Health Savings Accounts are special savings accounts available to help those with high deductible health insurance plans cover unexpected costs. Contributions are tax-free as are withdrawals, provided they are used for qualified medical expenses. Keep reading for details about health savings accounts, how they work, and how they can be beneficial.
Note: Many people refer to these as HSA accounts but since the ‘A’ stands for accounts it’s really redundant. These are simply HSAs.
What Are Health Savings Accounts?
For many of us, health insurance will take care of any worries. But, some of us still get stung when disaster strikes, thanks to the increasing popularity of high-deductible health insurance plans (HDHPs) — where you are forced to pay a chunk of your medical expenses yourself, out of your own pocket, before the insurance will kick in. While money is probably the last thing you want to think about when you’re facing illness or injury, help is at hand. Health Savings Accounts (HSAs) are medical savings accounts designed to cover or contribute to the deductible on your insurance.
- Tax-free deposits, tax-deferred balances, and tax-free withdrawals
- Payments can cover non-traditional medicines like massage and holistic treatments, if they are covered by your health insurance plan
- Many will let you reimburse payments from previous years if you can provide evidence
- Chop and change — much like insurance products or energy supplies, you can search for better accounts and ditch & switch where necessary
- After your 65th birthday, you can no longer make contributions
- Non-medical withdrawals are taxable and penalized 20% (when under 65)
- Even with this account, high deductibles can still be very high — it may not be a complete life saver
- HSAs can be audited, so keep all receipts and documentation for health care expenses to prove you have used your money accordingly
Whether you hold an account as an individual or as a family, it is a legal requirement that HSAs are combined with high-deductible health insurance plans. These HDHPs can often cost less than traditional health insurance plans and are becoming increasingly popular among employers — maybe you’ve got one now or are about to enter one. The following eligibility requirements must be met in order to have an HSA account, according to this page of the IRS website:
- Not covered under other health insurance
- Not enrolled in Medicare
- Not another person’s dependent
- Minimum HDHP deductible amount of $1,300 for an individual
- Minimum HDHP deductible amount of $2,600 for a family
Because HSAs offer significant tax benefits, the amount you can add to your account each year is limited. In 2018, if you had a plan as an individual, you could put up to $3,450 in your account each year. On a family plan, that rose to $6,900. The limit usually increases yearly with inflation, and the IRS will be increasing the limits to $3,500 for an individual and $7,000 for a family plan in 2019. As of press time, the IRS website has not been updated to reflect the new limits for 2019.
If you’re over 55 you can make extra catch-up contributions of up to $1,000 a year, whether you are on an individual or family plan. Once you reach 65 years of age you can no longer make contributions to your HSA — so it’s worth using this feature if you started your account a little later on.
As the HSA holder, you are not the only one entitled to contribute to the account. Your spouse, relatives, and anyone else who wants to can contribute, providing it is within the limits. Employers may also contribute, but they are not under obligation to do so.
Accessing your money from an HSA is simple. Most accounts have online access and a debit card is typically provided so you can pay for prescriptions and expenses directly and conveniently. But, in some cases, there are penalties for withdrawal. Here are the possible scenarios:
- Medical withdrawals under 65 years of age — tax-free and penalty-free
- Non-medical withdrawals under 65 years of age — taxed and penalized 20%
- Medical withdrawals over 65 years of age — tax-free and penalty-free
- Non-medical withdrawals over 65 years of age — taxed, but not penalized
There is no obligation to withdraw your money, although you can if you need or want to — for any reason. Even if you do have a medical insurance claim to make, there is no obligation to use your HSA to fund that. If you have a good interest rate and would rather use money from elsewhere to pay off your initial HDHP payment — do it! And, instead, let your HSA accumulate as much as possible, tax-free, at a great interest rate. Around 2% is a good interest rate for this type of account. The best health savings accounts available offer a great interest rate as well as other benefits.
Suggested Article: How to Get Cash from an HSA
Under 65, Triple Tax Benefits
Contributions to your HSA are 100% tax deductible from your federal gross income and withdrawals from your HSA to pay medical expenses are completely tax-free. What’s more, interest earned on savings is tax-deferred. This means if you don’t spend your savings at the end of the year, it rolls over to next year! This equals a triple tax bonus — you can deposit tax-free, accumulate tax-deferred, and withdraw tax-free (if for a health-related reason).
Over 65, an Additional Retirement Fund
Need another reason to locate the best HSA? Two words — retirement fund. While you can have an account when you are 65 and over (if opened and nurtured before your 65th birthday), you can’t make any more contributions to it. But, if you are 65 or over, you can withdraw cash from your HSA for ANY reason, health or non-health related, penalty-free. Withdrawals will still be taxed, like an IRA or a 401(k).
Imagine that at age 45 you put $10,000 in an individual plan at 2% interest and were fortunate enough to never need to rely on your medical insurance. In line with the rules, you deposit the full $3,350 annually for 20 years (we’re not taking into account that the limit rises with inflation). You could be looking at upwards of $97,000 (before tax) to withdraw and spend on whatever you like, just like a second retirement fund. You can play around with this retirement fund calculator to get an idea of how your account will grow in your situation.
