Fidelity HSA - What to invest in?

[G-Man]

My HSA is moving to Fidelity in 2023. This is great since all my other retirement investments is with Fidelity.

Here is my approach that I'm thinking of implementing:

Core Position - Default is FDRXX. I do have the option of FDIC bank. Maintain a $0 balance in the core. Move monthly deposits into SPRXX (short term - MM fund) or FXAIX (long term investing).

Yearly Medical Spending - Maintain a $5K balance in SPRXX for yearly medical spending. In addition, I will gain some interest/dividend throughout the year. SPRXX will be drawn from automatically when the core account is depleted.

Long Term Investing - All other dollars will be invested in FXAIX for long term growth.

Any feedback on the approach?

 

[mrfeh]

Looks good to me, as long as the money in FXAIX isn't needed for 10+ years.

 

[audreyh1]

It’s all about when you think you will need the money.

 

[FLSUnFIRE]

I view my HSA as an insurance policy for my future medical/LTC needs and don't intend to withdraw for a long time (though I have about $10K I could reimburse myself if I hit hard times) and as such have invested it in FZROX. I continue to add to it even in ER and pay all medical expenses out of my annual allowance.

 

[audreyh1]

We use our HSAs to pay Medicare premiums and intend to draw them down after 65. DH is using his now and I will start next year.

For us that makes the disbursement documentation easy because we just need the annual record of what we paid CMS Medicare each year, plus we are paying directly from the HSA.

Anyway our investments are aligned with the time expected to draw down each account.

 

[sengsational]

My HSA is just part of my overall asset allocation. So take this year's contribution...where to put it? Put it where it helps balance to target AA.

The reaction to that might be "if I put it in something volitile and that investment class is down when I need the money, then I'll have to sell-low." But there's a remedy for that. You just sell the low asset class in your HSA while concurrently buying in another tax bucket. The result is that your AA stays the same.

 

[mrfeh]

My HSA is just part of my overall asset allocation. So take this year's contribution...where to put it? Put it where it helps balance to target AA.

The reaction to that might be "if I put it in something volitile and that investment class is down when I need the money, then I'll have to sell-low." But there's a remedy for that. You just sell the low asset class in your HSA while concurrently buying in another tax bucket. The result is that your AA stays the same.

Your AA stays the same, but you may still be selling something low, if most asset classes are down (as was the case in 2022). I agree with audreyh...use an investment with a time horizon for when you think you'll need the money.

HSAs are like Roth IRAs on steroids when it comes to taxes. As such, if you can pay for medical expenses out of pocket, you want growth/equities in your HSA.

If you're using your HSA for annual or near term expenses, that portion of it should be kept in more conservative offerings.

 

[Accidental Retiree]

I have most of mine in a Treasury ladder, with a little in an account to fund monthly Medicare reimbursements.

 

[COcheesehead]

I asked the question on another forum since I never had access to an HSA until this year. The best advice I thought was to pay for medical expenses out of pocket, get the credit card points and let the triple taxation benefits of the HSA work for you long term. So invest as if it were like a Roth, because it is even better than a Roth.

 

[audreyh1]

I asked the question on another forum since I never had access to an HSA until this year. The best advice I thought was to pay for medical expenses out of pocket, get the credit card points and let the triple taxation benefits of the HSA work for you long term. So invest as if it were like a Roth, because it is even better than a Roth.

Except that once inherited except for spouse, all medical expense benefits are lost. So it’s not like a Roth.

So we plan to spend ours down and get rid of two more accounts and their associated paperwork.

 

[COcheesehead]

Except that once inherited except for spouse, all medical expense benefits are lost. So it’s not like a Roth.

So we plan to spend ours down and get rid of two more accounts and their associated paperwork.

That situation doesn’t apply to us. We have no heirs.
We’ll likely use it for LTC hopefully in 25-30 years.

 

[SecondCor521]

That situation doesn’t apply to us. We have no heirs.

I'm puzzled.

If you have no heirs, then when the second of you dies, the beneficiaries of the survivor's HSA will have to distribute the entire remaining amount and pay ordinary income taxes on it in that single year. (*) See https://www.irs.gov/publications/p969#en_US_2021_publink1000204098.

The beneficiaries of your Roth IRAs, depending on who they are and what the law is then, will have 10 years to distribute and will owe no taxes.

So even though an HSA is great while you're alive, I think Roth IRAs are better from an inheritance point of view.

(*) More or less. There may be some minor exceptions for some leftover medical bills.

 

[COcheesehead]

I'm puzzled.

