Health-savings accounts draw mixed reviews

Your Money

December 03, 2006|By Janet Kidd Stewart | Janet Kidd Stewart,Chicago Tribune

Health-savings accounts are growing fast, and so are the amounts of tax-free money consumers can sock away in the fledgling plans.

The relatively new accounts, created for use starting in 2004, allow users of high-deductible health insurance plans to open tax-free savings accounts. The idea is to put consumers more directly in charge of their medical spending by making them financially responsible for more of their care.

Health-savings accounts are the plan's carrot, enticing consumers to go with lower-premium, high-deductible plans in exchange for contributing tax-deductible dollars into accounts that grow tax free and are withdrawn tax free if used for health care expenses. Over the long term, proponents say, investments in the accounts can grow to try to keep pace with health-care inflation.

For 2007, singles can contribute a maximum of $2,850 to health-savings accounts, and families can kick in up to $5,650, an increase from $2,700 and $5,450, respectively, in 2006.

Critics of the plans say they are simply another tax break for the rich and healthy, allowing wealthy people to accumulate more tax-advantaged savings while they comfortably afford higher out-of-pocket medical expenses.

Although money not used for health care expenses is taxed at regular income tax rates (and triggers a 10 percent penalty if withdrawn before age 65), experts say some higher-earning people are starting HSAs to boost savings once they've maxed out their contributions to other tax-advantaged retirement plans.

But are HSAs really a solid investment vehicle for long-term savers planning for retirement?

Gloria Smith, a Chicago financial planner, has been looking into the plans for herself recently but is finding it a hair-tearing experience.

"The fees can be high, sometimes higher than the interest earned," Smith said. "The upfront tax break is nice, but most people should probably plan to use these accounts for their actual expenses, and if there's anything left over, it's gravy."

Proponents say fees are dropping fast as more financial institutions get into the market. More than 1,100 firms offer HSAs, said JoAnn Mills Laing, president of Information Strategies Inc. in Fort Lee, N.J., and author of The Small Business Guide to HSAs (Brick Tower Press, $14.95).

Of those, about 200 list their account information on Information Strategies' Web site (

Laing said account fees have dropped in the two years of the plans' existence as more competition came into the field. Average annual fees in the firm's October survey had dropped to $38, down from $88 the first year, she said.

On average, Laing said, 55 percent of the money in the accounts is being carried over into the next year, indicating people are thinking of these as long-term savings vehicles.

Industry projections showing average account balances growing in the next decade from $1,500 to $20,000 are driving the interest from providers.

"It's about evenly split between savers and spenders," said Nav Ranajee, vice president of health care-product management for LaSalle Bank in Chicago, which offers the accounts both to retail customers and through employers.

LaSalle's retail product charges no account fees and offers tiered interest rates depending on account size. Once accounts reach $1,500, they are eligible to be rolled into mutual funds provided by a third party, Ranajee said.

The bank has an online calculator that lets consumers figure out how much they need to save to reach a preset goal for carrying money into retirement (

Other major players offering the accounts to retail customers or through employers include mutual fund giant Fidelity Investments, Bank of America, Wells Fargo and JPMorgan Chase.

The key to selecting a provider has more to do with health issues than investment choices, however, said Kristine McKinley, a 35-year-old financial planner in Lee's Summit, Mo., who chose a high-deductible health plan with a health-savings account because she's self-employed, healthy and has no dependents.

But they're not appropriate for many other savers, McKinley said. Even wealthy investors who have contributed the maximum to their retirement accounts are better off saving in taxable accounts, she said.

Why? Current low capital gains rates are more attractive than the income tax rates that savers would pay in retirement to draw out money from the accounts for non-medical expenses, she said.

"And for many people, the difference in premiums for a high-deductible plan aren't enough to justify the risk of much higher deductibles," she said.

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