HSA Investment Options/Help

[stephenandrew]

Hi-

Earlier this year, I enrolled in an HSA to manage my famiy's health insurance needs. I plan to invest the maximum I am allowed to ($5,800 per year for a family) this year, and hopefully max out future year contributions as well. The deductible on this plan is $3000 per year, and after that, I am basically responsible for covering 10% of all medcial charges--the insurance carrier picks up the rest. I do not plan to withdraw any funds from the HSA to cover current mdical expenses--I should be able to cover those out of my existing cash flow.

My HSA has a number of invetment options--none of which I am thrilled about. First, the management company charges a fixed fee of $2.50 fee per month to use the investment options. Second, the fee structure for the fund options are higher than what I accustomed to paying--e.g. .45% expense ratio for an S&P 500 Index fund, to 1.46% for a managed growth fund (4 stars from Morningstar).

I can leave the money in my HSA in the so-called "savings account" option where I get a return of 1.5%. I don't see myself needing this money for quite some time, so feel like my long term best interest would be to start investing this in an equity or balanced mutual fund, but the expenses kind of turn me off. My immediate reaction is to say I am not going to pay these fees--I'd rather keep it in the savings account than pay inflated fees. Long term, I am thinking this is short sighted. Any thoughts or advice?

Thank you.

[CitricAcid]

Not knowing any more of the specifics, the .45% expense ratio does not seem too too bad. You can definitely find cheaper alternatives out there for retirement accounts but for the health account, it isn't totally out of the question. The difference between 1.5% interest savings account and equities over the long run will be absolutely huge, especially if you will put $5,800 a year in. The $2.50 a month is annoying as hell, but when you look at $30 a year on $5,800... it just adds another .5% or so, so if you do the S&P index it is 1% total for the fees about... and that is only the first year, the $30 a year is fixed no matter how high it goes. I would definitely suggest putting the money into the S&P index.

[FIREdreamer]

I don't know, I still think of a Health Savings Account as a savings account (and not an investment account) that you may have to tap quickly in case of a medical emergency. Even if you can pay for routine healthcare costs out of cash flow, an expensive medical emergency can arise anytime so I would not invest the money in the market. I would keep it in cash or short term bonds. Sure it's not going to make you big bucks, but I don't think it's the purpose of in HSA. At least that's just my opinion...

[ziggy29]

Originally Posted by FIREdreamer

I don't know, I still think of a Health Savings Account as a savings account (and not an investment account) that you may have to tap quickly in case of a medical emergency. Even if you can pay for routine healthcare costs out of cash flow, an expensive medical emergency can arise anytime so I would not invest the money in the market. I would keep it in cash or short term bonds. Sure it's not going to make you big bucks, but I don't think it's the purpose of in HSA. At least that's just my opinion...

I'm just starting to build my HSA (about $2700 in it now, just started this year). We have a $4000 out of pocket maximum per year, so my plan is to keep about 3 years of out of pocket maximums in "safe" stuff and, when it gets large enough, invest portions that I don't anticipate needing for many years.

It's not much different than building a portfolio that has a "bucket" of several years of living expenses in money markets and CDs so you can avoid needing to sell equities while the market is down.

Then again, the strategy of aggressively investing all of an HSA makes sense if you still have the cash flow to pay for medical expenses with after-tax cash flow. It's not really the intended purpose of an HSA, but financially speaking it makes sense if you're in that situation.

[FIREdreamer]

Ziggy,

I like your idea of keeping at least several years worth of out of pocket expenses in safe "stuff" and invest the rest. My concern was that in the OP's case his out of pocket expenses could increase dramatically in case of a severe illness because each year he has to pay 10% co-pays on all medical expenses (no maximum) + his deductible. If he or one of his family members has to stay in the hospital a few weeks, even if you pay only 10% of the bill, your out of pocket expenses for the year could be staggering.

But in the end I think this is a personal preference. Some people don't keep an EF at all because they feel secure enough knowing they can sell some assets in a bind, and some people sit on large piles of cash.

[jIMOh]

I have an HSA, here is my thought:

1) they are new, the expenses will go down once there is more competition for client HSA investment dollars.

2) I want to keep 2 years medical expenses in CASH. The third year expenses moderate growth, 4+ years expenses sky is the limit.

3) Don't pay the medical bills from your checking account- use the HSA. The tax benefits alone make it a good deal. Tax deferred going in, tax free coming out- it does not get much better.

4) Just take time and build up the cash level of the account and take the 1.5% for now. If you really have low expenses, then this years expenses and next years expenses earn a low return (but you have liquidity), but every other year's contributions can be allocated to growth.

**keep in mind there are fees to sell/liquidate shares of a mutual fund for current medical expenses. I suggest keeping a years expenses (out of pocket max) in the cash portion of the HSA for planning purposes and keeping fees in check**

[kaneohe]

Are you stuck w/ that management company or can you move the funds elsewhere?
If you are stuck there and you are really in for the long term and can pay the medical expenses from other funds, then maybe the mindset should not be on the expenses but, as others have commented, on the net returns (no guarantees, of course) which would favor equities of some sort.

