great, it's not bad for this current interest environment, if there are NO FEES at all, and you consider that it's tax free.

(4) Remember, you can only use the funds for MEDICAL costs (you can check the IRS website or other websites for what it can be used for), but remember that unless you're a Superhero, you're going to use medical services throughout your life. The one drawback is that it usually CANNOT be used to pay your normal monthly medical premiums (although there are exceptions, such as if you're currently on unemployment), but basically the point is to put as much aside when you're young (or don't need medical services) and then as you get older and switch to a more traditional health plan (that won't let you deposit anymore into an HSA), you can then start taking out your HSA funds (if you want) to help you pay for your medical services (other than your premiums).

In a nutshell, an HSA is NOT worth someone switching to a high-deductible plan for JUST for that in itself. But if a high deductible plan works for you, you'd be foolish not to take advantage of an HSA.
Anonymous   |     |   Comment #5
A  "exxxxxcellennnnnnnt" post.
Mick   |     |   Comment #2
Another way to keep your tax free earnings growing is to not pay medical expenses from the HSA account, but keep a good record of the expenses you pay from regular income. You can leave the money in the HSA and let it grow and reimburse yourself down the road when you need or want to withdraw from the HSA. 
Dave   |     |   Comment #3
Are Explanation of Benefits forms sufficient paperwork to later claim reimbursement?
Mick   |     |   Comment #4
I don't think you need them, the credit union or bank does not need any documentation to make withdrawals. You just need to report it on your HSA tax form. The tax form does not require any documentation either, you just need to keep a record for yourself so if you are asked for it in an audit, you can show you had reimbursable expenses. I just keep a list of payments I make, either by check number or credit card transaction for each medical expense in my HSA file.
BtW, I have my HSA with Connexus Credit Union, easy membership and a 2% rate for accounts over 15,000.00. Thanks to Ken for steering me to them.
jim   |     |   Comment #9
A trick if you are young is to have your doctor write fake receipts.  They will be dead by the time you withdraw the money and this will get you a tax free benefit.
bwk1954   |     |   Comment #6
Not well publicized is this bit of HSA contribution info for married couples (which regrettably I discovered several years too late):  if one spouse is employed with a high-deductible family plan, the other spouse age 55 and over can open his/her own HSA and contribute $1000 worth of catch-up contributions per year.  In effect, a married couple, both age 55 and older, can contribute a maximum of $8750 (for tax year 2016) spread between their respective HSA accounts. (source:  page 6 of IRS Pub. 969, tax year 2015)
Anonymous   |     |   Comment #10
The best "catch up" plan is IRC Section 403b for church employees or missionaries
Anonymous   |     |   Comment #7
Two articles for the price of one! Excellent post anon456. One thing I've learned over the years is every financial question has a unique answer for that individual. One thing missing from both articles is the relationship if any between HSAs and purchasing health insurance thru the healthcare marketplace and receiving a premium credit. Another issue is whether income received from social security affects HSAs and premium subsidies.
anon456   |     |   Comment #8
Can't answer your question about Social Security, but as far as I know, how/where you buy your high deductible plan doesn't affect at all if you can have an HSA. It's pretty simple: if you have a high deductible plan (as defined on the IRS website, but basically: a medical plan with a deductible of at least $1,300 for a single, or $2,600 for a family) you can you open and fund an HSA. It doesn't matter if you get it from your work, buy it on an exchange (with or without subsidies) or buy it directly from the insurance company. All that matters is that you have a high deductible plan (as defined by the IRS).

Keep in mind though, that reality is different than the IRS minimums. For singles, the IRS says a plan is a high deductible one if it has a deductible of at least $1,300, but while some workplaces out there might offer a plan with such a small deductible (for a high-deductible plan anyway), if you don't get your medical plan through work, on the open market, at least in the state where I live, the high deductible plans availalbe have deductibles of at LEAST $4,500 (either $4500-$6500, depending on the plan). So especially if you don't get a medical plan through work, just figure that any plan that would qualify you for an HSA would have a deductible of at least $4000 for a single person (unless your state is vastly different than mine). But on the other hand, I have a friend who has a high deductible plan through work that has a $2700 deductible (still not $1300 but better than $4000). But if you use even a moderate amount of medical services, unless you have a plan through work that is in the $1300-$1400 deductible range, it doesn't make much sense to buy a plan on your own with a $4500-$6500 deductible (where you pay EVERYTHING until you hit the deductible -- at the full, chargemaster, rip-off rates level) just to be able to deposit $3350 a year into a tax deferred account. But if you're relatively healthy and hardly seek medical services, or you can find (most likely through work) a "high deductible" plan with only $1300-$1500 deductible, it might make sense to do.
DCGuy   |     |   Comment #11
The HSA is a good option if you rarely have medical expenses.  I wished it had been available when I first started working (over 35 years ago).  I would have been able to deposit a very large amount of money over that time and accumulate tax free earnings too. I rarely ever filed a medical claim.
RJM   |     |   Comment #12
I have one at LMCU. Just paid in 3 years now so its just over $10k. I think it pays 2%. $132 in interest last year. Big whip.