If you have no heirs, then when the second of you dies, the beneficiaries of the survivor's HSA will have to distribute the entire remaining amount and pay ordinary income taxes on it in that single year. (*) See https://www.irs.gov/publications/p969#en_US_2021_publink1000204098.

The beneficiaries of your Roth IRAs, depending on who they are and what the law is then, will have 10 years to distribute and will owe no taxes.

So even though an HSA is great while you're alive, I think Roth IRAs are better from an inheritance point of view.

(*) More or less. There may be some minor exceptions for some leftover medical bills.

Inheritance is truly the last of our priorities. HSAs are also deductible in the year of the contribution in addition to the total tax free nature, which makes them superior for us to a Roth.

 

[Cobra9777]

Except that once inherited except for spouse, all medical expense benefits are lost. So it’s not like a Roth.

So we plan to spend ours down and get rid of two more accounts and their associated paperwork.

+1

After contributions are done, the HSA is treated same as Roth in our withdrawal plan. But when needed, we'll draw from the HSA first, to the extent of past receipts. This avoids paperwork hassles later in life and sidesteps any potential inheritance issues.

Just another useful subtlety I learned about on this forum.

FWIW, my HSA at Fidelity is 100% invested in VTI and I've never taken a distribution.

 

[audreyh1]

I have a stack of receipts I will gleefully shred when we finally spend down and close our HSA accounts. I never planned to use them, but felt obligated to keep the receipts “just in case”. I still have that option of course.

 

[sengsational]

Isn't the documentation for HSA accounts beyond a pain? I was under the impression that you needed to keep the receipts 7 years after you used them on your taxes. So it would seem that people employing the "don't spend the HSA 'till later" strategy will have maintained some records for 15 or more years! Seems like a lot of work, but I started down that path, and guess I'll keep going for a while more.

 

[FLSUnFIRE]

Isn't the documentation for HSA accounts beyond a pain? I was under the impression that you needed to keep the receipts 7 years after you used them on your taxes. So it would seem that people employing the "don't spend the HSA 'till later" strategy will have maintained some records for 15 or more years! Seems like a lot of work, but I started down that path, and guess I'll keep going for a while more.

I find it pretty easy. I maintain a 3 ring binder and put medical receipts in it in reverse chronological order. When/if I reimburse, I will put a divider between the reimbursed and reimbursed from oldest to newest. As I pay medical bills, I log them in a simple spreadsheet so I have a running total of reimbursed and unreimbursed medical expenses.

 

[audreyh1]

Yes, it can be a pain. I have just collected receipts so far “just in case” but not used them. Then if I do use them I have to keep them with that tax return for a good while.

So instead we decided that given the amounts in our HSAs, paying for Medicare premiums until we start drawing SS would be a good use. We can pay directly from the HSA and documentation is easy as we simply keep each year’s payment history - electronic copy. Once SS takes over paying premiums we will reimburse ourselves until the HSAs are exhausted. In that case the 1099-SS each year will show the premiums that we paid.

I find it pretty easy. I maintain a 3 ring binder and put medical receipts in it in reverse chronological order. When/if I reimburse, I will put a divider between the reimbursed and reimbursed from oldest to newest. As I pay medical bills, I log them in a simple spreadsheet so I have a running total of reimbursed and unreimbursed medical expenses.

Yep, too much work for me.

 

[HenryD]

I keep scanned electronic copies of all of my receipts with chronological file names and a master key. It's always been curious to me that there is no time limit on their use. Couldn't a tax cheat just wait 7 years after a receipt's use and just rinse and repeat? Or does the IRS retain paperwork beyond the timeframe a taxpayer is?

I'm being as diligent as I am in keeping ours but it's hellish complicated for the bigger bills I've had for DD. They span many sessions over many months, often initially incorrectly coded, renegotiated, rebilled, and have partial payments applied over many months. So I have stacks of partial and or incorrect bills and receipts that don't match 1:1. I can't imagine any auditor would take the time to sort it all out for maybe 10-20 grand which leads me to think they never will. I could see them asking for the paperwork and I'll gladly provide it and explain as best I can but I suspect it will end there once they are satisfied that some paperwork actually exists.

 

[big-papa]

My HSA is moving to Fidelity in 2023. This is great since all my other retirement investments is with Fidelity.

Here is my approach that I'm thinking of implementing:

Core Position - Default is FDRXX. I do have the option of FDIC bank. Maintain a $0 balance in the core. Move monthly deposits into SPRXX (short term - MM fund) or FXAIX (long term investing).

