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A health savings account is a powerful financial tool when saving for retirement, since medical care expenses are likely to increase as you grow older. Those who can afford to pay their current medical bills out-of-pocket will find that the best use of an HSA is to accumulate a nest egg to pay for medical expenses incurred after they’ve retired. It’s also a terrific “health insurance policy,” should an unexpected medical emergency occur before retirement.
Any financial product described as “no-fee” is usually worth a second (or third) look. That’s more true than ever these days, when banks seem to be doing somersaults in their efforts to slap fees on every transaction that they process.
Even savings accounts praised for their overall value can carry hidden fees. A great example is a health savings account, or HSA. These vehicles allow people to contribute tax-free dollars, receive tax-free earnings on their balances, and spend the money on qualified medical expenses without paying tax on withdrawals.
The problem is that many HSA providers charge a monthly fee of up to $5.00, just for the privilege of owning an account. Some of those institutions will waive the fee once the account reaches a minimum balance, but others charge the maintenance fee regardless. Over decades, those fees can total well over $1,000.
Worse yet, some health savings account providers charge the account owner another fee for the ability to invest their balance in mutual funds, stocks or bonds. That’s a separate fee, over and above the costs you would expect to incur when making actual investments.
There’s one obvious conclusion. When you’ve decided to open an HSA, it’s worth finding a provider who won’t bury you in fees while you’re trying to save money.
The Lively HSA is a perfect solution.
Why Open An HSA?
Let’s start with the magic word: tax-free. In fact, let’s use it three times – to explain why many experts say that an HSA account provides “triple tax benefits.”
First of all, HSA contributions are tax deductible if you make them yourself; if they’re deducted from your paycheck, they’re taken out of your salary on a pre-tax basis. Either way, you don’t pay income tax on the money deposited into your health savings account, making the contributions tax-free.
Next, tax-free withdrawals from the account can be made at any time, as long as they are to pay for qualified medical expenses (as defined by the Internal Revenue Service).
Finally, the money held inside the account can be carried over from year to year, growing tax-free over years or even decades. There are a number of investment options for owners of HSAs, who can also simply choose to receive the interest generated by their savings (if they don’t mind the very low interest rates paid by normal savings accounts).
It’s important to understand that you can’t just add $100,000 into your HSA and receive all of these tax advantages. There are annual contribution limits, which are set by the government and adjusted each year. The limit for 2019 contributions is $3,500 for an individual or $7,000 for a family, with an additional “catch-up” contribution allowed for those over the age of 55 of $1,000.
Even so, a health savings account is a powerful financial tool when saving for retirement, since medical care expenses are likely to increase as you grow older. Those who can afford to pay their current medical bills out-of-pocket will find that the best use of an HSA is to accumulate a nest egg to pay for medical expenses incurred after they’ve retired. It’s also a terrific “health insurance policy,” should an unexpected medical emergency occur before retirement.
And when you’re not paying an account maintenance fee every month, every dollar of your HSA balance will be available for those purposes
Why Doesn’t Everyone Open an HSA?
Well, some people don’t even know that health savings accounts exist, but there’s more to the story than that. Even if you’re well aware of the benefits of HSAs, you may not be eligible to open one. Here’s why.
These tax-advantaged accounts are only available to people covered by a high-deductible health plan, commonly referred to as an HDHP. If you have any experience shopping for health insurance, you probably have a pretty good idea what “high deductible” means. Instead of a $250 or $500 annual deductible, an HDHP requires that you pay at least the first $1350 of your medical costs out of your own pocket (or $2700, for a family plan) before your health insurance kicks in. Those minimum deductibles are set by the IRS and are subject to change every year.
There are other regulations which determine if a health plan is an HDHP. The deductible must be applicable to prescription costs as well as medical bills. All deductibles, copayments and co-insurance charges must be counted toward the policy’s out-of-pocket maximums. And the policy must set an annual limit no higher than $6,750 ($13,500 for families) on total out-of-pocket, in-network spending for the year – with the insurer paying all bills in full once the maximum is reached. Those numbers are also subject to change each year.
