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Health Savings Accounts (HSA)

Question of the Week:  Should I max out my HSA Account?

Answer:  If you are eligible for an HSA account then you should try to max it out.  Unless you are 100% certain you will have a medical expense, I would generally recommend building an emergency fund, taking advantage of your employer’s 401(k) match, and maxing out a Roth IRA (if possible) prior to contributing to an HSA plan.

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 Like a 529 plan, any capital gains earned in the HSA account are not taxed when funds are withdrawn from the HSA to pay for qualified medical expenses.  Here’s the bad news, many people reading this blog post likely do not have an HSA account!

Who can have an HSA Account?

Only those with a qualified high deductible health insurance plan.  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.  You can click here to view the other qualifications to open an HSA plan.  Again, it’s probably easier to 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. Betterment, TD Ameritrade, 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 I found 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. If you transfer more than $1,000 to your HSA account at HealthEquity within 90 days of opening the account, your first year administration fee is waved.

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