Yearly Medical Spending - Maintain a $5K balance in SPRXX for yearly medical spending. In addition, I will gain some interest/dividend throughout the year. SPRXX will be drawn from automatically when the core account is depleted.

Long Term Investing - All other dollars will be invested in FXAIX for long term growth.

Any feedback on the approach?

I consider what I have in my HSA to be part of my overall AA, albeit one with restrictions on how I use the withdrawals. Because I plan on cash flowing medical expenses for a while and because of the tax advantages, I treat it like I would a Roth which is for it to be 100% stock for maximum long term growth. Because I already have my AA planned, the stock fund(s) are exactly what I hold elsewhere. Don't see a reason to hold anything I hadn't already decided to hold as part of my AA.

Cheers.

 

[SecondCor521]

Isn't the documentation for HSA accounts beyond a pain? I was under the impression that you needed to keep the receipts 7 years after you used them on your taxes. So it would seem that people employing the "don't spend the HSA 'till later" strategy will have maintained some records for 15 or more years! Seems like a lot of work, but I started down that path, and guess I'll keep going for a while more.

I have a folder with HSA receipts and a spreadsheet. It's not that hard.

Any receipts I use for qualified HSA distributions would be put with that year's tax return.

You can save tax returns for up to 7 years if you want. For "normal" audit issues, the IRS only goes back 3 years. I save 4 years. My Dad saves 10 years, but mostly just because he has room in his filing cabinets.

Some people will find it worth the hassle, some won't. YMMV.

Couldn't a tax cheat just wait 7 years after a receipt's use and just rinse and repeat? Or does the IRS retain paperwork beyond the timeframe a taxpayer is?

We have an honor system, with computer checking of most major items and audits of maybe 1% of tax returns. Tax cheats will always exist, and many will get away with it. Doesn't make it right, and may make it harder to sleep at night.

I don't know how long the IRS retains records. They have at least one transcript from 2013 on my online account.

 

[tmitchell]

I just put mine into a target date fund and don’t plan to use it until Medicare kicks in, then maybe LTC. That way I don’t have to worry about receipts.

 

[pb4uski]

We started our HSAs in 2009 and didn't make any withdrawals for 10 years.

My concern was that DW and DD might not realize that $19k in HSA money could be withdrawn tax free if I got hit by a beer truck, so I did a big $19k withdrawal in 2020 for expenses for 2009 to 2019 and since then draw our eligible expenses for the previous year in January or February. Since we're now on Medicare and have a plan G Medicare Supplement it's mostly Medicare Part B and Part D premiums, the Part B deductible, dental and vision and Part D copays, and I suspect that the HSA will be done and gone in 8-10 years, which is fine.

Right now ours is invested in an Allstate preferred stock (ALL-B) which will soon be yielding about 8% (thanks for the tip Mulligan) but will likely be called in 2023.

 

[G-Man]

We started our HSAs in 2009 and didn't make any withdrawals for 10 years.

My concern was that DW and DD might not realize that $19k in HSA money could be withdrawn tax free if I got hit by a beer truck, so I did a big $19k withdrawal in 2020 for expenses for 2009 to 2019 and since then draw our eligible expenses for the previous year in January or February. Since we're now on Medicare and have a plan G Medicare Supplement it's mostly Medicare Part B and Part D premiums, the Part B deductible, dental and vision and Part D copays, and I suspect that the HSA will be done and gone in 8-10 years, which is fine.

Right now ours is invested in an Allstate preferred stock (ALL-B) which will soon be yielding about 8% (thanks for the tip Mulligan) but will likely be called in 2023.

Allstate preferred stock (ALL-B). Let me research that.

 

[G-Man]

My HSA is moving to Fidelity in 2023. This is great since all my other retirement investments is with Fidelity.

Here is my approach that I'm thinking of implementing:

Core Position - Default is FDRXX. I do have the option of FDIC bank. Maintain a $0 balance in the core. Move monthly deposits into SPRXX (short term - MM fund) or FXAIX (long term investing).

Yearly Medical Spending - Maintain a $5K balance in SPRXX for yearly medical spending. In addition, I will gain some interest/dividend throughout the year. SPRXX will be drawn from automatically when the core account is depleted.

Long Term Investing - All other dollars will be invested in FXAIX for long term growth.

Any feedback on the approach?

I talked to a Fidelity HSA rep yesterday about the Fidelity HSA core position and how it works with MM funds. He was unware that if the core is depleted, than medical expenses would automatically be paid by the MM fund. In my case SPRXX.

Has anyone verified this?