How to Invest Your HSA Funds
You may not realize your Health Savings Account (“HSA”) is also a tool for long-term savings. With access to traditional wealth building assets like stocks and bonds, mutual funds and ETFs, your HSA can also be part of your retirement strategy and overall wealth portfolio.
Of the many HSA benefits, the brokerage feature may be the most valuable. Fortunately, consumer access to brokerages has increased over the years as many HSA providers now offer brokerage accounts, though fees and plan details have received criticism as of late.
Even still, many feature similar investment options as your 401(k) and IRA. Familiar mutual funds, ETFs, and money market accounts, as well as individual stocks and bonds, amongst many choices, can all be found in HSA plans.
Just because you can, should you?
By now you’ve probably heard the news on health expense projections — already high, estimates continue to grow higher still. As EBRI found in their 2017 study a couple with median prescription drug expenses would need $165,000 for a 50% chance of covering their retirement healthcare expenses, but would need $265,000 for a 90% chance of accomplishing the same. These are large, even daunting sums, but time and a balanced portfolio make them attainable for many consumers.
However, before jumping to accumulate large brokerage balances, stop to consider how you are currently using your HSA account and why:
- Are you withdrawing funds periodically to pay for the higher deductibles and co-pays?
- Do you want the flexibility to do so?
If you answered “yes” or even a tentative “maybe” to either of these questions, then be sure to keep some of your HSA in the checking feature.
While there are no time-tested HSA financial planning thumbrules, most individuals and families would probably benefit from keeping at least the health insurance plan’s annual deductible. For those more risk averse, consider saving the plan’s maximum out-of-pocket limit, typically 2–3x higher than the minimum deductible. For some this could be $10,000 or more. Further, keep in mind your plan deductible is likely to change each year, and go up over longer periods. Be sure to pay attention to your health plan during each open enrollment period.
Once you have found a situation-appropriate amount saved — consider employing the help of a financial planner who can assist with this and more — now the truly wealth building opportunities await.
Security types, short-term vs long-term, plus things to look out for
While a brief post cannot address the broad spectrum of financial planning, below are a few thoughts to consider before investing in your brokerage account:
1. Short term vs long term. As the HSA usage questions above underscored, account usage will (and should) help frame your time period and therefore the type and mixture of individual brokerage assets.
a. Long term. In general, stocks and stock groupings like mutual funds and ETFs are more volatile (prices fluctuate) than other options, but in exchange offer higher market returns when held over longer periods of time, generally 7–10 years.
b. Short term. On the other end of the time spectrum, short term is generally 12 months or less. For cash needs within this time period investors tend to favor cash and cash-like holdings sure a short term notes and money market accounts.
c. Medium term. Finally, situated between the two, a Goldilocks “not too hot and not too cold” is the period of greater than a year but less than seven years. Bonds and other fixed income securities are thought most appropriate given the risk/return tradeoff.
d. Blending. Of course, most people will want a combination that reflects their specific financial situation and intended health care usage. Also important to recognize that other financial assets, like checking, savings and non-HSA investment portfolios, can be a financial shock absorber to pay for unexpected health costs without necessarily having to withdraw funds from the portfolio.
2. Stocks and bonds, mutual funds and ETFs (Oh my!) As a general rule individual assets like stocks and bonds are probably best left to professionals to help you manage to achieve your specific goals. More friendly to the non-professionals, mutual funds and ETFs represent a collection, often hundreds if not more, of individual assets which researchers and financial experts agree provide better values to the individual consumer.
a. Risk-reward, a term commonly used in portfolio management, is a measure by which investors are “rewarded” for the specific risk implicit in their investments. By spreading the “risk” across lots and lots of individual stocks and bonds, investors tend to generate higher returns while at the same time reducing the chances of a single asset compromising their portfolio.
3. HSAs and a total wealth picture. With High Deductible Health Plans increasingly common and as a result HSA usage growing in importance, consumer familiarity will grow. However, HSAs are still only a portion of the total financial picture. By taking a broader view of your other assets (401(k), IRA, outside brokerage, real estate, etc.) as well as your current and future cash flow (income minus anticipated expenses), you will not only be more informed on how to best use your HSA, including the brokerage features, but also appropriately integrate and balance your other wealth building assets. Time can be your greatest ally when accumulating wealth, so if you suspect you may not be on the right course make it a priority to address. See additional resources below.
4. Taxes. Often an afterthought in the financial services arena, HSAs highlight the role of taxes on real world, cold hard cash. Keep in mind what you can spend is what the IRS allows you to keep. HSAs enable account holders to withdraw funds tax free when used for qualified health expenses; all other uses are subject to the same ordinary income tax as 401(k) and IRA withdrawals (10% up to 39.6%), in addition to any early withdrawal penalties. If you are unsure of your tax planning consult a tax professional. Decisions today could save you thousands of dollars each year down the road.
5. Additional Resources. While software and technology continues to address elements of financial planning, portfolio management and tax planning, the rules and regulations are broad and change periodically. Often savers and investors would benefit from independent, expert counsel. If you feel this could be you check your local listing of financial planners and tax prepares and schedule a consult. At a minimum you will learn what options are available. Also consider visiting your local library (or Amazon), which can provide much more than foundational knowledge to all the topics important to your financial wellbeing.
About Aaron Benway, CFP, EA — Aaron is a Certified Financial Planner (CFP) and IRS Enrolled Agent (EA). He co-founded HSA Coach, a digital tool to educate consumers on HSAs, track health expenses and other documents, and provide individual financial calculators, to help consumers get the most from their HSA and other savings. To help individuals directly with their financial planning he founded AB Financial Planning.
Prior to HSA Coach Aaron was the CFO of HelloWallet, a financial wellness startup purchased by Morningstar. Earlier in his career Aaron was an investor at The Carlyle Group and a nuclear engineer in the US Navy. Aaron has an Electrical Engineering degree from the US Naval Academy and an MBA from Harvard Business School. Aaron lives in the Washington DC area with his wife and two children.
