Paired with high-deductible healthcare plans, health savings accounts help ease healthcare costs. HSAs are a triple tax-advantaged vehicle in the tax code, allowing for pretax contributions, tax-free compounding, and tax-free withdrawals for qualified medical expenses. However, few owners fund their HSAs to the maximum, and even fewer invest their HSA dollars outside a savings account.
Most consumers likely don’t fill their HSAs because they lack the financial means; critics note that the HDHP/HSA combination can be less beneficial for lower-income workers. But even wealthy consumers may decline to fully fund their HSAs. Many HSAs charge account-maintenance fees and extra costs for investing in long-term assets.
Unlike 401(k)s, where participants are typically captive in employer plans, HSA savers can move money from one HSA to another via transfer or rollover. Below, how to know if your HSA is subpar, and what to do if it is.
Valuable Tax Advantages May Come at a Price
HSAs appear preferable to other tax-advantaged savings vehicles, especially for investors expecting out-of-pocket healthcare expenses. Even in a worst-case scenario—using HSA funds for non-healthcare expenses—the HSA is at least as good as a traditional tax-deferred 401(k) or IRA.
Yet HSA expenses and/or investment shortcomings can erode their tax benefits, particularly for smaller HSA investors. Flat dollar-based account-maintenance fees (say, $45/year) hit smaller HSA investors harder, and interest rates for smaller HSAs may be lower. It’s worthwhile to conduct due diligence on your HSA, assessing the following:
1. Setup Fees: A one-time fee imposed at account opening, sometimes covered by employers.
2. Account-Maintenance Fees: Monthly or annual fees for maintaining your account, also sometimes covered by employers.
3. Transaction Fees: Dollar-based fees that may be levied when paying for services using the HSA.
4. Interest Rate on Savings Accounts: For people using the HSA to fund out-of-pocket healthcare costs (or taking a hybrid approach), it’s particularly important to monitor your savings rate of return. Many HSAs offer higher interest rates on larger balances; that argues for building and maintaining critical mass in your HSA.
5. Investment-Related Expenses: Investors may face mutual fund or ETF expense ratios, sales charges, and dollar-based fees for maintaining investment accounts.
6. Investment Choices: Assess the investment lineup on offer to make sure it aligns with your investment philosophy.
How to Switch Out of a Poor HSA
If your employer-provided HSA is lacking, you have three choices.
