(PUB) Morningstar FundInvestor

January 2 014

Morningstar FundInvestor

17

Objection 3 | Why would I want to tie up money in a savings account when I could invest it instead? Despite the word “savings”in the term“health savings account,” monies invested in an HSA needn’t nec- essarily be in a cash account earning next to nothing. Increasingly, HSA s allow participants to purchase long-term investments within the HSA wrapper. Health Savings Administrators, for example, offers 22 Van- guard funds. HSA Bank allows savers to invest in a wide range of securities (stocks, funds, and exchange- traded funds) via a TD Ameritrade brokerage account. However, if you intend to pay your out-of-pocket health-care costs out of your HSA , make sure you’re steering enough money into liquid assets. That way you won’t need to pull assets out of your long- term holdings when they’re at an ebb. Objection 4 | I took a look at the details on the HSA that I can contribute to and was dismayed by the transaction costs. Alas, high costs remain the sticking point with many HSA s and can chip away at the wrapper’s many tax benefits. There are frequently fees to set up the HSA , ongoing annual or monthly maintenance fees, trans- action fees, and fees for using debit and checking features. Because many of these fees are levied on a dollar basis, rather than a percentage basis, you can downplay the toll they take by adding more assets to your account. œ Contact Christine Benz at christine.benz@morningstar.com

HSA s are also portable, meaning that you can keep your HSA even if you’ve left your employer or if you’re no longer covered by an HSA -eligible plan. (You won’t be able to make additional contributions to the HSA if you’re not in an HDHP , however.) Objection 2 | Why would I want to tie up a lot of my money in a vehicle if I can withdraw the proceeds only for health-care expenses? You’re right that monies in your HSA can be with- drawn tax-free only to cover health-care expenses for you, your spouse, or your dependent children. But the list of covered expenses is long, encompassing everything from physician’s fees, drug costs, and surgeries, to eyeglasses and exams, fertility treat- ments, and weight-loss programs. (The list of quali- fied HSA expenses—found in IRS Publication 502 — is the same one used to determine the deductibility of medical expenses.) Withdrawals from HSA s also can be used to pay long-term care premiums or long- term care expenditures. Considering that the typical 65 -year-old couple will spend $ 220 , 000 in health-care costs in retirement, according to an estimate from Fidelity Benefits Consulting, it’s unlikely that many people will get to retirement and wish they hadn’t earmarked so much money for health-care costs. It’s also important to note that withdrawals in retire- ment don’t need to be used for health-care expenses at all. Although withdrawals for qualified medical expenses during retirement will be tax-free, just as they were when you were working, you can withdraw the money for any reason after age 65 . You’ll owe taxes on those distributions, but no penalty. In that respect, saving in and making in-retirement with- drawals from an HSA is just like saving in and investing in a traditional 401 (k) or traditional deduct- ible IRA : You make pretax contributions and enjoy tax- deferred compounding, but you owe tax upon distribu- tion. (Cracking into an HSA prior to age 65 for non- health-care-related expenses is more onerous than cracking into an IRA or 401 (k), though; you’ll pay tax on the distribution as well as a 20% penalty.)