HSA - Small cap for aggressive growth?

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HILA88
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HSA - Small cap for aggressive growth?

Post by HILA88 »

Hi guys,

I recently opened a HSA (2nd year of having it), and since it is triple tax-free if used for health care, I was considering investing money in this account more aggressively compared to my other accounts. I was hoping I could get some advice. Since I only opened the HSA recently, it comprises an extremely small portion of my portfolio. Briefly, this is my and my wife's portfolio:
- Our 401k/457/403b: ~200k (we max these out each year)
- Combined Roth IRA: ~120k (max out back door roth each year)
- Taxable/brokerage: ~ 70k
- HSA: currently around 11k, but will be around 14k after this year
- My overall portfolio is a typical 3 - fund portfolio but with only like ~5% bonds as I am still 32yo and have a long time horizon
- We have had the HSA for 2 years (after this year), but since we plan on having kids, we plan on switching away from a HDHP/HSA in 2023 during pregnancy. Whether we will go back to a HDHP/HSA after having kids we are not sure yet... but maybe not.. So unfortunately our HSA space can be very limited, potentially maxing out at the current 14k contributions by the end of 2022.

The HSA has several vanguard options. Up until now, I created my own VTSAX within the account by investing 80% VIIIX (S&P500 index) + 20% VEMPX (SP500 completion index including mid and small caps). Now, since HSA has great tax advantages, I kind of changed my mind and was thinking of being more aggressive with this account and making it heavier on small caps for potential higher returns. At this point, I am not sure how exactly I should go about doing this: Should I just keep adding to the fund I'm already using: VEMPX (mid and small cap), or if I should invest into a new index fund, either of the following:
1) VSMAX ( vanguard small cap index adm)
2) VSIAX (vanguard small cap value index admiral).

Lastly, what should I do with the currently fund (VIIIX+VEMPX)? Should I just convert all my current holdings (equivalent to VTSAX) into the small cap? or gradually transition to them to the above fund once I decide on one?

Thank you in advance!
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retired@50
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Re: HSA - Small cap for aggressive growth?

Post by retired@50 »

To answer your question, I'd probably use VSIAX (#2) in the situation you described.

Although, it's probably good to keep in mind that HSA money is best spent during your own lifetime, so I wouldn't get too carried away with risky choices. Given the amounts in play, I'd probably lump sum the money into the desired fund instead of stringing it out over time.

I'm planning on using my HSA money to pay my Medicare premiums when the time comes. Inheriting an HSA isn't all that great for a non-spouse.

Details here: https://www.bogleheads.org/wiki/Health_savings_account

Regards,
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rkhusky
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Re: HSA - Small cap for aggressive growth?

Post by rkhusky »

Keep in mind that an extra-risky fund can also have large losses, which cannot be offset (e.g. TLH) inside a tax-advantaged account.
dcabler
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Re: HSA - Small cap for aggressive growth?

Post by dcabler »

HILA88 wrote: Mon Aug 08, 2022 12:29 am Hi guys,

I recently opened a HSA (2nd year of having it), and since it is triple tax-free if used for health care, I was considering investing money in this account more aggressively compared to my other accounts. I was hoping I could get some advice. Since I only opened the HSA recently, it comprises an extremely small portion of my portfolio. Briefly, this is my and my wife's portfolio:
- Our 401k/457/403b: ~200k (we max these out each year)
- Combined Roth IRA: ~120k (max out back door roth each year)
- Taxable/brokerage: ~ 70k
- HSA: currently around 11k, but will be around 14k after this year
- My overall portfolio is a typical 3 - fund portfolio but with only like ~5% bonds as I am still 32yo and have a long time horizon
- We have had the HSA for 2 years (after this year), but since we plan on having kids, we plan on switching away from a HDHP/HSA in 2023 during pregnancy. Whether we will go back to a HDHP/HSA after having kids we are not sure yet... but maybe not.. So unfortunately our HSA space can be very limited, potentially maxing out at the current 14k contributions by the end of 2022.

