HSA is short for a “health savings account.” HSAs are tax-advantaged accounts used to save and invest in medical costs. If you have a qualifying high-deductible health plan (HDHP), you can save and invest with any HSA account provider you choose. Let's take a look at how HSAs work and which one is the best for you.
What Is an HSA Account?
A health savings account, or HSA, is a type of account used to save for future medical expenses. Contributions to HSA accounts are pre-tax. But you don't pay any tax on withdrawals for qualified medical costs. That makes an HSA arguably the most tax-friendly account around.
Any investment gains in an HSA are also tax-free as long as you use the funds as intended. That's due to the tax-free withdrawals.
What to Look For in an HSA Account?
- Account fees: Some HSA accounts charge a small fee, usually a few dollars a month. Others have no recurring fees. Some charge when you use investment features. Check this crucial detail before signing up.
- Interest on savings: Bank account interest isn't always great, but you should get something for the cash in your account. Higher rates are better.
- Investment options: Some HSAs are essentially a bank account. But others have a connected brokerage account to invest in anything from a limited set of funds to the entire stock, bond, mutual fund, and ETF markets.
- Ease of use: Getting reimbursed for medical expenses shouldn't feel like pulling teeth. Some HSAs are integrated with a specific insurance provider or employer system. But others work anywhere, independent of particular providers.
Comparing The Best HSA Accounts
|Account provider||Minimum balance to avoid a monthly fee||Investments||Fee for investments|
|$5,000||TD Ameritrade or Devenir||$3 per month|
|$0||Pre-selected fund list||$36 per year|
|$2.75 per month for all accounts (may be paid by the employer)||Pre-selected fund list||$3 per month|
Lively brings a win-win of low fees and great investment choices. The account is free for individual users. There are no recurring fees and no minimums. Funds are housed in an FDIC-insured bank account that comes with a modest interest rate. You can also open a connected HSA investment account through a partnership with TD Ameritrade. This allows you to invest in virtually all U.S. stocks and ETFs with no fees.
For cash in a Lively HSA account, you can expect the following rates:
|Rate Tier||Required Balance||Interest Rate (APY)|
|Tier 1||Balances up to $2,499.99||0.01%|
|Tier 2||$2,500 to $4,999.99||0.01%|
|Tier 3||$5,000 to $14,999.99||0.01%|
|Tier 4||$15,000 or more||0.01%|
*Rates can change at any time without notice, based on Lively's 03.16.2020 rate update and are current as of 03.20.2020.
Interest rates are better than what you get with the average U.S. savings account but are still not all that exciting. This is why the ability to invest your balance through a linked account at TD Ameritrade is such a valuable part of the overall Lively account experience. TD Ameritrade investment accounts allow you to buy and sell stocks and ETFs for free, among other great features.
Fidelity InvestmentsFidelity is already a top investment firm for retirement accounts, so HSA accounts are a natural fit as well. With a Fidelity HSA, there are no recurring fees and no minimums. The account has many bells and whistles available with regular Fidelity brokerage accounts too, which makes it worth consideration. Fidelity offers no-fee stock and ETF trades and its own family of mutual funds with no trading fees or load fees.
For cash, Fidelity offers a couple of ways to invest your balance.
|Product and Rate Tier||Required Balance||APY|
|FDIC-Insured Deposit Sweep – Tier 1||$0 to $4,999.99||0.01%|
|FDIC-Insured Deposit Sweep – Tier 2||$5,000 or more||0.01%|
|Fidelity Government Money Market||All balances||0.01%|
|Fidelity Government Cash Reserves||All balances||0.01%|
*FDIC-Insured Deposit Sweep Balances rates as of 02.05.2021. Fidelity Money Market Fund rates are 7-day yields as of 02.05.2021.
Fidelity is one of the most popular brokerage providers for many reasons, and those benefits extend to HSA accounts as well:
- No monthly or recurring fees for personal HSAs (employer-sponsored accounts may cost up to $48 per year)
- No commissions to trade stocks and ETFs
- No minimum balance
HSA Bank is a low-fee provider of health savings accounts. You'll pay $2.50 per month for an account with a balance of up to $5,000. There is no fee once you hit $5,000. But if you decide to invest, you'll have a $3 per month fee. Paper statements cost $1.50 per month. You have the choice between investing in your own linked TD Ameritrade account or investing in mutual funds through a connected account with Devenir.
