How to Invest Your HSA

We recently received a reader question on investing in an HSA (Health Savings Account) and I thought I’d follow up with my thoughts in an article, as I have quite a few.

It’s worth mentioning that I am a founding member of the HSA Committee for the Plan Sponsor Council of America, which helps educate employers and employees on HSA best practices while also helping to shape policy around these powerful accounts in Washington.

In my day job as a financial wellness coach, I was also tapped to present a series of webinars this past fall on behalf of one of the largest HSA providers to help the participants in their HSAs better understand how they work.

In short, I have a lot of experience here.

With that said, here are a few key considerations as you prepare to invest your HSA:

Your Account is Portable Right Now

Probably the biggest thing to know is that you don’t have to leave your employer or switch plans in order to move some or all of your HSA savings to another provider, specifically one that charges little or no fees for investing.

Since the fee structures and investing options within specific HSA plans will vary according to the employer and the provider, I’m not sure if it would make sense for you to move the money you’re thinking of investing to another provider or if you could go the simpler route of using BofA, but if there is any type of monthly fee for investing, it’s probably worth the hassle to move the money elsewhere, so those fees don’t cut in to your performance returns.

The provider that my employer uses charges $3 per month to have an investing account, plus the mutual funds offered are limited and have higher expense ratios than those at Fidelity, where I have chosen to move my funds to invest.

Here’s How I Invest: I basically have two HSAs:

I keep my HSA with my employer because I’m continuing to make deposits via payroll, plus my employer makes deposits for me on a quarterly basis as long as I’m enrolled in the eligible plan. Once a year (on my birthday, because it’s easy to remember), I have a check cut to myself and then deposit that check to Fidelity using the 60-day indirect rollover rule.

Very important things to know here:

1. You can only do this once a year!
2. Once the check is cut, I have 60 days to get it into my Fidelity HSA or I will pay taxes and a 20% penalty on the amount of the check.
3. I have to keep very clear records showing how I did this, as the IRS could ask at any time for proof that the annual checks were being deposited to the new HSA and not just spent on qualified or unqualified expenses.
4. I’m doing it this way because otherwise my work-based HSA will charge me a $25 distribution fee if I asked them to send the money directly to Fidelity, but no fee for cutting a check to me.
5. If you’re worried about any of the above, then you may find it worth the distribution fee (if any) that your provider charges in order to make it a “trustee-to-trustee transfer,” where you never touch the check. Check with your provider to see.

How to Decide How Much to Invest in Your HSA

So how do you decide how much to invest in your HSA versus keep in the savings account side? This very much depends on your personal situation, but the general way to think of it is the same rule of thumb for any investment: do not invest any funds you would anticipate needing within 5 years or less.

Now when it comes to medical expenses, this is a little more ambiguous – the assumption here is that you would NOT use your HSA for the “little” things that come up such as prescriptions, doctor’s visits, etc, but that perhaps you’d have to tap your HSA if a large medical expense were to befall you. (See You’re Probably Using Your HSA All Wrong for more on this)

For example, if you were to have an accident that requires an ambulance and a hospital stay, you could easily be on the hook for $10k+. The good news is that most of those providers are likely to allow you to set up a payment plan, so you wouldn’t necessarily have to keep $10k in cash to shield against this unlikely event, but think of what amount a bill would have to be for you to be whipping out your credit card versus paying from regular savings, and that’s the amount you should keep in cash in your HSA.

How I Decide to Invest My HSA

I’m pretty conservative when it comes to money, believe it or not, so I personally prefer to keep $5k in cash, and invest the rest as if it’s retirement savings. Other more aggressive people might only keep $1,000, which is the minimum that many HSA providers require before allowing investing. Fidelity does not have a minimum cash requirement, yet I keep my cash there because at least I earn money in their money market versus no interest in my workplace HSA.

Deciding When to Invest in Your HSA

Finally, I’ll say this – don’t worry too much about what’s going on in the market today because even if you invest all of your account at the top of the market and it declines in value, you’ll still be earning dividends on the funds that are invested, and over the long-term (10+ years) you’re very likely to have more than you started with – historically speaking, the market has always been higher than it was 10 years prior, with a few very notable exceptions from the 2008-2009 era, which was exceptional.

I’m personally an index investor, so I invest for the market, rather than trying to beat it. I know enough about investing that if I wanted to, I could probably do the research and pick some winners, but I have more important things to do and am just fine with participating in the market as a whole, rather than trying to beat it.

I hope that provides a little more clarity around some of the decision points, but if you have any follow-up questions, feel free to ask and I’ll definitely answer!