If you are eligible for a health savings account, now may be a good time to open one.
HSAs can help you pay for medical treatment and medicine that insurance doesn’t cover. Typically, money is deposited into an HSA before taxes, grows tax-free and is tax-free when you withdraw it as long as you spend it on eligible expenses. (A few states tax contributions to HSAs, or earnings from interest or investment gains.)
Money in the account can also be invested, acting as a sort of 401(k) for health needs in the future.
The federal pandemic relief program has made tax-favored HSAs even more useful. Money in the accounts can now be used to pay for a variety of everyday items, including nonprescription medicine, like pain relief and allergy pills, and menstrual products like tampons and pads.
To qualify for an HSA, you must have a health plan that meets certain criteria, including a high deductible — the amount you pay before insurance coverage begins. For 2021, the qualifying deductible is at least $1,400 for an individual or $2,800 for a family.
Many people don’t use the accounts to their full potential, benefits experts say.
Just 6% of people with HSAs invest the money that is in them, said Paul Fronstin, director of health research at the Employee Benefits Research Institute, a nonprofit group. “People go into HSAs not quite understanding what they are,” Fronstin said.
Some employers contribute seed money to HSAs — about $572 on average for single coverage, according to the Kaiser Family Foundation — and cover monthly bank maintenance fees for workers. For 2021, HSA contribution limits are $3,600 for an individual and $7,200 for family coverage. (People 55 and older can save an extra $1,000.)
Nor do you need to have health insurance through an employer to have an HSA. Many plans are available through HealthCare.gov.
If you need help in choosing an HSA, the research firm Morningstar recently evaluated accounts from about a dozen prominent providers. Accounts from Fidelity, Lively, Health Equity and HSA Authority topped the recommendations for savers, while Fidelity, HSA Authority, Health Equity and Bank of America were recommended for investors.
Look for a plan with no maintenance fee, a low minimum balance for investments and a manageable selection of investment funds, said Leo Acheson, director of multi-asset ratings at Morningstar. Interest rates on savings are so low these days that it really isn’t a factor in choosing an account, he said. But you’ll want to avoid accounts that charge extra fees, like those for mailing paper statements.