Are you taking advantage of health savings accounts?

Steve Merrell |

If you are looking for another tax break for 2021, take a look at opening a Health Savings Account, or HSA. Next to getting employer matching funds in a 401k account, an HSA is the best retirement savings vehicle around.

With an HSA you get the best features of traditional and Roth IRAs. Like a traditional IRA, every dollar you put into your HSA reduces your taxable income by a dollar. Your savings then grow tax free within your HSA until you decide to take a withdrawal. Then, like a Roth IRA, the money you withdraw from your HSA comes out tax free as long as you use those funds to pay for qualifying medical expenses.

Unfortunately, not everyone is eligible to contribute to an HSA. In order to contribute to an HSA, you must first be covered by a high-deductible HSA-compatible health plan. If you are covered by any other health plan, including Medicare, you are out of luck. You are also disqualified if you are eligible to be claimed as a dependent on another person’s tax return. 

Eligible individuals can contribute up to $3,600 to their HSA in 2021, while families can contribute up to $7,200. In 2022, the limits increase to $3,650 for individuals and $7,300 for families. In addition, individuals who are 55 or older by the end of the tax year, get a $1,000 catch up. Contributions for 2021 can be made up to the April 18 tax filing deadline.

Some HSA account providers are better than others. Before opening an account, take time to carefully compare potential providers and then select the one that best fits your needs. If you already have a health savings account, it pays to periodically evaluate your current provider to make sure they are keeping up with the competition. If your current provider comes up short, you can always switch providers and move your account. Researching and comparing different HSA providers can quickly get complicated, so you may want to enlist the help of a trusted advisor. Here are some questions to consider as you compare HSA providers.

1. Does this provider offer an investment account option, a savings account option, or both? Some HSA providers operate like bank savings accounts. They allow you to deposit funds and withdraw them as needed, but pay minimal interest. This kind of “savings account” option will not serve you well in the long run because it will never earn enough to keep up with inflation. You will be much better off looking for an HSA provider that allows you to invest your HSA in a well-diversified portfolio of high quality equity mutual funds. Again, your advisor can help you decide which funds make the most sense for what you are trying to accomplish.

2. What fees does this provider charge? In the old days, some HSA providers could get away with charging account opening fees and high annual or monthly administrative fees. Fortunately, those days are gone. Today, the best HSA providers offer low- or no-fee arrangements. You should also check to see if the HSA provider levies special fees on investments or transactions in the investment account. Look also at the expense ratios charged by the funds in the investment account. Fees are a drag on your performance, so make sure you do all you can to keep them to a minimum.

3. What kind of reputation does this provider have? When I opened my first HSA in 2004, HSAs were brand new and there were few providers to choose from. Unfortunately, I chose poorly and my funds were stolen from my account. Eventually, the funds were recovered and the perpetrators went to jail, but I learned a valuable lesson: reputation matters. Today, there are many more providers, including some very well-established firms like Fidelity Investments. Whoever you choose, make sure they have the reputation of putting their customers first.

 

 

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to smerrell@montereypw.com.