March 20, 2017
Investor’s Business Daily
by Donald Jay Korn
Most people who contribute to health savings accounts are setting aside tax-free money to use for medical expenses as they arise. But a growing number of HSA members can afford to invest contributions in stocks, mutual funds and other investment vehicles.
According to the 2016 Year-End Devenir HSA Research Report, only 15% of HSA assets are invested. The other 85% are held in low-yield deposits, where HSA owners can easily access the money for current health care outlays, tax-free.
Similarly, the 2016 Bank of America Merrill Lynch Workplace Benefits Report found that 53% of employees with an HSA view it as a short-term vehicle to cover near-term health care expenses, not a long-term savings vehicle. Indeed, 55% usually spend their entire HSA balance within a given year.
Nevertheless, the current 15% that’s invested is up sharply from 4% of a much smaller total of HSA assets in 2008. So more people are thinking of HSAs as long-term holdings — and discovering that there are various strategies to consider.
Playing It Safe
“We increasingly recommend HSAs for high-income earners and business owners,” said certified financial planner Frank Pare, president of PF Wealth Management Group in Oakland, Calif. “However, contribution limits are not very high.”
In 2017, tax-deductible HSA contributions are capped at $3,400 for those with single qualifying health insurance coverage and $6,750 with family coverage. “When an HSA has a relatively low balance, people should stick to more stable investments, such as cash and short-term bond funds,” said Pare, the 2017 president-elect of the Financial Planning Association.
HSAs are intended to be used for health-related expenses, so Pare warns against investing too aggressively because it’s impossible to predict when a costly health event might occur. “Staying conservative with very limited equity exposure in an HSA is best,” he said, “while using other portfolio money to go further out along the risk spectrum.”
But not every advisor believes in reducing risk for HSA investments. “I typically recommend a proportionately higher stock allocation to HSAs, compared with clients’ 401(k)s or traditional IRAs,” said Debbie Gallant, a certified financial planner and founder of Gallant Financial Planning in Rockville, Md.
Gallant “urges” and “cajoles” clients not to use HSA money in the short term. Instead, she encourages them to operate their HSAs like a “medical Roth IRA” for their retirement.
“That’s because this money can be allocated for retirement, in a tax-free vehicle,” Gallant said. Her clients’ HSA money might be 80% or even 100% in stocks, depending on their age, risk tolerance and access to other funds for emergencies.
Investors’ age is a key factor in determining HSA asset allocations for Ann Gugle, a certified financial planner and principal at Alpha Financial Advisors in Charlotte, N.C. “We treat HSAs much like we treat 529 college savings plans, as both have a distinct time horizon,” she said. Just as youngsters probably will start college around age 18, HSA owners can plan to start tapping HSAs in retirement, probably when they’re in their 60s or 70s.
“For younger clients,” Gugle said, “we want their HSA to grow so we put growth-oriented asset classes there.” Just as a 5-year-old’s 529 account likely would be more growth oriented than a 15-year-old’s 529, a 40-year-old’s HSA probably will have more stocks and fewer bonds than a 65-year-old’s HSA. As that 40-something investor goes through the 40s and 50s, the HSA allocation gradually will become more conservative.
Costs Count, Too
Gallant encourages clients to open their HSAs at a low-cost provider. “Many of the HSAs available through the employer or the employee’s health insurance plans have higher investment fees on their options,” she said.
Therefore, Gallant explains to her clients that they do not need to stay with a plan from their employer or their health insurance provider. Instead, individuals can invest their HSA money wherever they want.
“If the employer is matching and/or providing some HSA funding, that money would stay wherever the employer was putting it,” Gallant said. “So my clients might end up with two HSA accounts.”
Gallant mentions Webster Financial‘s (WBS) HSA Bank division and HealthSavings Administrators as low-cost providers. She also recommends that clients invest HSA money in Vanguard mutual funds, known for low expense ratios.
“If clients want me to manage their money for them at TD Ameritrade, I suggest HSA Bank because investors can link a Webster Bank’s HSA to an HSA at TD Ameritrade,” Gallant said. There, she can invest HSA money in Vanguard index ETFs.
Specifically, Gallant prefers large, broad index mutual funds and ETFs. “For example, instead of using Vanguard S&P 500 ETF (VOO), I will use Vanguard Total Stock Market ETF (VTI) because it includes small caps, which have provided an advantage, over time,” she said.
Gallant also advocates using a broad international fund for HSA investing. “If I believe a client will benefit from or is more comfortable having a bond fund in an HSA, I will select a low-cost intermediate-term bond fund,” she added.
This article appeared at Investor’s Business Daily at: http://www.investors.com/etfs-and-funds/personal-finance/hsa-investment-vs-spending-health-care-savings/