HSA investment choices
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HSA investment choices
I (healthy 36M) max out my HSA every year. My HSA has a feature where I can automatically invest any cash above a threshold (I chose $1200). I have many, many choices of funds. What is the best way to think about investing within the account? View it like a Roth and load it up with a Vanguard international index fund, a target date retirement fund, a mix of stocks/bonds for when I inevitably need the cash for medical expenses/copays etc, keep it in cash/money market account? Any thoughts would be helpful. I currently have it in a 2050 target date fund.
my choices:
https://www.pnc.com/content/dam/pnc-com ... ptions.pdf
my choices:
https://www.pnc.com/content/dam/pnc-com ... ptions.pdf
- Artsdoctor
- Posts: 6063
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- Location: Los Angeles, CA
Re: HSA investment choices
Honeycrisp,
Two simple questions to start. Which state are you in? And, are you maximizing your other investment accounts as well?
Most states recognize HSAs and tax-advantaged accounts (sadly, CA does not) so you don't have to worry about tax-efficiency when investing. The target date fund is just fine if you prefer a hands-off approach and you're not paying tax on dividends or capital gains distributions.
If you're already investing in all of your other retirement accounts maximally and if you don't anticipate using the money in your HSA for years, then by all means invest as aggressively as you want. The simplicity of the target date fund is fine for now.
The PNC line up is good although there's no mention of fees. You'll want to pay attention to those since sometimes they can be on the higher side. If the PNC account is through your employer, are they contributing as well? You'll want to pay attention to maximums (the employer's contribution counts). If you're not beholden to the PNC account, there are other options with no fees and no minimums (e.g., Fidelity).
Two simple questions to start. Which state are you in? And, are you maximizing your other investment accounts as well?
Most states recognize HSAs and tax-advantaged accounts (sadly, CA does not) so you don't have to worry about tax-efficiency when investing. The target date fund is just fine if you prefer a hands-off approach and you're not paying tax on dividends or capital gains distributions.
If you're already investing in all of your other retirement accounts maximally and if you don't anticipate using the money in your HSA for years, then by all means invest as aggressively as you want. The simplicity of the target date fund is fine for now.
The PNC line up is good although there's no mention of fees. You'll want to pay attention to those since sometimes they can be on the higher side. If the PNC account is through your employer, are they contributing as well? You'll want to pay attention to maximums (the employer's contribution counts). If you're not beholden to the PNC account, there are other options with no fees and no minimums (e.g., Fidelity).
Re: HSA investment choices
" and if you don't anticipate using the money in your HSA for years, then by all means invest as aggressively as you want."
Key here (beyond ER) is aggressivity. You have a Very long horizon. Don't keep it in cash!
Key here (beyond ER) is aggressivity. You have a Very long horizon. Don't keep it in cash!
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Re: HSA investment choices
Thank you for replying. Very good questions.
1. I am in NY.
2. My 401k and IRA are also maximized. I also contribute to a taxable account (with a 90/10 stock/bond overall portfolio goal)
3. My employer contributes ~500 per year.
4. Very good point on the fees. I will investigate
5. If I end up having medical expenses >1200, and I need to cash out some of my HSA investment are there any tax consequences?
1. I am in NY.
2. My 401k and IRA are also maximized. I also contribute to a taxable account (with a 90/10 stock/bond overall portfolio goal)
3. My employer contributes ~500 per year.
4. Very good point on the fees. I will investigate
5. If I end up having medical expenses >1200, and I need to cash out some of my HSA investment are there any tax consequences?
Re: HSA investment choices
On #5, you need to be able to prove where the money went, from first dollar. (It must be health care related)
Other than that there are no tax consequences. It's the beauty of HSA's!
Other than that there are no tax consequences. It's the beauty of HSA's!
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Re: HSA investment choices
Wow, so my contribution reduces my taxable income, and both the growth and withdrawal of the HSA investments are all tax-free (obviously when used for medical expenses)? Damn, that's a good deal.
Re: HSA investment choices
Yes, and once you turn 65 the 20% penalty for non-qualified distributions goes away. So you can use the account for anything (not just medical) and only owe ordinary income tax on it. The HSA essentially becomes another IRA at that point. Of course if you do use it for medical expenses then they continue to be tax free.Honeycrisp wrote: ↑Tue May 24, 2022 12:35 pm Wow, so my contribution reduces my taxable income, and both the growth and withdrawal of the HSA investments are all tax-free (obviously when used for medical expenses)? Damn, that's a good deal.
