HSA investment options

[igsoy]

We started our HSA account this year. We are actually planning on using it as the equivalent of an IRA, for tax-deferred investment. You can take money out at age 65 as if it was a retirement account. So we will not take money out for medical expenses, but want to maximize the tax-deferment till retirement age.

We just funded it for 2007 and 2008. Now we have enough in there, 10k, so they will let us choose investments. Here are the choices:

John Hancock Classic Value (Large Cap Value) PZFVX
Vanguard Wellington
Neuberger Berman Fasciano (Small Cap Growth) NBFSX
Vanguard Global Equity (International) VHGEX
Vanguard 500 Index
John Hancock High Yield A (High Yield Bond) JHHBX
PIMCO Real Return (Infl ation Protected Bond) PRTNX

They say any loads are waived. We are interested in maybe getting something tax-inefficient that we would not want to hold in an after-tax account. What would be a good choice?

PS, most of our present investments are in after-tax accounts, so this account gives us a chance for better asset allocation. It's less than 1% of our holdings right now, but we will add the max to it every year.

[stephenandrew]

Originally Posted by igsoy

We started our HSA account this year. We are actually planning on using it as the equivalent of an IRA, for tax-deferred investment. You can take money out at age 65 as if it was a retirement account. So we will not take money out for medical expenses, but want to maximize the tax-deferment till retirement age.

We just opened an HSA and are funding it to the max---I was completely unaware that after age 65 you could withdraw the mney for any reason w/o penalty. Not to doubt you, but I did a bit of research and confirmed what you said---so this was great news. Thanks for making me aware of this. Regarding your question, I would thing an optimal way to use your HSA investment would be to choose a fund or fund type that may not be availalbe to you in your 401-K. If additional diversification is not an issue, I would likely look use the boradest based index fund available. But that's just me. By the way--I wish I had you investment options--my fund choices are are all rather expensive, and I am charged $2.50 per month for the privlage of putting money money in one of the fund options. Still, its better than nothing.

[kaneohe]

Originally Posted by stephenandrew

---I was completely unaware that after age 65 you could withdraw the mney for any reason w/o penalty. .

No penalty but you still need to pay taxes so still best if used then for medical expenses. Of course if the pile so big then and you are in good health so medical expenses are small........a nice problem to have.

[jIMOh]

My thought was this for my HSA:

5200 in cash (that is this year's deductable)
5200 in cash or bonds (that is next year's deductable)
next 10k or so in stable grwoth
all other monies in high growth

I plan to use my HSA money for current medical expenses while hoping it accumulates enough to retire on as well. The funds in our plan would charge frequent trading costs if I sold off a share or two (from growth) if I needed to get a persciption filled. So my plan is to leave enough in cash to cover this year and next, grow something at a moderate rate for 3rd year, then let all other assets go petal to the metal.

[DblDoc]

I'm looking to use our HSA for bonds as I'm quickly going to run out of tax deferred space for them. Unfortunately our HSA is with Synovus and their investment options suck and their expenses are terrible. Looking to transfer to HSA administrators and access VBTLX - Vanguard total bond index.

DD

[Midpack]

Your options are much better than mine, ours are all variations on Money Market funds (sigh)...

[jIMOh]

My options are the entire world of funds, I think I have an $8 transaction fee for each purchase within HSA.

[ziggy29]

I just started an HSA this year, too. Personally, I always want at least enough cash to cover a year's out of pocket maximum expenses (for us, that's $4,000). What's above that we may invest at some point (our HSA is with Chase and uses JP Morgan funds with the loads waived). But not until we have enough cash that I'm comfortable that I won't have to sell stock at a low price in order to pay for major services.

We don't have any trading fees that I can tell, but there's a charge of something like $2.50 per month if you use the investment option -- so you need to have at least $6,000 invested (for example) to get that down to a 0.5% overall drain.

[igsoy]

I see we've got one vote for bonds within a tax-deferred account. We don't currently hold many bond investments (5-15% of portfolio). Of those bond choices, which would you go with?

Or does anyone see anything attractive about the first 3 tickers listed?

