Make the most of your HSA

USA TODAY Weekend Extra - - PERSONAL FINANCE - Pow­ell is ed­i­tor of Re­tire­ment Weekly and con­trib­utes reg­u­larly to USA TO­DAY, The Wall Street Jour­nal, TheStreet and Mar­ketWatch. Have ques­tions? Email Bob at rpow­ell@allth­ingsre­tire­ment.com.

Most Amer­i­cans who have health sav­ings ac­counts use them as spe­cial­ized check­ing ac­counts for health care costs such as de­ductibles, co-in­sur­ance and co-pay­ments rather than as in­vest­ment ve­hi­cles for med­i­cal ex­penses in re­tire­ment, ac­cord­ing to new re­search from the Em­ployee Ben­e­fit Re­search In­sti­tute. In fact, 96% of HSA own­ers in­vest their money in cash, ac­cord­ing to EBRI.

That’s not nec­es­sar­ily a bad thing. HSAs can be used ei­ther as a ve­hi­cle for ei­ther spend­ing or in­vest­ment.

But HSA own­ers — given nearly 24 mil­lion ac­counts with $37 bil­lion in as­sets in 2016 — should at least know how and where to in­vest their money. And that’s es­pe­cially so since, ac­cord­ing to Morn­ingstar’s 2017 Health Sav­ings Ac­count Land­scape re­port, in­vestors have few re­sources avail­able to help them nav­i­gate the hun­dreds of plan providers that ex­ist.

An HSA is a tax-ex­empt trust or cus­to­dial ac­count funded with con­tri­bu­tions and as­sets in­di­vid­ual work­ers can use to pay for health care ex­penses, ac­cord­ing to EBRI’s re­port.

“HSAs ben­e­fit from a triple tax ad­van­tage: em­ployee con­tri­bu­tions to the ac­count are de­ductible from tax­able in­come, any in­ter­est or other cap­i­tal earn­ings on as­sets in the ac­count build up tax free, and distri­bu­tions for qual­i­fied med­i­cal ex­penses from the HSA are ex­cluded from tax­able in­come to the em­ployee,” the re­port says.

For 2017, if you have self-only high-de­ductible health plan cover­age, you can con­trib­ute up to $3,400, ac­cord­ing to the IRS. If you have fam­ily HDHP cover­age, you can con­trib­ute up to $6,750. An ad­di­tional catch-up con­tri­bu­tion of up to $1,000 may be made by peo­ple over age 55, as set out by the IRS.

On av­er­age, to­tal con­tri­bu­tions to HSA ac­counts — com­bined in­di­vid­ual and em­ployer con­tri­bu­tions — were $2,922 in

Tax ben­e­fits make health sav­ings ac­counts a great way to save be­fore re­tire­ment “In­vest­ments carry risk, and the ac­count bal­ance may fall and not be suf­fi­cient to cover cur­rent med­i­cal ex­penses.” Paul Fron­stin, au­thor of “Trends in Health Sav­ings Ac­count Bal­ances, Con­tri­bu­tions, Distri­bu­tions, and In­vest­ments”

2016, ac­cord­ing to EBRI.

So how might you go about de­cid­ing where and how to in­vest your HSA?

PLAN TO USE FOR CUR­RENT HEALTH CARE EX­PENSES?

If you’re us­ing your HSA for cur­rent health care costs, you have a lot of flex­i­bil­ity, said Paul Fron­stin, di­rec­tor of EBRI’s Health Re­search and Ed­u­ca­tion Pro­gram and au­thor of the re­port, Trends in Health Sav­ings Ac­count Bal­ances, Con­tri­bu­tions, Distri­bu­tions, and In­vest­ments, 2011-2016: Es­ti­mates from the EBRI HSA Data­base.

“You can fund the ac­count as you in­cur med­i­cal ex­penses,” he said. “Or you can wait — as you can with a tra­di­tional IRA — un­til April 15 of the fol­low­ing cal­en­dar year to fund the ac­count for the past year and take an im­me­di­ate dis­tri­bu­tion.”

