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Q&A: Should I Open a Health Savings Account?

The answer has a lot to do with the state of your health.

Question: I didn’t start saving for retirement seriously until the past couple of years, so I’m looking for innovative ways to save wherever I can. Should I open a health savings account, considering that insurance plan deductibles keep getting higher and my health isn’t the best?

Ric: The concept behind HSAs is good, but in practice we find them frustrating.

Health savings accounts have been around for some time. Money set aside in an HSA grows on a tax-deferred basis. You can use the money to pay for medical expenses, but until you need it the money keeps growing tax-deferred. In 2019, an individual can contribute up to $3,500 to an HSA; a married couple can contribute twice as much. Add $1,000 to those numbers if you’re 55 or older.

So the concept’s fine, but here’s the dilemma: You need to place the money in a money market fund where it is safe from market volatility, so you can withdraw the money next year to pay for medical bills. But if you won’t need it for medical expenses for many years, you can invest the money in a more diversified portfolio, perhaps even one that’s heavily tilted toward stock.

So, answer one question: When will you incur those medical expenses?

You don’t know, of course — and that’s the problem. We don’t know if the account is short-term or long-term.

If we knew for sure that you’d need to spend the money within three years, we’d tell you to leave the money in cash. And if you knew (or were highly confident) that the money would remain untouched for five or 10 years or longer, we’d recommend a diversified portfolio.

However, with an HSA we simply don’t know. You said your health isn’t the best, suggesting you suspect that you might incur medical expenses. Imagine if you had money in an HSA in 2018 and then needed it to pay medical bills in 2019 — just as the stock market fell sharply in value.

That’s why we’re frustrated with HSAs. We’d love to see the money grow tax-deferred on a long-term basis, but because we can’t be sure it won’t be needed soon, we have to take the conservative, safety-oriented approach. Thus, when we advise a client to open an HSA, we recommend a bank CD, money market fund, T-bills or the like that’s very low-risk.

In your case, I would say that it’s fine to open an HSA if you wish — but don’t invest it in anything with a high degree of risk.

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