Are You Making the Most of Your HSA?
The increase in high-deductible health plans is contributing to the rising popularity of Health Savings Accounts (HSAs). As of mid-year 2018, according to Morningstar, HSA assets reached $51 billion! Can you invest the funds in your HSA? Yes, but here’s what you need to consider.
First, a quick refresher on health savings accounts is in order. HSAs are only available to those covered by a qualified high-deductible health plan (HDHP). The minimum deductible amounts are set by the IRS and for 2019 (unchanged from 2018) they are: $1,350 for self-only plans and $2,700 for a family plan. If your current health insurance deductible is less than these amounts, you do not have an HDHP and therefore are not eligible to set up an HSA.
For 2019, the HSA contribution limit is $3,500 for individuals and $7,000 for families (including both employee and employer contributions). If you’re age 55 or older, you’re allowed an additional HSA catch-up contribution of $1,000. HSA contributions are tax deductible, grow tax-free, and are distributed tax-free for qualified medical expenses. Along with triple-tax benefits, there aren’t any “use it or lose it” provisions associated with HSAs. This means that funds remaining in the account at the end of the year can be used for future medical expenses as well as long-term investment growth. That makes these accounts powerful savings vehicles!
Spending Accounts vs. Investment Accounts
There are essentially two ways to look at HSAs. The first is to view them as spending accounts, i.e. a source of ready cash for paying those high deductible amounts. The less traditional way is to view them as investment accounts, with your funds invested in stocks, bonds, or mutual funds. Neither viewpoint is wrong. However, investing HSA funds for long-term growth does have several advantages. The combination of compound and tax-free growth make HSAs a great savings vehicle for future medical costs, especially during retirement years when medical expenses tend to be higher.
So how do you decide whether to spend or invest your HSA dollars? The first consideration is based on your current financial situation. It might make more sense to view your account as a spending vehicle if you answer “no” to any of the following questions:
- Are you able to pay insurance deductibles and qualified medical expenses from other sources?
- Have you saved an adequate emergency fund (three to six months of living expenses)?
- In the near future, are you clear of major healthcare expenses, such as pregnancy or surgery?
Conversely, you might be a good candidate for investing your HSA funds for future medical expenses if you answered "yes" to all the above.
Your Financial Institution Matters
If you've decided that treating your HSA as an investment account would be more beneficial for you, the next step is to determine if the financial institution that holds your account will allow you to invest your HSA funds. While HSA providers have come a long way in a short period of time, not all institutions offer investing services.
It's important to note that while many employers have preferred HSA providers that employees are encouraged to use, typically employees have the option to switch providers. If your current HSA provider doesn’t allow for investing, you may be able to switch to one that does.
Aside from an institution that provides investing services, what else should you look for? Morningstar, an independent investment research company, recently published a report titled "The Best HSA Investment Accounts in 2018," which includes rankings for 10 of the most well-known HSA providers. Morningstar assessed the investment accounts based on the following criteria:
- Quality of investment options
- Performance of underlying investment funds
- Investment fees and maintenance costs
- Minimum threshold for investing
- Design of investment menu
Unless you have a diverse set of well-performing investment options, your HSA will not experience the long-term growth that would provide a medical expense “nest egg” for your retirement. Be sure to carefully select and monitor any investment vehicles that you include in your HSA. For many, reviewing the Morningstar report may be a good place to start.
While HSAs are traditionally viewed as spending accounts, they also can be viewed as longer-term investment opportunities with some nice advantages. But, as stated earlier, they aren’t right for everyone. Be sure to consult your financial planner with your HSA-related questions!
Abby VanDerHeyden is a Financial Planner with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website or email Abby.