In gen­eral, Fron­stin and oth­ers rec­om­mend in­vest­ing money in an HSA that will be used for cur­rent or near-term health care ex­penses in safe rather than risky as­sets. “In­vest­ments carry risk, and the ac­count bal­ance may fall and not be suf­fi­cient to cover cur­rent med­i­cal ex­penses,” he said.

Fron­stin also rec­om­mends mak­ing per­sonal HSA con­tri­bu­tions via pay­roll de­duc­tion.

“That al­lows you to save FICA taxes on the con­tri­bu­tion,” he said. “For th­ese peo­ple, con­tri­bu­tions are more about the tax break than about ac­count buildup, as­sum­ing all they want to do is fund cur­rent ex­penses.”

In the Morn­ingstar re­port, Al­liant Credit Union, Selec­tAc­count and The HSA Au­thor­ity are the most com­pelling plans for ac­count hold­ers us­ing their HSA to cover cur­rent med­i­cal costs. The three plans of­fer check­ing ac­counts with­out monthly main­te­nance fees, ac­cord­ing to Morn­ingstar.

Ac­cord­ing to Leo Ach­e­son, co-au­thor of Morn­ingstar’s HSA re­port, ac­count main­te­nance fees rep­re­sent the most im­por­tant con­sid­er­a­tion for ac­count hold­ers.

“In some cases, it can be chal­leng­ing to know what fees are be­ing levied,” Ach­e­son said. “But it’s im­por­tant to know be­cause it can def­i­nitely erode away your sav­ings.”

PLAN TO USE FOR LONG-TERM EX­PENSES?

For those se­lect­ing an HSA plan to use as an in­vest­ment ve­hi­cle to save for fu­ture med­i­cal ex­penses, Ach­e­son said there are three im­por­tant con­sid­er­a­tions: the breadth of in­vest­ment op­tions of­fered, the at­trac­tive­ness of those in­vest­ments and the to­tal cost of in­vest­ing in those op­tions, in­clud­ing fund fees, main­te­nance fees and in­vest­ment fees.

Fron­stin said those us­ing HSAs for fu­ture health care ex­penses should con­sider max­ing out their con­tri­bu­tions if pos­si­ble, as well as mak­ing con­tri­bu­tions via pay­roll de­duc­tion to get the FICA tax break.

Ac­cord­ing to Ach­e­son, us­ing HSAs for fu­ture med­i­cal ex­penses makes sense, es­pe­cially given cost pro­jec­tions. A 65-year-old cou­ple re­tir­ing in 2016 would need an av­er­age of $260,000 — in to­day’s dol­lars — to cover med­i­cal ex­penses through­out re­tire­ment, not in­clud­ing longterm care costs such as a nurs­ing home, ac­cord­ing to Fidelity Ben­e­fits Con­sult­ing.

“It def­i­nitely makes sense to think about an HSA as a sup­ple­ment to re­tire­ment sav­ings,” Ach­e­son said. Ach­e­son also said it would be “op­ti­mal, if you can af­ford it,” to avoid us­ing money in your HSA for cur­rent med­i­cal ex­penses and pay out of pocket. “But it also de­pends on how much you have saved al­ready,” he said.

If you’ve saved enough to cover your fu­ture health care ex­penses in a 401(k), Ach­e­son said pay­ing for cur­rent med­i­cal ex­penses with your HSA makes sense, though it’s also a good idea to use both a 401(k) and an HSA when sav­ing for re­tire­ment.

A word of cau­tion to those who plan to use their HSA as an in­vest­ment ve­hi­cle. Morn­ingstar gave only four plans — Bank of Amer­ica, HealthEquity, Op­tum and The HSA Au­thor­ity — pos­i­tive over­all as­sess­ments for their in­vest­ment pro­grams. And only one plan — HealthEquity — of­fers a well-de­signed in­vest­ment menu, strong un­der­ly­ing man­agers and at­trac­tive fees.

JOHN MOORE, GETTY IM­AGES

If you in­vest your health sav­ings ac­count funds wisely and spend them only on qual­i­fied med­i­cal ex­penses, th­ese ac­counts are a great way to sup­ple­ment re­tire­ment sav­ings.

GW BIO­MED­I­CAL COM­MU­NI­CA­TIONS

Robert Pow­ell

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