You can also shop around for the best HSA to capitalize on better interest rates when and where they appear. The account is also not subject to withdrawal penalties if you become permanently disabled or die. This is why the best health savings accounts offer high interest.
The Best Health Savings Accounts — 2019
By now, you’re probably thinking HSAs are a good tax-free investment, either for your health or for retirement. And, you’d be right. All that’s left now is to find the right one for you.
There are two main types of HSAs — here are our favorites from each:
Non-Brokerage Based HSAs
These are accounts where your money stays within the company you invested with. Scope for growth can be limited with just one company, but you’ll usually find the interest rates are higher with these types of accounts.
Lake Michigan Credit Union: At first glance, this HSA looks to require you to have lived, worked, worshiped, or have been educated in a county of Michigan’s lower peninsula. But, if you are from elsewhere — don’t worry. For a $5 donation to the ALS Association of Michigan, you can have an account nationwide. Many of the best health savings accounts are found at credit unions.
- Fees: None (but $5 if no south Michigan roots)
- Interest: Tiered interest rate starting around .5% and increasing from there
- Best for: Michigan locals (but not exclusively!)
Stanford Federal Credit Union: While this HSA carries no startup fees either, you will need to become a member of the Museum of American Heritage OR the Friends of Palo Alto Library. Membership with these organizations is available to any resident of California and Stanford FCU will pay for your first year’s membership fees. Non-California residents will need to contact Stanford about eligibility, as there may be additional requirements before signing up. Access your account online for free with no minimum balance requirement.
- Fees: None
- Interest: 0.2%, or 1.5% if paying in over $500 a month
- Best for: Savers with more to put away monthly. A personal interest in museums or the Palo Alto Library would help!
Connexus Credit Union: Again, no startup fees, but a $5 donation is required to join the Connexus Association, unless you are an employee, student, retiree, alumni, or family member of certain organizations. Manage for free online with a minimum account balance of $100.
- Fees: None (but potentially $5)
- Interest: Tiered, starting at 0.5%, but eventually peaking at 2% if you’re over $15,000
- Best for: A small starter that will expand over time
Enjoy investing? These are the best HSA options for you. Focusing on spreading your money through funds, stocks, bonds, and more, these accounts can be great if you are into wider investing but don’t always meet the criteria. Certain accounts provide you access to elite funds without depositing the volumes of money the funds ordinarily ask for.
Elements Financial: This account allows investments in mutual funds, stocks, bonds, ETFs, and more. You must retain a minimum balance of $2,000 to enroll for investment programs and a minimum balance of $100 to earn interest.
- Fees: $3 monthly and $24 per investment account transfer
- Interest: Starting at 0.25% for balances between $100 – $2,499, rising gradually to 1.00% from $10,000
- Best for: Five figure accounts with an interest in investing
Sterling HSA: There are three different accounts with different fee rates, but a minimum balance of $20 is needed for all. The fees and interest rates perhaps leave something to be desired, but the investment options with Sterling are manifold, covering large, medium, and small-cap markets, internationals, money, real estate, and more. For these reasons, Sterling is one of the best HSAs available.
- Fees: $2.50 – $8.75 monthly
- Interest: 0.55% if over $15,000
- Best for: Numerous investment options, including more unique markets
HealthSavings Administrators: No setup fee is required, but these accounts do incur an annual administration fee and quarterly custodian fees.
- Fees: $45 annually, plus $0.625 per $1,000 per quarter for Dimensional and Vanguard accounts
- Interest: Ranging from 0.05% for $0 – $2,499.99 and up to 0.50% for $25,000 and above
- Best for: Access to 22 exclusive Vanguard funds, but without having to meet Vanguard’s normal minimum investment requirements
There are also lots of good options available only for certain states — for example the State Employees Credit Union for South Carolina residents and the Indiana Members Union for residents of Indiana. The Coastal Federation covers North Carolina, South Carolina, and Virginia and there are many, many more health savings accounts serving individual states.
Suggested Article: Want a No Fee HSA? These Are the HSA Banks with No Fees
What Are Flexible Spending Accounts?
Similar to, but not to be confused with, HSAs, Flexible Spending Accounts (FSAs) are well worth a mention. They are tax-free money that can be spent on medical expenses (among other things). Your employer can contribute to this account, too, but it’s not compulsory. Employer contributions are capped at $2,500 per year and your spouse’s employer can pay up to $2,500 per year, too. Money from FSAs can be used to cover the costs of medical care, but also prescriptions and medical equipment, such as wheelchairs, crutches, and other supplies. BUT, the catch — money in this account is lost at the end of the year (with a couple of exceptional grace periods).
HSAs are a pretty new financial product, only created in 2003. But with many employers increasingly offering high-deductible health insurance plans, they’re becoming a must-have safety net for many Americans. The money you pay in and withdraw for health insurance excesses is tax-free and while in your account, money is tax-deferred. For many, this account is not only cost effective but a saving grace in times of need — one to check out if you are on or thinking of entering an HDHP.