Health Savings Account (HSA) Investment Strategy

On the other hand, investing the fund in a diversified portfolio may yield longer-term returns. Especially for investors with longer time horizons, there are opportunities to invest in assets such as equity funds. High short-term volatility can lead to higher long-term returns.

HSA’s tax benefits make it even more valuable for your investment. A Morningstar analysis found that in 20 years he could triple the money invested in the HSA, with balances 18% higher than the same assets in 401(k) or IRA accounts, and assets in taxable accounts. more than 30% higher than

How do you invest in HSA?

You invest in HSA through your account manager just like you would a 401(k) account. Most custodians offer a menu of investment options such as index funds and exchange-traded funds to choose from. Some HSAs allow for self-directed investment. This means account holders can use their accounts to invest in most types of securities, including individual stocks, bonds, and alternative investments.

Which HSA investment strategies can I use?

As with any other type of investment account, there are several strategies you can use when it comes to investing in HSA. These depend on the options available to the account holder.

Go all in with the Target Date Fund.

Similar to retirement accounts, many HSAs offer Target Date Funds (TDFs) as an investment option for participants. These funds contain a mix of stocks, bonds, and other types of investments selected based on their expected retirement dates. As time goes on, move to more conservative assets to reduce the risk of loss as the date approaches. It is intended for investors to put the entire balance into the fund and does not require rebalancing by the account holder.

Allocate to multiple funds.

If your HSA offers a variety of equity and fixed income indices, exchange-traded funds and mutual funds, we can help you determine the best allocation for your financial situation. These funding options often resemble those found in a typical 401(k) retirement plan.

Build custom portfolios.

Most employer-linked HSA accounts only offer fund or cash investment options, but there are also self-directed HSAs that allow account holders to invest in the same way as self-directed IRAs.

The IRS allows HSA rollovers once a year, so clients interested in building a custom portfolio can voluntarily transfer funds from their work account if they are interested in investments not available through their work HSA. can be moved to a more efficient HSA. Alternatively, the client can donate cash directly to her HSA unplanned and deduct the donation on her tax return.

What are the potential drawbacks of HSA investments?

While there are many benefits to investing with HSA, there are also drawbacks to consider.

Accounts can lose value over time.

As with any investment strategy, there is always the potential for portfolios to lose value during periods of market volatility. People who need HSA funds to cover current medical expenses or expected medical expenses in the next few years should keep some or all of their HSA in cash. Or you might work to build an emergency fund with enough money to cover at least the HDHP annual out-of-pocket cap ($15,000 for families and $7,500 for individuals in 2023).

Fees may be higher.

Fees associated with HSA can be higher than other types of retirement savings. According to a Plan Sponsor Council of America report, most employers pay an account maintenance fee, averaging less than $3 a month. According to Morningstar, the average HSA also has six to 10 additional his one-off fees.

Your account balance may become too large.

If the investment works very well over the long term, the account holder may have more money than they can use for medical expenses. In this case, for non-medical purposes, he can still make withdrawals after age 65 without penalty, but the distributions are subject to regular income tax, so he’s basically a 401(k) withdrawal. treated the same.

The bigger downside of having too much money in your HSA account is that if you die and want to pass your assets on to someone other than your spouse, you are likely to be charged a hefty tax bill. This is because HSA ownership can easily be transferred to the designated beneficiary spouse, but the account must be converted to another heir’s regular taxable account and claimed as taxable income. is.

Here’s how to get started with HSA investing.

Getting started with HSA investing is fairly easy. Most of his HSA’s have an online portal, usually accessible through the employer’s benefits website. Account owners can change account assignments. If your HSA does not offer an investment option, you can open an account with an outside brokerage firm, roll over your funds and start investing.

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