A large percentage of health insurance plans don’t fit into those very strict parameters. That’s why, if you’re interested in opening an HSA (and you should be), you have to make sure that the policy you’ve chosen is actually an HSA-eligible HDHP.
Maximizing the Benefits of Your HSA
The true power of a health savings account is realized when you maximize your contributions to the HSA every year. As you might expect, the government sets strict regulations in that area, too.
As we’ve mentioned, the most an individual can contribute to an HSA is $3,500, while families can contribute a total of $7,000. There’s also the catch-up provision allowing those 55 or older to contribute an additional $1,000. It’s important to know that the limits are adjusted annually, so you must pay careful attention every year in order to avoid the six-percent excise tax charged on over-the-limit contributions.
Those limits, by the way, are on the total amount that can be placed into your HSA. If your employer makes contributions on your behalf, you can’t add another $3,500 (or $7,000) on your own. It’s up to you to ensure that your total contributions don’t exceed the annual limit. Thankfully, that’s an easy task. Most HSA providers, including Lively, have an easy-to-understand online account interface that will show you your account status and balance 24/7.
If you’re maximizing your annual contributions, you’re halfway to your goal. The second half of the puzzle involves making smart investment decisions.
Making the Most of Your HSA
We’ve already briefly mentioned the investment options available to owners of health savings accounts, and the best HSA providers make an enormous number of choices available. Since a no-fee Lively HSA is one of the best accounts you can find, let’s look at the options a Lively client will have to grow their “health equity.”
When you open a Lively health savings account, you also have the opportunity to open a TD Ameritrade investment account that is linked to your HSA. That self-directed brokerage account is available for use immediately, with no additional fees charged to your HSA balance.
Any powerful investment account will give you the ability to invest in the funds or instruments of your choice, whenever you want. A Lively/TD Ameritrade account is no exception. You have access to well over 10,000 different mutual funds and 300 commission-free ETFs (exchange-traded funds), all open for your investment. You can also invest in individual stocks or bonds if you are in search of potentially greater returns.
Any or all of these choices are available to Lively/TD Ameritrade account holders, providing a wealth of diversification choices for any desired level of investment risk. Experienced investors may wish to make their investment selections on their own, while the less-experienced might be wise to consult with their financial advisor before deciding on an investment strategy.
Either way, the final decision is up to the HSA owner, since the brokerage account is self-directed. Needless to say, the more money you build up in your health savings account, the better off you’ll be in retirement when health care bills start to add up (or if you’re hit with an unexpected medical bill, which can easily be paid with the debit card tied to your HSA account). It’s all a matter of balancing safety and risk, just as it is with an IRA, 401K or any other investment account.
The easiest – and safest – way to be sure that your HSA balance is continually working for you is to set up automatic investment transfers. With a few clicks on your phone or computer, you can establish scheduled deposits into the fund of your choice.
The Lively No-Fee HSA
There’s no better alternative than Lively when you’re ready to open an HSA. Here are just a few reasons.
- No fees: There’s no monthly maintenance fee for a Lively HSA, and no fee to open or maintain a linked TD Ameritrade brokerage account. The only fees you’ll ever be charged are the normal ones associated with making any investment. And one of the benefits of TD Ameritrade is that they offer a wealth of commission-fee fund choices, while charging just $6.95 per stock trade.
- No minimum balance required: You can begin investing your HSA balance immediately, no matter how much you have in your account.
- Convenience: All transactions are handled online through an easy-to-use Lively interface, which also shows your current balances and the performance of your investments.
- Flexibility: The wealth of investment choices offered by Lively/TD Ameritrade, plus the ability to schedule regular investments, allows you to craft the optimal strategy for maintaining and growing your HSA balance over time.
For more details on how a Lively no-fee health savings account can work for you 24/7, visit our website. The more you learn about HSAs, the more you’ll understand why Lively is the right choice.
About the author
We are HSA Experts! Lively is a Health Savings Account (HSA) platform for employers and individuals. A 401(k) for healthcare.