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While many people are well aware of runaway health insurance premiums, less discussed are the equally disturbing increases in copayments, deductibles and coinsurance provisions. They can amount to thousands of dollars each year, on just a single major medical claim. Meanwhile, the tax-deductibility of medical expenses is complicated and unavailable to most taxpayers.
That’s why Health Savings Accounts, or HSAs, are becoming more popular every year. They offer more people an opportunity to get a tax break on their medical expenses, even if they don’t itemize on their income tax returns.
An HSA is something like a medical IRA.
You contribute funds to the plan, which are tax-deductible. Any withdrawals related to allowable medical expenses can be taken tax-free. Any funds that have not been spent can be retained in the plan, and even invested – much the same way as you would with an IRA.
HSAs have a lot of advantages, even apart from making medical expenses tax-deductible.
IN THIS ARTICLE:
What Are the Best Places to Open an HSA?
Most banks and credit unions offer health savings accounts. Naturally, these are the preferred choices for interest-bearing accounts.
Banks & Credit Unions
Between the two, credit unions are more likely to offer a combination of high interest and no monthly fees.
Just as in the case of credit unions, you should check out banks with branches available in your area. But be sure to evaluate important account features like:
- Minimum initial deposit
- Minimum ongoing balance requirement
- Account fees
- Availability of debit cards and checks
- Interest rates paid
- Possible investment options
While credit unions offer interest-bearing accounts and banks offer both interest-bearing accounts and investing (mostly in mutual funds), investment brokers provide the widest range of options on the investment front.
Several major investment brokerage firms offer HSA accounts. But if you go this route, make sure they offer access to options similar to banks and credit unions, particularly debit cards and check-writing capabilities.
Other HSA Providers
There are other HSA providers dedicated to providing hybrid HSA accounts. You’ll get a checking account, out of which medical expenses can be paid, and an investment account. Funds must be transferred back to the checking account for payment of medical expenses.
Best HSA Accounts for 2020
Here are the 11 best places to open an HSA account in 2020:
- Bank of America
- DCU Credit Union
- HealthSavings Administrators
- Affinity Federal Credit Union
- Northern Bank & Trust Company
- First American Bank
- The HSA Authority
Fidelity allows you to open an account with no minimum initial deposit and no fees. The account can be accessed with a debit card. And as one of the largest investment brokers in the world, they offer you a choice between professionally selected funds, target-date funds, or self-directed investing in mutual funds, ETFs, stocks, bonds, US treasuries, CDs, and options.
It’s also worth noting that Fidelity does not charge commissions on stocks, ETFs, and options.
Learn more about Fidelity
2. Bank of America
With Bank of America, you can open an HSA account with no minimum initial deposit. The account pays interest of 0.10% APY on balances up to $2,500, rising to 0.45% for accounts over $25,000. But if you have at least $1,000 in the account, you can also invest in mutual funds.
The account can be accessed with a debit card and has a monthly fee of $2.50.
Learn more about Bank of America
Lively is an HSA specialist that holds your account with a broker. In this case, it’s TD Ameritrade (soon to be merged with Charles Schwab). The account has no minimum balance requirements, no monthly fees, and comes with a debit card.
Funds held in a cash account earn interest at a current rate of 0.25% APY, up to 0.60% APY on balances exceeding $15,000. Otherwise, you can hold the money in a TD Ameritrade self-directed brokerage account, which like Schwab and Fidelity, charges no trading fees on stocks, ETFs, and options.
Learn more about Lively
Based in Salt Lake City, Utah, this company specializes in HSA accounts. They offer three different investment options, including a low-interest cash account, their Yield Plus account paying higher interest, and a lineup of mutual funds.
There is a monthly administrative fee of 0.033%, plus a monthly investment advisory fee of 0.08% if you take advantage of the Advisor plan for investment guidance.
Learn more about HealthEquity
The company is Further, but the account is the Charles Schwab Health Savings Brokerage Account. It’s a self-directed brokerage account that allows you to invest in stocks, bonds, mutual funds, ETFs, and other investments available on the Schwab platform. And like Fidelity, Schwab charges no trading fees for stocks, options, and ETFs.
You must maintain a minimum of $1,000 in your Further Base HSA, and once you reach a minimum of $11,000, you can move $10,000 into the investment account. The account comes with a debit card. Interest on the basic account ranges between 0.20% and 1.25% APY, depending on the specific account level and balance you have. The company isn’t clear on the fees associated with the basic account, but a brokerage account charges $18 per year.
