By Dan Miller, WCI Contributor

A Health Savings Account (HSA) can be one of the best investment options available to savvy investors. In addition to its stated purpose as a tax-free way to save on medical expenses, it is also a bit of a “stealth” retirement account. But choosing an HSA can be a daunting experience—you'll want to find an HSA custodian that offers a wide array of investment options while also choosing a custodian that minimizes fees.

Remember that in order to contribute to a HSA, you must have a High Deductible Health Plan (HDHP) as your only health insurance. Do not choose a HDHP JUST to get a HSA, but if an HDHP is right for you, be sure to take advantage of having access to an HSA.


What Is a Health Savings Account?

Health Savings Accounts (HSAs) were first established with the Medicare Prescription Drug, Improvement, and Modernization Act in late 2003. HSAs are triple-tax advantaged, because you deduct your contributions; your earnings grow tax-free; and, as long as you withdraw the money to pay for qualified medical expenses, your withdrawals don't get taxed.

To open or contribute to an HSA, you must have a high-deductible health plan (HDHP). An HDHP is a type of health insurance plan that comes with a higher-than-average deductible. The IRS sets the income limitations for HDHPs, and the deductible and out-of-pocket annual maximums are indexed for inflation. In 2022, the IRS has defined a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family with total out-of-pocket expenses of $7,050 for an individual or $14,100 for a family.

There are many reasons why an HSA should be your favorite investing account, even besides the amazing fact that HSAs are triple-tax advantaged. Unlike contributions to IRAs, there are no income restrictions to investing in an HSA, which makes them even more valuable for high-income professionals. Also, high-income professionals are more likely to have the cash flow to manage a high annual deductible, which makes signing up for an HDHP less of a potential burden if the person gets seriously ill.

In 2022, the HSA contribution limit is $3,650 for a single person and $7,300 for a family.


How to Choose a Health Savings Account (HSA)

Typically, employers offer HSAs as an employee benefit, but you're eligible to open an HSA even if your employer does not offer one, as long as you're covered by a high-deductible health plan. And if your employer does offer an HSA, you don't actually have to use that one. There can be advantages to using the HSA that is offered by your employer, especially if your employer makes or matches contributions to your HSA. But it isn't imperative. Look around at several different HSA custodians, compare their offerings, and make an informed decision about which HSA is best for you.


Best Place to Open an HSA account

When deciding where to open your HSA, you should first think about what features are the most important to you. HSA fees, investment options, cash options, convenience, and features are all points of comparison that you'll want to look at. To help you decide the best place to open an HSA account, The White Coat Investor has compiled a list of the best health savings accounts, and we've done an in-depth comparison between two of our top choices—Fidelity and Lively.


How to Compare HSA accounts

When comparing Health Savings Accounts, you'll want to decide what account features are most important to you and use that as a basis for your comparison. If you're not going to regularly use and withdraw the money in your HSA (until retirement), then expense categorization may not be an important feature for you. If you're planning on using your HSA as a “stealth IRA,” the two features you're likely most interested in are the overall fees and making sure there are investments available with low expense ratios (like index funds).

choosing an HSA


Do All HSAs Have Monthly Fees?

Fees in Health Savings Accounts vary by custodian, and you'll want to make sure to choose an HSA custodian that minimizes the fees that you have to pay. Some custodians charge a monthly, quarterly, or annual fee just to keep your HSA open. Also, the investments offered by most HSA custodians generally charge expense ratios, which can impact your total return on investment (ROI). Make sure you understand the various fees that your HSA custodian charges so you can make an informed decision.


Is There a Penalty to Use HSA Funds for Non-Health Expenses?

Yes, there is a substantial disincentive to using HSA funds for non-health expenses. If you use the money in your HSA for a non-medical expense, you'll owe a 20% penalty on the total amount that was used for non-qualifying expenses. On top of that, the IRS will treat any non-qualified expenses as ordinary income, meaning that you will have to pay income tax on them on top of the penalty.

One exception to the penalty for using HSA funds for non-health expenses is once you reach the age of 65. After age 65, you can withdraw any money in an HSA without penalty. One important thing to keep in mind, however, is that if you use your HSA money for nonqualified expenses in retirement, you'll still owe income tax (just not a penalty).


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[This updated post was originally published in 2012.]