John Hancock Classic Value (Large Cap Value) PZFVX
Vanguard Wellington
Neuberger Berman Fasciano (Small Cap Growth) NBFSX
Vanguard Global Equity (International) VHGEX
Vanguard 500 Index
John Hancock High Yield A (High Yield Bond) JHHBX
PIMCO Real Return (Infl ation Protected Bond) PRTNX

[2B]

You seem to be in the same HSA as I am -- Optum Health Bank. I've got about $9,500 in mine but I'm using it to pay medical bills since once its tax deferred it is off setting what would otherwise be expenses I'd be paying taxes on the income to pay. My intent is to keep doing this until retirement and then spending it down as needed for medical bills. It is a trivial amount of my assets so I'm not interested in putting it in a mutual fund. The "bank" was paying 4% but I haven't checked lately. I don't even count it in my asset allocation.

[mn54]

Originally Posted by kaneohe

No penalty but you still need to pay taxes so still best if used then for medical expenses. Of course if the pile so big then and you are in good health so medical expenses are small........a nice problem to have.

As was noted in a previous thread about HSA's, T-Al pointed out that you can use previous medical bills that were paid with non-HSA money to take out HSA funds after age 65 tax-free.

[ziggy29]

Originally Posted by mn54

As was noted in a previous thread about HSA's, T-Al pointed out that you can use previous medical bills that were paid with non-HSA money to take out HSA funds after age 65 tax-free.

But only if the expenses were incurred after the HSA was already established.

[kaneohe]

Originally Posted by ziggy29

But only if the expenses were incurred after the HSA was already established.

and better have a really good record of medical bills & payments if you intend not to use the HSA for 10, 20 or 30 yrs

[mark500]

The only investment option our custodian offers is a fixed percentage rate that is below the general inflation rate and well below the health care inflation rate. Subsequently, we spend all of the money in our HSA each year on current health expenses. It is easy to do with family of 6.

[jIMOh]

Originally Posted by igsoy

I see we've got one vote for bonds within a tax-deferred account. We don't currently hold many bond investments (5-15% of portfolio). Of those bond choices, which would you go with?

Or does anyone see anything attractive about the first 3 tickers listed?

John Hancock Classic Value (Large Cap Value) PZFVX
Vanguard Wellington
Neuberger Berman Fasciano (Small Cap Growth) NBFSX
Vanguard Global Equity (International) VHGEX
Vanguard 500 Index
John Hancock High Yield A (High Yield Bond) JHHBX
PIMCO Real Return (Infl ation Protected Bond) PRTNX

You cannot use an HSA as part of regular asset allocation (IMO) because it has a different time horizon than the rest of the AA.

I am 35, I will retire in 18-38 years. Preferably closer to 18 than 38, but you never know. Money for retirement is 18+ year time horizon and 100% equities, more or less.

HSA money is realistically money my family could spend this year, between my wife, me and the twins which are in the ICU right now (6 weeks old).

So the HSA needs to be set up such that
a) you do not incur fees for the money you spend
b) the money which sits there collects some interest
c) money which might NOT get spent collects more interest
d) money which can grow is allowed to grow at higher rates.

So keep 1 years medical expenses (based on budget) in cash
Keep another years expenses earning interest
maybe a third years expenses earning same interest
then let the rest grow.

But do not put growth over current need to meet the current year deductable. New contributions to most HSAs are made to cash, so once 3-4 years worth of budgeted expenses are in the account, it's easy to use current contributions to fund current expenses (if you have a year or two or three without high medical expenses).

[DblDoc]

Originally Posted by jIMOh

You cannot use an HSA as part of regular asset allocation (IMO) because it has a different time horizon than the rest of the AA.

I am 35, I will retire in 18-38 years. Preferably closer to 18 than 38, but you never know. Money for retirement is 18+ year time horizon and 100% equities, more or less.

HSA money is realistically money my family could spend this year, between my wife, me and the twins which are in the ICU right now (6 weeks old).

So the HSA needs to be set up such that
a) you do not incur fees for the money you spend
b) the money which sits there collects some interest
c) money which might NOT get spent collects more interest
d) money which can grow is allowed to grow at higher rates.

So keep 1 years medical expenses (based on budget) in cash
Keep another years expenses earning interest
maybe a third years expenses earning same interest
then let the rest grow.

But do not put growth over current need to meet the current year deductable. New contributions to most HSAs are made to cash, so once 3-4 years worth of budgeted expenses are in the account, it's easy to use current contributions to fund current expenses (if you have a year or two or three without high medical expenses).

Unless you can afford to self insure for the deductible each year. I agree though in many cases this likely doesn't make sense. We are healthy (touch wood) and I make a large enough salary I can take the $5600 annual deductible limit without significant pain and have a significant need for the tax deferred space.

DD