Learn more about Further
6. DCU Credit Union
Their HSA Checking account requires no minimum initial deposit and has no monthly fees. The account comes with a debit card and unlimited check-writing. It currently pays 0.20% APY on account balances up to $1,000, with progressively higher rates moving up to 0.45% for balances of $100,000 or more.
Based in Massachusetts, DCU is available to consumers across the United States.
Learn More about DCU Credit Union
7. HealthSavings Administrators
This is another investment focused account. You can open either a cash account (with a debit card), an investment account, or both. The cash account pays interest starting at 0.05% APY, increasing to 0.50% for balances greater than $25,000. There is no minimum balance requirement, and your account will be invested in mutual funds from Vanguard and Dimensional.
There are no fees for the cash account, but the investment account charges fees. However, while they are referenced on the website, they’re not specifically disclosed.
Learn more about HealthSavings Administrators
8. Affinity Federal Credit Union
This HSA account has no minimum deposit requirement and charges no fees. It offers a debit card with the account, but no checking privileges are indicated. The account currently pays 0.25% APY and can be funded with direct deposits. It’s available primarily to residents of New Jersey and Connecticut, but there’s a long list of exceptions.
Since most credit unions serve consumers who either live in a specific geographic location or work in a certain industry, it’s best to check with institutions in your local area.
Learn more about Affinity Federal Credit Union
9. Northern Bank & Trust Company
The HSA requires $25 to open the account, then no minimum balance. There is no monthly service charge, but there is a $25 account closing fee. But the account pays 0.50% APY on all balances.
You’ll be issued a debit MasterCard as well as checks to pay for medical expenses.
Learn more about Northern Bank & Trust Company
10. First American Bank
You can open a basic HSA account at First American Bank with no minimum initial deposit, and no monthly fees. The account comes with a debit card as well as unlimited check-writing and mobile wallet.
The basic account is interest-bearing, but you can invest if you have at least $2,000 in the checking portion of your account. Funds can be invested in mutual funds, and the monthly fee is $4.95 for the service.
Learn more about First American Bank
11. The HSA Authority
Part of Old National Bank, The HSA Authority is designed specifically for HSA accounts. They offer no-load mutual funds for investing purposes, and there is no minimum balance required to begin to invest.
The checking account comes with a debit card, check-writing privileges, and no monthly fees. But there is a $36 annual fee for the investment account.
Learn more about The HSA Authority:
What to Look for in an HSA Account
Opening an HSA account is generally no more complicated than opening any other type of account. You provide basic information, complete forms specific to an HSA account, and make your opening deposit.
The amount of the initial deposit may vary from one institution to another. But it’s often a minimal amount, like $50 or $100 – or even zero. If you already have another account with the same institution, you can simply transfer the funds from that account to the HSA.
Access To Your HSA
For allowed medical expense payments to be tax-free, they must be dispersed directly from the HSA account. You won’t be able to pay with a checking account or credit card, then reimburse that account out of the HSA.
For that reason, the HSA account should come with easy direct access. That should include, at a minimum, a debit card that can be used to pay allowable medical expenses directly. But you should also have checks provided, in case they’re needed in certain circumstances.
A word of warning – any payments made from your HSA must be limited to allowable medical expenses. If funds are disbursed for any other purpose, that payment will be fully taxable and subject to an early withdrawal penalty. For example, if you use your HSA debit card to pay for a prescription, then include other non-medical purchases, or even take some cash back, the payment over and above the cost of the prescription itself will be taxable.
The best HSAs don’t have any.
But it may be possible that a financial institution charges various fees, including a monthly fee or even an activity fee.
This gets back to the IRA nature of an HSA. Once again, any funds in the account not spent on medical expenses can be retained in the plan. If it appears the balance will be relatively large and growing, you’ll want to earn income on those funds.
At a minimum, an HSA account should be interest-bearing. But depending on your age and health status, you may also be interested in more aggressive investments.
Interest-bearing accounts are more likely to be offered by banks and credit unions, while investment accounts will be available through investment brokers.
Interest-Bearing Account vs. Investment Account
Which should you choose?
It really comes down to two questions:
- How much do you intend to contribute to the plan each year?
- How much money do you expect to withdraw for medical expenses in a typical year?
The answer to either of these questions can determine whether you’ll hold your money in an interest-bearing account or an investment account.
