Archives for July 7, 2017

Best HSA Plan Provider For Long-Term “Healthcare IRA” Investing – Morningstar

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piggy_hsaNearly 30% of covered workers are now enrolled in a high-deductible health plan (HDHP). This means a lot more people are also eligible to contribute to a Health Savings Account (HSA). HSAs have the unique feature of triple-tax-free savings when used as designed:

  • HSA contributions are tax-deductible,
  • HSA investments can grow tax-deferred, and
  • HSA withdrawals are also exempt from taxes if spent on qualified medical expenses.

(Penalties: Funds withdrawn for non-healthcare expenses are taxable. If withdrawn before age 65, there is an additional 20% penalty.)

HDHPs have lower premiums in exchange for higher deductibles and higher out-of-pocket maximums. As of 2017, in order to qualify for an HSA, an HDHP must have a deductible of at least $1,300 for individual coverage or $2,600 for family coverage. Many people will use their HSA balance to cover current health expenses. However, if you can manage to pay for your current expenses out-of-pocket while also contributing to the HSA, you have the opportunity to maximize the tax advantages by investing the funds into long-term vehicles like stocks. Here are the annual contribution limits:

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You can then use the future balance to pay for Medicare premiums or other eligible healthcare costs in retirement.

We personally don’t have an HDHP/HSA option from our employers, so I don’t have much first-hand experience. However, Morningstar just released an HSA research whitepaper by Leo Acheson that examined 10 of the largest HSA plan providers:

  • Alliant Credit Union
  • Bank of America
  • BenefitWallet
  • HealthSavings Administrators
  • HealthEquity
  • HSA Bank
  • Optum Bank
  • SelectAccount
  • The HSA Authority
  • UMB Bank

In terms of using an HSA simply as a way to grab the upfront tax break on contributions, you really just want to find an HSA provider that offers a checking account without monthly maintenance fees. Earning 0.50% APY on a $2,000 balance will earn you $10 a year, but a $4 monthly fee will cost you $48 a year. The top plans listed by Morningstar for this short-term purpose were Alliant Credit Union, SelectAccount, and The HSA Authority.

In terms of using an HSA as a portable, long-term investment vehicle (think “Healthcare IRA”), the top plans listed by Morningstar were Bank of America, HealthEquity, Optum, and The HSA Authority. However, as a firm believer in the “Costs Matter Hypothesis”, I would personally narrow it down based on the lowest overall expense ratios (underlying fund + manager fee). Here’s a chart comparing costs for a $15,000 balance (click to enlarge):

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The same cost chart but for a $50,000 balance:

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The two cheapest plans recommended by Morningstar are HSA Authority and HealthEquity. You can see that overall HSA costs are still higher than what you can get in a IRA or better 401(k) plan. At least the selection is pretty good. See HSA Authority investment options and HealthyEquity investment options ]. Below is a sampling from the HealthEquity menu.

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Keep in mind, this is not my list but what Morningstar recommends. One option not listed here is Saturna, which may make sense if you only plan on making a single lump-sum max contribution each year and buy an all-in-one Vanguard mutual fund with one transaction per year.

Please feel free to share your own experiences in the comments below.

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