The HSA has several vanguard options. Up until now, I created my own VTSAX within the account by investing 80% VIIIX (S&P500 index) + 20% VEMPX (SP500 completion index including mid and small caps). Now, since HSA has great tax advantages, I kind of changed my mind and was thinking of being more aggressive with this account and making it heavier on small caps for potential higher returns. At this point, I am not sure how exactly I should go about doing this: Should I just keep adding to the fund I'm already using: VEMPX (mid and small cap), or if I should invest into a new index fund, either of the following:
1) VSMAX ( vanguard small cap index adm)
2) VSIAX (vanguard small cap value index admiral).

Lastly, what should I do with the currently fund (VIIIX+VEMPX)? Should I just convert all my current holdings (equivalent to VTSAX) into the small cap? or gradually transition to them to the above fund once I decide on one?

Thank you in advance!
I treat it similarly to the way many people treat a Roth - 100% stock. Otherwise, I'm doing something similar as you with a more aggressive stock choice. I came to the HSA party late in my career, so it won't ever get all that large regardless.
- I've been paying for healthcare costs out of-pocket but keeping receipts since I first became eligible for an HSA 5 years ago
- Though I'm keeping receipts, I can't see a situation where I won't have medical bills at some point in the future
- I will likely pay for Cobra from my HSA for the remainder of the year in which I retire
- Will consider paying medicare premiums once those start in a few years - really just depends on the size of the HSA and whether we foresee future large medical bills coming our way.

Cheers.
MrJedi
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Re: HSA - Small cap for aggressive growth?

Post by MrJedi »

If you're going to tilt, I would do it in the Roth IRA.

If the tilt pays off, the Roth IRA is a much better account to have large gains in. The HSA is much more limited to spend down and also if you're not able to spend it down, it's not a very good asset/estate passing vehicle unless it's going to a qualified charity.
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nisiprius
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Re: HSA - Small cap for aggressive growth?

Post by nisiprius »

...I kind of changed my mind and was thinking of being more aggressive...
Can you give a clearer, better reason for change other than "I kind of changed my mind?" John C. Bogle wrote "Time is your friend. Impulse is your enemy." "Kind of changed my mind" sounds like impulse to me.

The combination of the word "savings" in "health savings account" and "aggressive" (i.e. risky) doesn't seem right.

One official description of how an HSA is intended to be used is:
  • If you enroll in an HDHP, you may pay a lower monthly premium but have a higher deductible (meaning you pay for more of your health care items and services before the insurance plan pays).
  • If you combine your HDHP with an HSA, you can pay that deductible, plus other qualified medical expenses, using money you set aside in your tax-free HSA.
If you invest in a "aggressive growth," i.e. high risk vehicle, then it is possible that you won't be able to pay that deductible with it.

In other words, you are not going to use your HSA as intended. That's your prerogative, but I thought it should be pointed out.
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Topic Author
HILA88
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Re: HSA - Small cap for aggressive growth?

Post by HILA88 »

Thank you all for the responses.

To clarify, I intend on not touching my HSA account until way later (again, >30yr horizon) and let it grow. Whatever health care cost comes up in the mean time I intend on paying out of pocket and maybe keep receipts. Also, I do intend on using it up so not planning to pass it on like Roth.

For those recommending tilting using the roth account, I've thought about it but since roth is more flexible and valuable, I'm a bit more risk averse in my roth account (I am still in 100% stocks, but not risky enough to put small cap tilt in it).
Topic Author
HILA88
Posts: 9
Joined: Thu Jan 16, 2020 5:48 pm

Re: HSA - Small cap for aggressive growth?

Post by HILA88 »

nisiprius wrote: Mon Aug 08, 2022 7:33 am
...I kind of changed my mind and was thinking of being more aggressive...
Can you give a clearer, better reason for change other than "I kind of changed my mind?" John C. Bogle wrote "Time is your friend. Impulse is your enemy." "Kind of changed my mind" sounds like impulse to me.