Investment HSA Accounts:
If you plan to make the maximum allowable contribution each year and you don’t expect to make regular withdrawals for medical expenses, the account can build up a substantial balance. If that describes your situation, you might prefer an investment account. You can use it to invest in stocks, bonds, mutual funds, exchange-traded funds, or any other investments allowable under the plan.
This will be even more important if you are years away from retirement. Generally speaking, you won’t be able to make contributions to an HSA once you reach 65. However, between now and then, you can build up the account and have it available to cover medical expenses in retirement.
Interest-Bearing HSA Accounts:
Conversely, if you plan to make minimal contributions – perhaps only enough to cover any required medical expenses – or you expect to use of the maximum contribution each year substantially, you’ll likely be better served with an interest-bearing account.
The best way to make this determination is to review your out-of-pocket medical expenses over the past several years. If you typically spent several thousand dollars per year to cover these expenses, an interest-bearing account will likely be the better choice. It may not earn as much income as an investment account, but it will offer the complete safety of the principal. That will guarantee your funds will be available when needed.
If your history of paying medical expenses is minimal, and both you and your family are in good or excellent health, an investment account may be the better choice. You’ll likely build up a substantial balance in the HSA account, allowing you to grow it over the long term.
Do Banks and Credit Unions Offer HSA Accounts?
Both banks and credit unions routinely offer Health Savings Accounts. In most cases, a bank or credit union will set up your HSA using either a savings account or a money market account. Either will be interest-bearing and highly liquid.
Banks and credit unions are the best choices if you expect to be an active user of your HSA account. The funds you deposit into your account will have zero risk, and be available as needed. And if you’re opening an account through your local bank, it may be more convenient than a remote investment broker will be when dealing with local healthcare providers.
Interest that a bank or credit union will pay on the HSA account is not likely to be competitive with the highest rates being paid on deposit accounts you seen advertised. But it’s important to remember that an HSA is a special-purpose account, and the interest rate return is, at best, a secondary consideration. That will be especially true if you’ll be actively using the account to pay medical expenses.
Opening an HSA with an Investment Broker
Brokerage firms are more likely to impose a minimum initial deposit into the account, and to charge fees. You’ll need to weigh the fees against the potential investment performance of your account. Be sure to review any restrictions on investment options within an HSA account. A brokerage firm may make certain investments available in the account while excluding others.
But even if they have no restrictions, you may want to lean on the conservative side of the risk spectrum with this type of account. After all, a sudden need for funds to cover a major health event can arise at any time. That makes a strong case for emphasizing better-behaved investment options, like high dividend stocks and index funds. More speculative investments may not be suitable for this type of account.
Just be sure that if you do choose an investment account, at least some of the money should be held in a cash type account for potential immediate use. The reality of healthcare is that the need often occurs suddenly. You won’t want to be caught in a situation where you’ll need to sell investments to cover medical expenses. If those expenses coincide with a decline in the value of your investments, the sale will lock in your losses.
This is when it’s important to remember that the first purpose of an HSA is to cover your medical costs. The investment angle is nice to have, but it’s only a secondary consideration.
Find the Best HSA Account for Your
Not only do HSAs have a lot of benefits, but as you can see from the list above, you’ll have plenty of options as to the best places to open an HSA account.
It’s becoming more important every year, as health insurance and out-of-pocket costs rise. But another under-appreciated factor is the changes that took place with the 2017 Tax Cuts and Jobs Act, that ushered in major shifts in the tax code.
Chief among them is the fact that standard deduction has nearly doubled. For 2020, the standard deduction is now to $12,200 for singles and $24,400 for married filing jointly. With the increase in those thresholds, far fewer people will be able to itemize expenses on their tax returns. That includes medical costs. And that’s where HSAs can help.
Not only will you get a tax deduction for your annual contribution to an HSA account, but that will automatically make any expenses paid out of the account tax-free. That will be even better than itemizing the expenses on your tax return – if you even can anymore.
Health Savings Accounts Offer Tax-Sheltered Investing
And whatever you don’t spend in your HSA account can simply be carried forward and invested in much the same way as an IRA. You can hold the funds in safe, interest-bearing bank accounts, or with investment platforms that allow you to either invest in mutual funds or engage in self-directed investing in just about any asset classes you want.
Since the investment income is tax-sheltered, it can build up just like a retirement account. And whatever you don’t spend out of the account between now and retirement can help provide for you in your old age.
If you don’t have an HSA account right now, there’s no time like the present to take advantage of this major benefit that’s available to nearly all taxpayers. It’s just a matter of selecting the best places to open an HSA. Use this guide as a starting point and make it happen.