Reap tax advantages, use funds now and in retirement

Those with high-deductible health insurance plans can reap decent tax advantages by contributing funds to a health savings account. Funds in the HSA can be invested and withdrawn to pay qualified health care expenses.

In 2020, those who have a health insurance deductible of at least $1,400 per year and families who have a deductible of at least $2,800 per year are eligible to participate.

Individuals can contribute up to $3,550 per year in the HSA. Families can contribute up to $7,100 per year. Individuals over 55 can contribute an additional $1,000 per year.

HSA contributors have several federal tax advantages. Contributions are tax deductible. Earnings on HSA investments are tax free if withdrawals from these accounts are used for IRS-qualified medical expenses. These include deductibles, co-insurance, prescription drug coverage, and vision and dental expenses.

It is not necessary to spend all the funds in these accounts in one calendar year. Account holders carry over these funds from one year to the next and still maintain the tax advantages.

Even after you retire, you can still maintain these accounts and retain the tax advantages as long as the withdrawals are used for medicalrelated expenses.

You can continue to make contributions after age 65 if you haven’t signed up for Medicare. You are no longer allowed to make contributions after you join Medicare. If you have made contributions after enrolling in Medicare, you are subject to IRS penalties. There is a 6% IRS penalty on excess contributions. (See Instructions for IRS Form 8889.)

After you die, your spouse can continue to use the funds in your account without any income tax liability for medical-related expenses. If you name non-spouse beneficiaries, the fair-market value of the funds will be taxable to the beneficiary in the year of inheritance.

Each year Morningstar evaluates the various HSA providers on two use cases: as a spending account to cover current medical costs and as an investment account to save for future medical expenses. In Morningstar’s latest rankings from 2019, only one provider earns positive marks on all criteria for spending accounts, and none meets that standard on all criteria for investment accounts.

As spending accounts

Morningstar ranks each provider of spending accounts, assessing them on maintenance fees, interest rates and additional fees.

It found Fidelity was the best provider by a “landslide.” Fidelity does not charge maintenance fees, offers much higher interest rates on deposits, and doesn’t have additional fees.

Lively comes in second place; it does not charge maintenance fees or additional fees, and it offers reasonable interest rates. The HSA Authority came in third place; it does not charge maintenance fees, but it does have many additional fees.

As investment accounts

Morningstar evaluates each provider regarding investment accounts, assessing them on investment choices, quality of investment, price, past performance and investment threshold.

Fidelity again was the best choice, followed by HSA Authority and Bank of America. Fidelity provides many investment options, allows first-dollar investing and charges the lowest fees among providers. For example, Fidelity offers a 60/40 ratio of stocks to bonds at an all-in cost of 0.02%.

The second cheapest provider charged 0.29%, and the most expensive provider charged 0.69%. Bank of America requires investors to keep $1,000 in their checking account before they can invest.

Morningstar argued that the industry seems to be progressing. Fees in general have decreased. The quality of investments overall remains strong and has improved for the second year in a row.

Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.