If you can move the funds, there are (or at least were places w/ 5% yields) and minimal expenses.

[Kronk]

Originally Posted by jIMOh

3) Don't pay the medical bills from your checking account- use the HSA. The tax benefits alone make it a good deal. Tax deferred going in, tax free coming out- it does not get much better.

But you missed the third part: tax-free growth. HSAs are the best savings vehicles out there. Even Roths only have 2/3 tax advantages. I have an HSA and I have never yet taken money from my account.

I actually need to revisit this. I've only got around $9,000 in my account, but I'll be contributing $5,000 this year. Now here's the thing: I've actually got two accounts (mostly by my mistake). One (HSA Bank) has $50 in it; the other has the remainder. I had established the HSA Bank one with the intention of buying mutual funds. But I added money to the wrong account and then never put money into this one.

Anyhow, looking over their fee schedule: $2.50 per month for balances under $3,000. If you transfer money to the brokerage account, you still need $3,000 left to avoid the fee. The brokerage account (through Ameritrade) has a $25 fee for purchasing mutual funds, and a $15 fee for stock purchase.

Does anyone know of a better HSA account management company for those of us looking to use the HSA account strictly for saving over at least the next decade?

[ChrisC]

I have a similar HDHP/HSA as the original poster. I've already advance funded this plan and I will be at the maximum contribution level very shortly for this year; I moved $2K into the investment account (and I've seen it drop after it went up) and the rest is now in the money market account; I'm probably going to move most of my funds into the investment account shortly.

I don't need to tap this account for medical expenses. So, if you don't need to tap this account, why would anyone do that? I'm paying all my medical expenses with after-tax monies, which so far has been around $200, though I could easily drain half of my funds to pay for the Long Term Health Care premiums I'm currently paying. For now, I'm using this HSA has a tax deferred retirement account, but once I get to 65, I'm going to reimburse myself for all the medical expenses I incurred since I started the plan, pay my annual LTHC and Part B Medicare Premiums from it, and draw down, as needed, for anything else.

[NW-Bound]

I have an HSA with Golden Rule (United Health Care). They told my wife they were paying 4% (versus your 1.5%) on the account, but I have not double-checked to see if that is current. If true, it is darn good. They also claim to have other investment choices, but I just barely accumulate $10K (my annual deductible), so in no hurry to look into moving part of the money to equities.

[rogersteciak]

I have a high deductible health insurance plan for catastrophic coverage and a health savings account. I pay all of my deductibles out of pocket rather than use the HSA.

My plan for the HSA is to let it compound and have it available for long-term care should I need that someday. I invest my HSA contribution in the most aggressive mutual fund the plan offers.

The plan used to keep $1 in money market and allow the rest in any mutual fund it offered. But since the beginning of this year, the plan requires the first $2K be kept in money market.

[NW-Bound]

I also pay all deductibles so far out of pocket. I may just left the HSA in the 4% MM, and consider that part of my allocation for cash, and reduce the cash portion in my IRAs. It all works out to the same thing.

Isn't it great that our tax system is so complicated? The government may just plan it this way, so we spend more time managing our money, instead of other "subversive" activities.

[TromboneAl]

I still think of a Health Savings Account as a savings account (and not an investment account) that you may have to tap quickly in case of a medical emergency.

I think of it as an IRA.

You can move your HSA funds, though there may be a fee involved.

I am happy with HSA Administrators, though IIRC someone posted info about a company with slightly lower fees.

Since starting my individual HSA in 2006, I've accumulated $10K in it. Medical, dental and vision expenses for the DW, DD, and me have totaled $11,500 in that time period (you can deduct the entire family's expenses, even if you have an individual HSA).

So, so far, all of the money will be tax free when I withdraw it down the road.

[DblDoc]

Originally Posted by TromboneAl

I think of it as an IRA.

You can move your HSA funds, though there may be a fee involved.

I am happy with HSA Administrators, though IIRC someone posted info about a company with slightly lower fees.

Since starting my individual HSA in 2006, I've accumulated $10K in it. Medical, dental and vision expenses for the DW, DD, and me have totaled $11,500 in that time period (you can deduct the entire family's expenses, even if you have an individual HSA).

So, so far, all of the money will be tax free when I withdraw it down the road.

I too use HSA Administrators having just moved from another (expensive) company. I need the bond space and they have VBTLX (Van Total Bond Index - Admiral shares!). They have fees but they "disappear" once the account grows.

DD

[free4now]

My approach, starting out, is to use Patelco for my HSA because they pay a good savings-style interest rate and have no fees. When my account balance gets over $10k or so it looks like I'll want to move it into another HSA where I can invest in equities with lower fees.

[MichaelB]

I use Shawnee HSA. They pay 4.25%, charge $3.00 monthly, and have a dozen or so funds to invest in. Not great options, but I'm sure most people would find something acceptable. I'll keep my money in the HSA as long as possible and fund medical from current income - which is certainly one of the HSA objectives.

See them here Individual Plan

Michael