HSA Strategy (Part 4)

In the last three posts, I have been definining and explaining Health Savings Accounts (HSA). Now let’s consider management.

Please remember this is not professional advice and not intended to replace the services of a tax advisor or attorney. HSA contributions, distributions, and eligibility are IRS-governed and subject to change. As the account holder, you are responsible for verifying eligibility, tracking transactions, and complying with IRS regulations. While some HSA funds are FDIC-insured, investment options are not bank-guaranteed and may lose value. Information provided here is [mostly] accurate at time of writing but subject to change based on new legislation or IRS guidance.

I have already opened an HSA with Fidelity because I deem that a reputable brokerage very diverse in terms of what types of investments are allowed. Next, I need to fund and invest.

A conservative management approach would be to use the HSA to pay for doctor visits and prescriptions throughout the year while maintaining enough cash to cover the annual HDHP deductible or out-of-pocket maximum. Being forced to sell investments during a market downturn to pay for medical emergency is thus circumvented.

A more aggressive approach would be to invest the HSA aggressively (100% in equities) with the intention of letting it grow tax-free for many years. This applies to those with outside funds to cover any immediate medical needs. In essence, the HSA then becomes a Roth IRA on steroids: tax-deductible contributions and tax-free growth. Examples of allocation include Vanguard Total Stock Market (VTI) or Fidelity Total Market Fund (FZROX), large-cap S&P 500 (VOO or SPY), or higher-risk growth funds like Nasdaq-100 (QQQM or QQQ) or Fidelity Semiconductor (FSELX). The latter is of particular interest because tax-free growth on high-returning assets can be priceless.

To minimize needless charges, research expense / tax-cost ratios and choose the lowest between equivalent funds. In today’s competitive environment, mutual funds should definitely be of the no-load variety.

A hybrid option would be to leave $1,000 – $3,000 in cash (or a money market fund) for emergencies with anything more invested in equities. Once again if discretionary income [for non-essentials] is available, then the bills could be paid from elsewhere and reimbursed (withdrawn) from the HSA at any future point.

An issue I often debate is whether it is okay to invest aggressively in tax-advantaged accounts given the increased risk of loss. On one hand, aggressive investment can squeeze maximum value out of tax-advantaged status. On another hand, losses in tax-advantaged accounts cannot be used to offset other gains. This begs for the standard recommendation to invest aggressively in proportion to time remaining until retirement to allow portfolio recovery in case of market downturn.

Should the HSA be treated as a separate portfolio, though, or as one segment of total net worth? I will resume here next time.