No deduction from my state.
paoli2   |     |   Comment #13
Are these HSAs the same as the ones some of the Presidential candidates are saying they want to use as their "health plan" when they repeal Obamacare?  I can't see how seniors on Medicare can ever use an HSA since they all need to usually get medical care regularly.  If one has a chronic condition it would take years to save up enough money in the HSA to pay for the regular medical bills and/or hospital bills.  I think this is scary if any candidate gets elected and ends Medicare and replaces it with a useless HSA for Medicare recipients.
RJM   |     |   Comment #14
If all these seniors you think deserve free, unlimited healthcare had been saving all these years they would have a pretty fair sized nest egg right now. I do and Im not a senior yet.
HSAs are not for everyone but healthcare without a high deductible isnt even close to being affordable for me.
I have no idea what happens on medicare, but I feel like adding to an HSA in the meantime is a prudent thing to do.
I pay almost zero attention to any presidential candidate or their plans.
I have a feeling that all my years of planning & prudence wont matter when I get older, only the fact that I have assets and therefore, the government will take from me to give to those who drove brand new cars every few years while never planning for the future.
Anonymous   |     |   Comment #15
RJM:  I guarantee you that you can have a fair sized nest egg when you are a senior but without an affordable, healthcare plan, when you are a senior, you can be wiped out with medical bills.  I think that is why past administrations came up with Medicare for seniors.  Without it, many would drown no matter how much they tried to save in their younger years.  I think you are wise to be planning and saving but I also think you would be even wiser to pay close attention to the person you vote in soon and their healthcare plan for our nation.  If we have an affordable healthcare plan especially as seniors, we can at least have enough left to pay our part of the medical bills if the government truly does take from us to give to those who were not as prudent.
Anonymous   |     |   Comment #16
Unfortunately, probably the only candidate that would not end or make big changes to Medicare is Clinton.
Anonymous   |     |   Comment #17
How $1 extra dollar of income cost us $2046.
Medicare income related premiums are based on income thresholds. Cross the line and you're taxed.
Our premiums went up $1474 based on crossing the line because of interest income!
It completely destroyed interest earned on an $81,840 2.5% CD.
$81,840 CD times 2.5% interest =  $2046
28% tax on $2046 = $573
$2046 - $573 = $1473 left to PAY THE PREMIUM.
We lost all the interest on a 2.5% $81,840 CD
The CD will, therefore, depreciate in earning power due to inflation.
All because we earned measly interest on lifelong savings and exceeded a threshold by one dollar.

Our healthcare remained the same.
Anonymous   |     |   Comment #18
The loss due to IRMAA was $1474; the remainer was due to FED taxes. I forgot state taxes but who's counting. The point is $1 of income can cost a bundle...in our case $1474.
Anonymous   |     |   Comment #19
Unfortunately, it is a loser's game.  Vote for Clinton and if your income is high enough, pay a higher premium for medicare and vote for others and you may have a decrease of medicare coverage.  I think maybe if one is close to getting hit with higher medicare premiums should look at investments that appreciate in value but are not included in the magi calculation for increased medicare premiums.
Anonymous   |     |   Comment #20
#19 you are correct.
We're taking the SS spousal benefit for four years to the tune of $40K (after taxes). That's extra money while the one receiving spousal continues to watch their SS benefit appreciate 8% per year until age 70. I originally thought this was unfair but no longer. The SS office is not obligated to inform you of this. They are only required to answer questions...which you must know to ask. It took some dedicated research but I think it was worth it. The following will inform and perhaps raise blood pressure!
Anonymous   |     |   Comment #21
And for you divorced persons...
Married ten years or more and now single? You can qualify for spousal benefits too. The amount depends on age but at full retirement age (FRA) you qualify for 50% of your former spouse's FRA amount. And, if they die before you then you are eligible for survivor's benefits which = 100% of the amount they were collecting at time of death. And, if you were born before Jan 1, 1954 you can collect spousal (50%) and let your own account grow 8%/yr until age 70. Married twice (each more than ten years) and now single? Good news. Pick the high earner former spouse and do the math before you choose.

Your ultimate payout may be more than 50% spousal (don't forget you may be able to let your acct. grow to age 70) but that 100% survivor's benefit is probably left on the table more often than not.         
Anonymous   |     |   Comment #23
Well, that $1 over $170,000 actually cost the two of us $1879.2 in increased annual payments. The medicare base is 104.90 but new enrollees base is 121.80. With a MAGI (includes everything) above 170K each will pay a penalty rate of 170.50 for Part B and 12.70 for Part D for a monthly total of $183.20. Times two = $366.40. For the year = $4396.80.

The $1879.20 IRMAA increase, based a single dollar of earnings over 170K, is after tax money requiring pre-tax earnings of $2726. This represents ALL the interest on a $91,000 CD earning 3% interest. In other words, one dollar of additional income destroys the earnings on a 91,000 CD at 3%. At 2.5% (my latest rate on a ten-year CD) this medicare income penalty would eat all the interest of a $110,000 CD.

So much for thrift, savings and responsible behavior for 43 years. Since this is just the beginning of wealth confiscation I dare say I'm happy to be retired.    

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