A Health Savings Account (HSA) is hands down the best way to save for health-related expenses. It’s also an excellent way to supplement your retirement savings. Unfortunately, many consumers don’t research HSAs, even though they have more choice in these accounts than with, say, an employer-sponsored 401(k).
Morningstar recently wrote a report evaluating HSA providers. The report examined many HSA options on the market today. It breaks down the top 10 options for consumers.
If you’re in the market for a new HSA — or if you will be after the first of the year — the report is worth reading. But here's a breakdown of the findings:
How to evaluate an HSA
Too many people look at an HSA like a regular savings account. You should look at it as an investment vehicle — that’s exactly what it is, an investment vehicle with huge tax advantages.
As long as you have a qualifying health plan, your contributions are tax-deductible. The money grows tax-free. And provided you spend withdrawals on qualified medical expenses, withdrawals are also tax-free. It’s like combining the benefits of both traditional and Roth retirement accounts.
With this in mind, Morningstar looked at HSAs in two different ways. One was as a spending vehicle. If you’ll use most of the money in your account each year, an HSA’s investment options and fees are of little concern. In that case, here are the primary considerations:
- Maintenance fees: Some of these accounts have really high maintenance fees, especially with lower-balance accounts. It’s best to look for an account with no monthly maintenance fee, no matter how much you have saved.
- Interest rates: Some HSAs offer no interest earned at all. If possible, find an HSA that earns at least some interest in an FDIC-insured account.
What if you likely won’t spend your HSA savings each year? Maybe your kids are grown and your own health expenses are relatively low. In this case, your HSA can be an additional investment vehicle for retirement.
Your health care expenses will eventually increase — probably dramatically. Investing through an HSA gives you a way to cover these expenses without tapping into your other retirement investments too heavily.
If you’re considering an HSA as an additional investment vehicle, consider the following:
- Investment options: Morningstar gave high importance to the investment options available through an HSA. Like a 401(k) or an IRA, some offerings are much more restrictive than others.
- Investment quality: Not only should your HSA have access to a variety of asset classes, but it should also offer some high-performing funds that are likely to keep performing well over time.
- Fees: Look for an HSA with low overall fees, including fund fees, maintenance fees and investment fees. It's important to pay attention to expense ratios with this, as with other investment vehicles.
- Performance: Morningstar looked at the past performance of the plan’s investments. This factor, however, was given lower priority than the potential for growth moving forward.
While Morningstar’s list of criteria is a good place to start, a couple things to add to the list include:
- Ease of spending: HSAs are getting more sophisticated. But it’s always easier if your spending-based account comes with a debit card or paper checks. That way, you can pay for your qualifying expenses directly from the HSA, rather than getting reimbursed after paying from your personal account.
- Online account management: These days, most of us manage various bank accounts online. Finding an account that hits the above criteria is most important. But if you can combine that with a good online management portal, much the better.