Health savings accounts (HSAs) have grown at an annual growth rate of 31% over the past 15 years. And a 2022 study by Morningstar says that HSA assets added up to $98 billion by the end of 2021. Overall, the Chicago-based financial firm found that providers cut fees and streamlined investment menus to offer higher-quality funds. But Americans are still not taking advantage of these investment features or tax benefits. Here’s a breakdown of what the study says, Morningstar’s 2022 ranking of the top providers and what investors should know about HSAs.
A financial advisor can break down the advantages and disadvantages of investing in an HSA.
Morningstar’s 2022 HSA Landscape Study
Morningstar’s annual health savings account study says that while HSAs can “provide unmatched tax advantages” for investors, the majority of account holders are using them to pay for current health expenses.
According to the study, spending accounts make up most of HSA accounts and assets —only 9% of the accounts reviewed have investment assets, which add to more than 36% of total assets.
HSAs are tax-free financial accounts that were created in 2003 to help taxpayers save money for future medical expenses. These accounts are eligible to those enrolled in high-deductible health plans (HDHPs). And Morningstar says that the fast adoption of HDHPs helped HSAs grow to $98 billion in assets by the end of 2021.
Another breakdown shows that in 2006, only 4% of insured workers opted into HDHPs. But 15 years later, that rate was six times higher (28% in 2021). And HSAs have also grown at an annual growth rate of 31% over the same period.
Since the first HSA study in 2017, Morningstar found that providers have improved their offerings overall in 2022. But the financial firm calls out three areas that they can work on:
- Fees schedules are still high, varying across providers
- Most providers require investors to meet spending account minimums before investing
- Fund lineups can offer “redundant and complicated niche options that can be hard to use”
Top HSAs for Investors in 2022
Morningstar ranked 10 of the most prominent HSA providers available to individuals. The study considered menu design, the quality of investments, price and investment threshold.
Fidelity claimed the top spot with the highest score (4.6), while UMB rounded out the bottom of the 10 (2.8).
Morningstar says that four out of the top 10 providers continue to dominate: Fidelity, HealthEquity, HSA Bank and Optum hold $64 billion in combined assets. This adds up to almost two-thirds of the total HSA market.
Data from the study also shows that HealthEquity overtook Optum as the industry’s largest HSA provider at the end of 2021.
A 2022 breakdown of the biggest HSA providers by Morningstar and the healthcare investment advisor Devenir shows that HomeEquity holds 21% of the market share. The second-biggest, Optum, has 19%, followed by Fidelity with 14%, HSA Bank with 11% and Bank of America with 5%.
What Investors Should Know About HSAs
While HSAs are mostly used as spending accounts to help cover medical expenses, they can also be used as investment accounts to save up for retirement.
Account holders age 65 and older, for instance, can take money out to pay for non-qualified expenses without penalty, but withdrawals will get taxed as ordinary income.
Unlike flexible spending accounts, the money you put in an HSA will continue to grow tax-free, even when you do not spend the funds in a given year.
Furthermore, HSAs are portable. So when you leave a job, you can keep the same account. And, if you retire, you can still contribute to your HSA until you begin Medicare.
Morningstar says that when HSAs are used optimally, they “have more tax benefits than 401(k)s, 529 education-savings plans, and traditional and Roth IRAs.”
HSAs are tax-advantaged in three ways:
- Contributions are tax-deductible (this is not the case for Roth IRA and 529 plan contributions, which pay taxes upfront)
- Investment gains are tax-exempt (this is the same for Roth and traditional IRAs, 401(k)s and 529 plans)
- Withdrawals for qualified medical expenses are tax-free (traditional IRAs and 401(k)s pay ordinary income taxes when money is taken out; HSAs pay ordinary income taxes for non-qualified withdrawals and account holders under age 65 also pay a 20% penalty)
One additional benefit: HSAs do not have required minimum distributions like 401(k)s and traditional IRAs.
In 2022, individuals with self-only HDHPs can contribute up to $3,650 to an HSA and twice as much for those with family coverage ($7,300). This will go up to $3,850 for individuals in 2023 (and $7,750 for families). Account holders age 55 and older can contribute an additional $1,000.
Morningstar’s annual study found that the majority of HSAs were used as spending accounts to pay for medical expenses. However, the financial firm says that HSAs can be used as investment accounts to create “a special, tax-advantaged healthcare bucket” for retirement. Additionally, account holders age 65 and older could also withdraw money without penalty for other expenses, but would have to pay income taxes on it like with a 401(k) or traditional IRA.
Investment Tips for Retirement
- If you’re unsure which asset allocation mix will help you reach your retirement goals, a financial advisor can help you compare different options for your financial plan. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s free investment calculator can help you estimate how much your money could grow over time.
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