Personal Finance

Here's why it pays to shop for this tax-advantaged savings account

Key Points
  • Individuals with high-deductible health insurance can save money in a health savings account, contributing up to $3,550 for self-only coverage or $7,100 in family plans in 2020.
  • Surprise costs, including account maintenance expenses and investment expenses, may be hiding in your HSA, Morningstar found.
  • When you select your HSA provider, think about how you’ll use the funds. Whether you save or spend the money during the year will help you decide.
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When it comes to health savings accounts, they all carry the same three major tax benefits. But that's about where the similarities end.

Tax-favored accounts for medical expenses, so-called HSAs are often paired with high-deductible insurance plans.

These accounts come with three primary benefits: You can contribute to them on a pretax or a tax-deductible basis, have your savings grow free of taxes and then make tax-free withdrawals for qualified medical expenses.

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In 2020, you can contribute up to $3,550 to an HSA if you're in a health-care plan with self-only coverage. That number goes up to $7,100 for family plans.

But there's more to using these accounts than just reaping the tax benefits. Savers should consider how they plan on using the funds, whether they plan to invest the money and how much they can expect to pay in fees.

"When it comes to choosing a good provider, it depends on how you plan to use the account," said Kelley C. Long, CPA and member of the American Institute of CPAs' consumer financial education advocates.

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Here's the kicker: People who are shopping around for an account will have a hard time getting that information.

"The fees are hard to find," said Leo Acheson, associate director of multi asset and alternative strategies at Morningstar. He coauthored the research firm's recent report on HSA trends.

"The investment fee and maintenance fees aren't standard disclosed, and if you shop around, they don't report it," he said. "You can find out that information once you sign up for an HSA provider."

Here are three factors to consider when you shop for an HSA.

1. Fees

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How fees are levied will vary based on your account.

HSAs that are more like a checking account — where customers keep a relatively low level of assets saved and withdraw from it in the present — tend to credit interest and assess account maintenance fees.

Those expenses vary sharply.

For instance, HealthSavings Administrators charges account holders $45 a year in maintenance fees, while Fidelity doesn't assess this charge at all, Morningstar found.

Other providers waive maintenance fees once clients' accounts hit a threshold of $2,000 to about $4,000, according to the research firm.

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The average account balance of $2,000 would pay an average of $25 in annual maintenance fees and earn $5 in interest, Morningstar found.

Meanwhile, investment-focused HSAs — where account holders grow their money over years — tend to have an average of $13,000 in them, with annual maintenance and investment fees totaling an average of $54 or 0.42% of the balance, according to the company's research.

"The more common providers charge you a monthly fee just for the right to invest," said Long.

There are also fund fees — the cost of the underlying investment you select for your HSA.

"If they're in a 60/40 portfolio, they can pay anywhere between 2 basis points versus 69 basis points at the most expensive," said Acheson.

2. Investment menu

Many advisors are now touting HSAs as one of the best ways to save for retirement.
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When it comes to investment-geared HSAs, sometimes too much choice is too much of a good thing.

"You want the process to be simple," said Acheson of Morningstar. "You want a concise menu and offerings in core strategies to build portfolios."

Just two years ago, a couple of HSA providers in Morningstar's study offered more than 100 different funds for investors to select. Now, the largest investment menu has 33 options.

A strong fund lineup will have a mix of "core" asset classes, including large cap equities and short-term bond strategies, as well as target-date funds and 60/40 funds for investors who prefer a hands-off approach, Morningstar noted.

3. Savings thresholds

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Most HSA providers will require savers to accumulate a certain amount — typically $1,000 to $2,0000 — in the checking account portion before allowing them to invest their money.

"It's reasonable to think that savers would want to put all their money into the investment account," said Acheson.

Money that's stuffed into the checking account is missing out on investment returns.

Three providers reviewed by Morningstar allow customers to invest their HSA funds from the beginning: HealthSavings Administrators, The HSA Authority and Fidelity.

"There is an opportunity cost by staying in the checking account, and we have a preference for providers that don't have an investment threshold," Acheson said.