Re: HSA investment choices
Indeed. There's no better deal anywhere in taxation.
(Not sure earned income credit is taxation)
(Not sure earned income credit is taxation)
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Re: HSA investment choices
Wow, thank you again
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Re: HSA investment choices
For an emergency buffer, I keep about 2 years worth of deductibles & co-pays invested in short-term TIPS & Bonds and invest the rest aggressively. Though about $1500 must be kept in a low paying savings account.
I keep receipts for large medical bills so that I can extract money from the HSA for emergencies.
I keep receipts for large medical bills so that I can extract money from the HSA for emergencies.
- Raspberry-503
- Posts: 954
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Re: HSA investment choices
If you use the HSA for medical expenses (including medicare premiums) after 65, they withdrawals ares till tax exempt, so it's still better than an IRA.
Also if you incur a medical expense today and don't pay it out of the HSA, keep the receipt and you can pay yourself back at a future date, even if it's decades away. That will be one way to pull money tax free later even if not to cover a medical expense at that time. Of course with inflation the value of waiting decade to claim the reimbursement has limitations.
You can also save extra after age 55.
As someone pointed out, watch out for fees, but otherwise HSA are triple-tax free in most cases.
Make sure you can pay medical expenses without it thought. If you invest aggressively, and need to get access to the money for medical expenses in a downturn, you could loose value.
Also if you incur a medical expense today and don't pay it out of the HSA, keep the receipt and you can pay yourself back at a future date, even if it's decades away. That will be one way to pull money tax free later even if not to cover a medical expense at that time. Of course with inflation the value of waiting decade to claim the reimbursement has limitations.
You can also save extra after age 55.
As someone pointed out, watch out for fees, but otherwise HSA are triple-tax free in most cases.
Make sure you can pay medical expenses without it thought. If you invest aggressively, and need to get access to the money for medical expenses in a downturn, you could loose value.
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Re: HSA investment choices
Very good points, thank you. Another good reason to stay healthy
- Artsdoctor
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Re: HSA investment choices
It's a great deal. That's why if you can afford to pay for your medical expenses out of pocket and use the HSA as an investment account, you will really be happy in the future. You live in NY so all of your contributions will be in pre-tax dollars, all of the investments will grow tax-free, and if you take the money out in the future to pay medical expenses, the withdrawals are all tax-free.Honeycrisp wrote: ↑Tue May 24, 2022 12:35 pm Wow, so my contribution reduces my taxable income, and both the growth and withdrawal of the HSA investments are all tax-free (obviously when used for medical expenses)? Damn, that's a good deal.
Your employer is contributing $500 each year so that will more than cover any expenses associated with the account. The investment options are reasonable so it would be reasonable to stay where you are. At some point in the future, you'll almost certainly be able to transfer to another administrator so I'd take advantage of your current set-up.
And yes, you can withdraw cash from the account now to pay expenses which is fine. But if you can allow of the contributions to grow, try that.
Re: HSA investment choices
If you are maxing out retirement accounts, the HSA can be invested for medical expenses in retirement. In that case, treat it as part of your Roth IRA, as both are growing tax-free for retirement expenses. You might hold only one fund in the HSA for simplicity, or because the HSA has better options in different asset classes (not applicable to the OP). If you use target-date funds in your other accounts, you can use the target-date fund in the HSA as well.
If you aren't maxing out retirement accounts, then you should plan to pay medical expenses from the HSA (and use the money you paid from the HSA rather than the bank to contribute more to your IRA or 401(k)). In that situation, one year's deductible in the HSA is part of your emergency fund and should be in low-risk investments, but the rest can still be invested as if it were part of your Roth IRA.
If you aren't maxing out retirement accounts, then you should plan to pay medical expenses from the HSA (and use the money you paid from the HSA rather than the bank to contribute more to your IRA or 401(k)). In that situation, one year's deductible in the HSA is part of your emergency fund and should be in low-risk investments, but the rest can still be invested as if it were part of your Roth IRA.
Re: HSA investment choices
I think of it as a Roth and invest 100% in VTI.
Re: HSA investment choices
During accumulation, I treat it closer to Roth than anything else. I pay medical expenses from taxable and do not use HSA for current expenses since I am already maxing everything else out (401k, IRA, etc.).
Note that HSAs are not great as part of an estate unless it's going to a spouse or charity. During retirement I will probably more aggressively spend it down / reimburse old receipts.
Note that HSAs are not great as part of an estate unless it's going to a spouse or charity. During retirement I will probably more aggressively spend it down / reimburse old receipts.