The combination of the word "savings" in "health savings account" and "aggressive" (i.e. risky) doesn't seem right.

One official description of how an HSA is intended to be used is:
  • If you enroll in an HDHP, you may pay a lower monthly premium but have a higher deductible (meaning you pay for more of your health care items and services before the insurance plan pays).
  • If you combine your HDHP with an HSA, you can pay that deductible, plus other qualified medical expenses, using money you set aside in your tax-free HSA.
If you invest in a "aggressive growth," i.e. high risk vehicle, then it is possible that you won't be able to pay that deductible with it.

In other words, you are not going to use your HSA as intended. That's your prerogative, but I thought it should be pointed out.

Thanks for the resources. As far as my reasoning, I still have a long time horizon, and don't intend on using the money in my HSA until after retirement. Once I switch to my other health plan for work, I will have no out of pocket cost for health care. That being said, since my HSA account has a very long time horizon (won't tap in to it until way later), is a small percent of my networth, and triple tax-free, I thought it would be a good vehicle to be a bit more aggressive with. If it returns are better than the rest of my 3-fund portfolio, it would be great due to the tax advantage. Furthermore since its a very small portion of my portfolio I can stomach the volatility within that account. Hope this makes some sense. That being said, do you have suggestions for which fund I should go with if this is a reasonable plan?
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dogagility
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Re: HSA - Small cap for aggressive growth?

Post by dogagility »

I agree with using a total stock market index fund for 100% of your HSA in your situation.

As for having too much in your HSA, keep in mind that it can be used for any expenditure at age 65; for non-medical expenditures, it is treated like a traditional IRA for tax purposes.
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Topic Author
HILA88
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Re: HSA - Small cap for aggressive growth?

Post by HILA88 »

dogagility wrote: Mon Aug 08, 2022 11:02 am I agree with using a total stock market index fund for 100% of your HSA in your situation.

As for having too much in your HSA, keep in mind that it can be used for any expenditure at age 65; for non-medical expenditures, it is treated like a traditional IRA for tax purposes.
Thanks! What do you think about putting more small cap in there for potential higher reward? And which fund I should use amongst the 3. I'm not too worried about having too much in there because after this year I will probably go back to a low deductible plan in preparation for kids and pregnancy.
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dogagility
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Re: HSA - Small cap for aggressive growth?

Post by dogagility »

HILA88 wrote: Mon Aug 08, 2022 11:20 am
dogagility wrote: Mon Aug 08, 2022 11:02 am I agree with using a total stock market index fund for 100% of your HSA in your situation.

As for having too much in your HSA, keep in mind that it can be used for any expenditure at age 65; for non-medical expenditures, it is treated like a traditional IRA for tax purposes.
Thanks! What do you think about putting more small cap in there for potential higher reward? And which fund I should use amongst the 3. I'm not too worried about having too much in there because after this year I will probably go back to a low deductible plan in preparation for kids and pregnancy.
I don't slice and dice my equity portfolio. There are some that trust the backtests to predict the future and slice and dice. I'm not one of those people.

Whatever asset allocation you choose, you need to stay the course... for decades... so you don't reduce returns by chasing recent performance.
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grabiner
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Re: HSA - Small cap for aggressive growth?

Post by grabiner »

While the HSA has an extra tax advantage over the Roth IRA, you already got that advantage when you made the investment and got the tax deduction on the contribution. Going forward, both accounts grow tax-free (except for HSAs in CA or NJ) as long as your withdrawals follow the rules. Therefore, it makes sense to invest the HSA as if it were part of your Roth IRA. If you have a three-fund portfolio, hold either the US or international stock index in the Roth IRA, whichever you would prefer not to hold in another account.

For example, if your 401(k) doesn't have a good international fund, you will have have to hold international in taxable, Roth IRA, or HSA. If your tax situation is such that you would prefer not to hold international stock in taxable (a high state income tax in a state which does not allow a foreign tax credit), hold an international index in your Roth IRA and HSA.
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