You heard the buzz on Health Savings Accounts (HSAs). You did your research. You determined that one HSA looked a lot like the others. Or maybe you noticed that one HSA administrator charged nominal fees, while another didn’t. And yet another requires you achieve an investment threshold before they’ll put your HSA deposits into the market.
These may sound like small differences, and they are if your intent is to use your HSA as a short-term bank account for medical costs. But what if you used your HSA as a long-term investment vehicle? What if you used it to save for retirement?
That’s precisely the investment advice many wealth managers are giving. And if that’s your approach, then you’ll want as much of your HSA funds invested in the market as possible. So you can earn as much money as possible. Which means any fees or minimum investment thresholds could cost you thousands of dollars in the long run.
Before we dive into investments specifically, it's important to cover other costs considering an HSA account.
On top of that many traditional HSA providers charge a laundry list of administrative fees. This is money that is being taken from employees health savings. Many providers nickel and dime customers with hidden fees that average $26/year according to a recent Morningstar report. Over the life of the HSA, this can reach almost $1,000 in lost HSA money (assiumed 3% growth over a 25 year period). On top of that, most traditional HSA providers make it difficult to get money out when employees need it most.
Here are some of the most common HSA account fees:
- Monthly Maintenance Fees (for individuals) – this is a set fee just for having an account with your HSA provider.
- Debit Card or ATM Transactions and Check Processing – fees for paying for health related expenses.
- Copy of statements – both monthly and tax forms so you can properly report and track your HSA usage.
- Legal – fees often associated with legal processing related to your HSA account.
- Account Closure – that’s right! If we want to move to a new HSA provider, expect a cost to get out of your “contract.”
- Debit Card Replacement – lose your card, it’s going to take time and money to get it back
Common HSA fees can steal money from your health savings. Let us help you understand costs you can watch out for when evaluating your current or future HSA provider.
Why you should use your account to save for retirement
The average couple who turned 65 in 2020 could expect to spend roughly $300,000 on health-related expenses during their golden years. That’s outside of any other costs like housing, food and utilities. If you’re not 65, you should know that inflation on healthcare costs is about 70% higher than inflation for general goods. So you'll likely have to save much more. Now, you could just throw all your money into your 401k or IRA. But once you start taking disbursements, you have to pay income tax on the money you receive.
That’s not the case with an HSA. HSAs have a triple tax advantage. That means your deposits, their growth and the withdrawals you make for qualified medical expenses are tax-free. There are also no required minimum withdrawals at age 71 like with other retirement accounts.
If you’re worried you might save too much for healthcare, there’s good news! At age 65, you can take withdrawals for anything. You’ll just have to pay income taxes on any money that wasn't used for qualified health expenses.
How HSA investments work
Luckily you don’t need any financial expertise to invest your HSA deposits. You just need to find the right account and follow some basic investment advice.
Step 1: Choose the right account
You want an HSA with no fees or required investment thresholds. Roughly 16% of all HSAs do not require fees or investment thresholds while about 53% require a threshold between $1 and $1,000. The rest require you keep more than $1,000 in your cash account. You also want to choose an HSA administrator that makes it easy to manage your investments.
Step 2: Choose an investment strategy
Your investment strategy for your HSA should mirror your strategy for your other retirement accounts. That means you want a diversified portfolio with a risk profile that’s appropriate for your age.
Step 3: Choose your investments
When looking at your investment options, you want to choose good growth stock mutual funds. You also want to spread your money across four categories: growth, growth income, aggressive growth and international.
Step 4: Fund your account
When your HSA allows you to invest your deposits, they will have two accounts for you. The first is your cash account. This is where the transactions take place. It's where you deposit your contributions and where you withdraw from to pay your health expenses and reimbursements. The second is your investment account. To invest your HSA contributions, you must move money from your cash account to your investment account.
If you know you have near term medical costs, keep enough in your cash account to cover those expenses and invest the rest.
How minimum investment thresholds cost you thousands of dollars
- You’re able to invest less money. When your HSA requires an investment threshold, that means you must have a minimum cash balance in your cash account before you can transfer money to your investment account. So if the investment threshold is $1,000 and you have $2,000 in your account, you can only invest $1,000, or 50% of your balance. As you can see from the table below, that costs you $3,000 in savings over the lifetime of the account.
- You have less flexibility in managing your investments. You’ve heard the mantra buy low, sell high. And that is sound investment advice. However, if your HSA requires an investment threshold, you won’t be able to buy as many cheap stocks when the market is down (i.e. “low”). That means you might miss out on good investment opportunities, and make less money in the long run.
- It could also mean your HSA administrator will sell some of your investments if your cash balance dips below the threshold. This could cost you money if prices have dropped from when you originally purchased your investments.
- Inflation will eat into your savings. If your HSA requires a $1,000 investment threshold, you might think, “It’s not like I’m losing that $1,000 it if I can’t invest it.” Unfortunately, you are. Inflation is the concept that prices rise over time, meaning $1 will buy less tomorrow than it will today.
The difference between a $1,000 minimum fee and a provider with no minimums on total asset growth is 192%
Historically, annual inflation in the US hovers around 2%. Which means your $1,000 from this year will only buy $980 worth of goods next year. And $960.40 worth of goods the year after that.
On the other hand, the average annual return for mutual funds is about 9.5%. Which means your $1,000, invested, can buy $1,075 worth of tomorrow’s goods once you account for inflation.
If you can open and invest an HSA that doesn’t have any investment thresholds, you could greatly improve your financial position at retirement. If you have any questions about thresholds for your specific HSA, reach out to your HR department.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.