A Health Savings Account can help you cover out-of-pocket healthcare costs if you have a high-deductible plan. How to choose the best HSA for your needs.

As deductibles and out-of-pocket maximums rise on both employer-based and individual plans, Health Savings Accounts, better known as HSAs, are an excellent way to minimize the impact of those high direct costs.

HSAs are similar to IRAs but for medical expenses instead of retirement savings.

The benefits of an HSA

Contributions to an HSA are tax deductible (for 2016 you can contribute up to $3,350 for individuals with self-coverage only, and $6,750 for individuals with family coverage). If an HSA is an employer-sponsored plan, the employer can make some or all of the contributions to the plan on your behalf, or match any contributions you make, just like contributions to a 401(k).

Funds in the plan can be invested, and the earnings will accumulate on a tax-deferred basis. Funds can be withdrawn from an HSA only for medical purposes (at least until you hit age 65).

HSAs help you spread costs across your lifetime. You can accumulate funds in an HSA in low expense years, and withdraw them in years when you have high medical costs.

HSAs are designed to be used in conjunction with high deductible health insurance plans—the minimum deductible is $1,300 for individuals (to a maximum of $6,550), and a minimum of $2,600 for families (to a maximum of $13,100).

Since the contributions are tax-deductible, you are effectively getting a tax deduction for medical costs, even if you don’t itemize on your tax return. (This can be especially helpful for those buying plans on the ACA exchanges, as their premiums are paid with post-tax money.)

HSAs are typically offered by employers, but you can also set one up with a third-party trustee, which is typically a bank.

How do you pick a health savings account? Since the plans are regulated by the IRS, they are generally standard. That doesn’t mean, however, that all HSAs are created equal—many, if not most, of them are riddled with fees and high-cost mutual funds.

Be on the lookout for fees, fees, fees

If an HSA is sponsored by your employer, this won’t be a relevant issue, since you will only have one option—to participate or not. If you do participate, you will use the plan trustee that has been selected by your employer.

Different plan trustees will charge different fees and for different things. For example, some trustees charge an annual or monthly fee, while others charge based on transactions within the plan. For instance, you might be charged for every withdrawal you make, or every change you make in your investments.

Some trustees may charge both a fixed fee and a transaction fee. Still others may waive certain fees if your account balance exceeds a certain amount.

For example, Bank of America’s HSA charges a $4.50 monthly fee (or $54 a year) for maintenance, as well as $25 for closing your account. It doesn’t, however, charge you an investment fee. SelectAccount’s HSA, on the other hand, has different fees for different tiers of service—you could pay anywhere from $0 to $4 a month—in exchange for higher or lower interest rates on your balance. If you want to invest your money in one of its offered mutual funds, you’ll pay an additional $18 a year.

When looking for an HSA, try to find one that charges minimal fees and whose fees align with how you intend to use the account. If you want to invest, look for one that doesn’t charge a super high fee for investments.

If you go to the doctor a lot, look for one that doesn’t charge transaction fees. Withdrawing money from the account regularly will likely result in a higher annual cost than a trustee that charges only an annual or monthly flat fee.

Be aware that since HSA trustees are usually banks, they will likely have fees normally associated with a bank account. This can include overdraft fees or insufficient funds charges.

If the account comes with a debit card, there may also be certain fees related to usage of the card.

Look for an HSA with a wide range of (low-cost) investment options

Given that an HSA may need to be accessed quickly, and for large amounts of money, you will probably want to invest the funds in the account at least somewhat conservatively.

After all, it’d be terrible if you needed several thousand dollars for a medical emergency just as the high-growth stock fund you invested your HSA money in lost 50 percent of its value.

But an HSA is a way to augment other savings, and investing can help your money grow and outpace inflation.

Keep an eye out for expensive mutual funds

Since an HSA has great potential to earn investment returns, you’ll want to work with a trustee that provides a reasonable number of investment options. This can include bank investments, like money market funds and certificates of deposit, but also certain mutual funds or exchange-traded funds that provide the opportunity for growth.

We talk a lot about not letting fees eat into your returns. This is even more important with an HSA, which has lots of fees already. Most HSAs don’t offer a ton of mutual funds, and many of the ones they do offer have super high expense-ratios. When looking at HSAs, look out for at least one Vanguard index fund, which is guaranteed to be cheap and good.

No matter what you do, know the expense ratio of any mutual fund you put your money into in an HSA.

Look for an HSA with no investment threshold

The growth angle will be especially important if you are young, healthy, and have little immediate need for the funds, and want to grow the account for potential future use. If that is your situation, having equity investment options will be important.

If you’re using an HSA primarily for investing, then you’ll want to look for one with low—or, even better, no—investment threshold. Many have investment thresholds of at least $1,000, which means it will take a while before you can get started.

You’ll probably want to keep some money uninvested, which means any investment threshold makes it all the harder to get started, since you’ll have to build up a cash cushion and the investment threshold.

Consider the location of your HSA’s trustee

Just like you’d consider location when choosing a normal checking account, you should also do so when choosing an HSA.

For example, there is an excellent chance that you will want the trustee to be a bank that has one or more branches close by.

This will provide you with convenient access, either for the purpose of making contributions and withdrawals, or being able to speak to an employee in the event that you are having a problem.

Make sure the account lets you access your money in a convenient way

This is partially related to trustee location, since it will generally be easier to withdraw funds from a local bank branch than it will be to request funds from a distant location. This will be particularly important if the trustee requires written documentation in order to make withdrawals.

But that problem can be overcome if the trustee allows you to access funds through checks, an ATM card, telephone, online, or some other on-demand method.

Once again, this will be especially important if you frequently use the health care system. You will need to work with a trustee who provides immediate access to funds, so that you can use them to cover copayments, deductibles, and other medical costs.

Look for robust customer service

Some smaller banks may only be available to answer questions or help you access funds during regular business hours. But larger banks may have extended hours, or even 24/7 access to customer service.

This can be especially important if you are looking for information in regard to qualifying expenses, and it happens after-hours. That’s not at all an unusual situation when it comes to healthcare either, since medical events often happen outside of regular business hours. Larger banks are likely to provide you with greater access to customer service, which will be especially important should an emergency event happen.

Summary

If you are looking to open up an individual HSA, do your homework, and find a trustee who will give you decent investment options, easy access to your funds, and doesn’t charge (too many) fees.

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About the author

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Since 2009, Kevin Mercadante has been sharing his journey from a washed-up mortgage loan officer emerging from the Financial Meltdown as a contract/self-employed “slash worker” – accountant/blogger/freelance web content writer – on Out of Your Rut.com. He offers career strategies, from dealing with under-employment to transitioning into self-employment, and provides “Alt-retirement strategies” for the vast majority who won’t retire to the beach as millionaires. He also frequently discusses the big-picture trends that are putting the squeeze on the bottom 90%, offering work-arounds and expense cutting tips to help readers carve out more money to save in their budgets – a.k.a., breaking the “savings barrier” and transitioning from debtor to saver. He’s a regular contributor/staff writer for as many as a dozen financial blogs and websites, including Money Under 30, Investor Junkie and The Dough Roller.