Investing in an HSA? Better Shop Around

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Nearly half of all people covered by private health insurance are now in high-deductible plans, with the percentage rising every year, according to the National Center for Health Statistics. Whether you sign up for a high-deductible plan by choice or because it’s the only option available, having a high-deductible policy unlocks a valuable opportunity: the ability to get a triple tax break with a health savings account. Your contributions are tax-deductible (or pretax if made through your employer), the money grows tax-deferred, and you can withdraw money tax-free for eligible medical expenses at any time.

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You’ll get the biggest benefit if you invest the HSA money for the future and use other cash for current expenses. There’s no time limit for withdrawing HSA money tax-free for eligible expenses you incur once you open the account, as long as you keep your receipts.

While these accounts provide a tax-efficient way to save for future health care costs, high fees can diminish their appeal.

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If your employer offers an HSA, that’s usually your best bet; most employers cover the administrative fees, and employers often contribute to employees’ accounts. But if you’re getting an HSA on your own, it’s important to compare the costs of different plans. Morningstar found that nine out of 10 popular HSAs charge a maintenance fee, ranging from $12 to $54 per year, and several charge an extra fee of $18 to $36 to invest the money, in addition to annual mutual fund expenses. (Some waived the maintenance or investing fee if you keep a minimum of $2,000 to $5,000 in the account.) The fees can be difficult to decipher. The industry needs a lot more transparency, says Morningstar’s Leo Acheson.

The options are improving. Fidelity, which used to offer HSAs only through employers, recently introduced an HSA available directly to consumers that charges no annual or maintenance fees. And Vanguard just started to offer HSAs to employers. The competition from new offerings should help lower fees and improve transparency; Acheson saw the same thing happen with 529 college-savings plans.

To qualify for an HSA, you need an HSA-eligible insurance policy with a deductible of at least $1,350 for individual coverage or $2,700 for family coverage, whether you get insurance through your employer or on your own (you can’t contribute if you’re enrolled in Medicare).

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.