Here are the interest rates you’ll earn on cash balances*:
|Rate Tier||Required Balance||Interest Rate (APY)*|
|Tier 1||Less than $2,500||0.02%|
|Tier 2||$2,500.00 to $4,999.99||0.02%|
|Tier 3||$5,000.00 to $9,999.99||0.10%|
|Tier 4||$10,000.00 to $14,999.99||0.10%|
|Tier 5||$15,000.00 to $24,999.99||0.10%|
|Tier 6||$25,000 or more||0.20%|
*Rates effective 09.01.2020.
HSA Authority comes from Old National Bank. HSA Authority has no minimum balance and no recurring bank fees. The account costs $36 per year for investments and an additional $2 per month if you want paper statements. You need $1,000 to get started with investing. HSA Authority has a list of pre-selected investment funds from Vanguard, American Funds, PIMCO, and others.
|Rate Tier||Required Balance||Interest Rate (APY)*|
|Tier 1||$0 to $2,499.99||0.01%|
|Tier 2||$2,500 to $4,999.99||0.01%|
|Tier 3||$5,000 to $9,999.99||0.03%|
|Tier 4||$10,000 to $24,999.99||0.10%|
|Tier 5||$25,000 to $49,999.99||0.25%|
|Tier 6||$50,000 or more||0.50%|
*Call HSA Authority to confirm current rates. Rates current as of 10.21.2020
The investment fee, low-interest rates, and limited investment choices make it less exciting than some others on the list. But it is possible to use this account for free, so it's still worth considering.
Optum Bank is a part of the same company as insurer UnitedHealthcare. If you have insurance through UnitedHealthcare already, which is very common at many large employers, your default HSA option to consider is Optum Bank. While it is highly integrated and relatively easy to use, it comes with a $2.75 monthly fee, which may be covered by your employer.
Interest rates for cash balances at Optum Bank are not publicly available, but I know from my past account there that the rates are pretty bad. That's why they are not published, and you have to be a logged-in customer to see them.
You need at least $2,000 to invest, and that costs an additional $3 per month. While there are some excellent investment choices, the list of available funds is limited.
Using an HSA as an Investment Account
The basic use of the HSA is to cover your out-of-pocket medical expenses from year to year. A lesser-known use of the HSA is as a long-term tax-advantaged investment vehicle. Most HSA's come with a cash account as the default savings option where you could earn around 1% interest per year. Many custodians allow the account owner to move their HSA balance into a variety of investment choices similar to what is available in a typical IRA.
The trick to using an HSA as “another investment account” comes from the reimbursement rules. Qualified medical expenses can be reimbursed out of the HSA at any time, even years or decades after the medical expense is incurred.
This feature allows the HSA account owner to grow the HSA's balance year after year completely tax-free. In retirement (or in a financial emergency), the HSA owner can withdraw from the HSA without paying taxes or penalties on any amount up to the total lifetime medical bills paid since the HSA was opened.
I've personally used my HSA as an additional investment account to help fund my early retirement. By making the maximum family contributions for seven years and getting modest investment returns, we've managed to accumulate $55,000 in our HSA.
I have a stack of paid medical and dental bills in a file cabinet that sums to $8,000. That means I can take an $8,000 tax-free and penalty-free withdrawal whenever I want.
I can also pay any unexpectedly large medical bills out of the HSA without worrying about tax impacts of drawing on an IRA or 401k (where most of my money is held). My expectation is that the HSA account balance will continue to grow enough to fund our out-of-pocket co-pays and deductibles for many years or decades to come.
Downsides to an HSA
With an HSA, the tax savings and potential for long-term investment growth are huge. The main downside of the HSA is dealing with the administrative hassle of tracking medical and dental spending and keeping the bills and receipts.
I tackle this chore by sticking all the bills and receipts in a file box during the year. Then each January, I spend an hour or two with my trusty spreadsheet to summarize the medical expenses paid during the previous year. Then the receipts and a print out of the spreadsheet go into the “HSA expenses” folder in my file cabinet.
So far, two hours of recordkeeping per year has been a reasonable cost to participate in the HSA, given the huge benefits.