One of my favorite financial accounts is the health savings account, or HSA. I’ve been using one for several years. It’s been a great help when I’ve needed to tap the funds — and it’s a tool I’m using to save money for retirement.
An HSA can help you stretch your health care dollars and build your retirement savings at the same time, as long as you’re eligible for one and you spend the money in your HSA on eligible expenses.
Here’s a look at the benefits of HSAs and tips for opening one:
1. HSAs are tax-free
Putting money in a health savings account is one of the very few ways you can entirely avoid paying any taxes on that money — ever.
Money in tax-advantaged accounts like 401(k)s and individual retirement accounts (IRAs) might grow tax-free, but you will pay taxes on at least the principal at some point.
With an HSA, though, you get a tax deduction for the money you put into the account. Then, the earnings grow tax-free. And, as long as you use it for qualified health care expenses, you don’t pay taxes on the money you withdraw from the account. It’s truly tax-free.
2. HSAs are more versatile than FSAs
A health flexible spending account (FSA) is another type of tax-advantaged account for stretching health care dollars, but it has a big downside.
FSAs are subject to a use-or-lose provision. That means workers generally must spend any money in their FSAs within their health insurance plan year or else lose the money.
With an HSA, however, your money remains in the account — and thus can grow — year after year.
3. You can invest the money in your HSA
It’s generally possible to invest the money that’s in your HSA so it can grow faster, though investment options may vary depending on where you open your HSA.
I invest a portion of my HSA in an all-market index fund to help me better reach my goal of using my HSA as a supplemental retirement account.
How to open an HSA
Opening an HSA is fairly straightforward — as long as you qualify for one. The main requirement to qualify, according to the IRS, is that you are covered by a high-deductible health insurance plan.
To open an HSA, you pick a custodian, meaning an institution that offers HSAs.
My current HSA custodian is a company called Lively. Signing up for an account there is easy, taking about five minutes.
Visit Lively’s website to learn more about it or to open an account.
Shobin Uralil, the co-founder of Lively, points out that the company made it easy to open an HSA because the process has been somewhat difficult in the past.
“We ask you a few basic questions about your identity, and then we also ask if you have a high-deductible plan,” says Uralil. “If you answer ‘no’ or ‘not sure,’ we can help you figure it out.”
Once your account is set up, it’s easy to keep track of what’s in your account, connect to a bank account to make regular transfers and invest your money through partner TD Ameritrade.
Lively will even help you figure out how much money you would need to save each month to reach the IRS’ annual contribution limit for HSAs.
My experience using Lively for my HSA
In the past, I opened an HSA through my bank. However, it was hard to use, without all the tools offered by Lively. The company has made an effort to make the entire process easier.
In addition to offering individual accounts, Lively works with employers to manage plans for workers. My first experience with Lively was through work. It was very easy to transform the employer-sponsored account into an individual account when I left that job — without me losing any of the money in the account.
“We’ve really built Lively for the end-user,” says Uralil. “My co-founder and I have had [the] experience of trying to pay out-of-pocket, and we know what it’s like to struggle with products.”
Here are some features that made sticking with Lively an easy choice for me:
- No account fees for individuals: Lively used to charge individuals but no longer does. Uralil says only employers using the service pay administrative fees.
- Fast customer service: Online chat allows you to connect quickly and easily if you have questions. Lively is also responsive to email. I had a bit of a hitch when setting up a new process with my account, and the customer service team helped me fix it fast.
- Invest 100% of your funds: You can invest as much of your HSA money as you’d like.
- Debit card for easy access: Lively issues a debit card that you can use to pay for qualified health care expenses.
Investing your account funds with Lively’s partner TD Ameritrade is easy as well. You can connect an existing TD Ameritrade account or quickly open a new one using Lively’s single sign-on technology.
“Once everything’s in place, you’re connected when you sign on with Lively,” says Uralil. “You can move funds into your investment account, or you can get into the account and buy or sell on the TD side. It’s easy to hop back and forth.”
You don’t have to worry about third-party issues because, Uralil says, Lively owns all of its own technology.
“We built it all from the ground up, based on our own lives and the lives of people we know,” says Uralil. “We’ve removed the nickel-and-dime aspect of HSAs, and made it a transparent, simple experience.”