Should You Max-Out Your Health Savings Account (HSA)?
Client question: Should I max out my HSA?
Advisor answer: Unless you are certain you will use the money you contribute to your HSA for an earmarked medical expense (similar to a Flexible Savings Account), I would generally recommend to prioritize building an emergency fund, taking advantage of your employer’s 401(k) match, and maxing out a Traditional/Roth IRA (if possible). An HSA is a good tool, but there is an opportunity cost for every decision you make. If you have excess cash after tackling your emergency fund, 401(k), and Traditional/Roth IRA then I would encourage you to max-out the HSA.
What is an HSA?
An HSA is similar to a 529 plan, except the funds within an HSA are supposed to be used for healthcare expenses instead of education expenses. Contributions to an HSA are tax deductible. For example, if you contribute $1,000 to your HSA, this would lower your taxable income by $1,000. So, if your marginal income tax rate is 25%, then you would save $250 in taxes ($1,000 X 25%). But that’s not all! Like a 529 plan, dividends, interest, and capital gains are never taxed when funds are used to pay for qualified medical expenses.
Unlike a Flexible Savings Account, the funds in an HSA do not have to be spent in the same year they were contributed. The funds can actually be invested for long-term growth similar to your other retirement accounts. This is a useful concept, especially for younger people who can “plant a tree now” to account for higher medical expenses (such as healthcare premiums) they will incur in the future when they’re old! Here’s the bad news, many people reading this post are not likely to be eligible for an HSA plan.
Who can have an HSA?
Only those with a qualified high deductible health insurance plan are eligible for an HSA. Perhaps the easiest way to find out if you have one of these plans is to ask your HR/benefits department! As you probably already know, a “deductible” is the amount of money you need to pay for a healthcare expense (e.g. visit to the doctor or x-ray) before your health insurance starts covering your expenses. Because those with “high deductibles” will need to pay for more of their health insurance expenses, they are afforded the benefit of having one of these nifty HSA plans. The funds within the HSA can be used to pay for the deductibles. This is one of the main reasons HSA’s were established, which is why you should try to maximize yours if you can. You can click here to view the other qualifications to open an HSA plan. Again, it’s probably easier to ask your HR department.
How much can be contributed to an HSA account?
In 2018, an individual can make a tax deductible contribution of $3,450 and a family can make a contribution of $6,850. If you want to make sure to hit these maximums, I would recommend setting-up automatic monthly contributions.
Who can I use as my HSA provider?
Many people do not know they aren’t necessarily stuck with the HSA provider their employers set them up with. Similar to investment custodians (e.g. TD Ameritrade, Fidelity, Schwab, etc.), HSA providers vary in the quality and price of their fees and investment options. One thing to remember is you will want to first make your HSA contribution to the provider set-up through your employer and then transfer the funds via a tax-free transfer to your new/better HSA. Making the initial contribution to the HSA set-up through your employer will shelter your contribution from the 7.65% FICA tax you pay (6.2% Social Security tax and 1.45% Medicare tax).
After researching the web, the best HSA provider in my opinion is HealthEquity. They have good, low cost investment options through Vanguard and their other fees are relatively low too. The annual account maintenance fee is a flat $36 and the annual investment fee is 0.24%; both of which are among the lowest I have seen.
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