- Use Your HSA as an Investment Vehicle – How to Maximize Your Health Savings Account Value
- Defining the “Best”
- The Best HSAs for Investing in 2019
- What I Considered
- Frequently Asked Questions
- Investment Options
- First Dollar Investing
- Ease of Use/Customer Service
- What I Didn’t Consider
- Interest Rates
- Quantity of Investment Options
- Frequently Asked Questions
- Trading Fees
- #1 Lively
- The Best Health Savings Account
- How To Compare HSA Fees, HSA Investment Options And More
- #2 The HSA Authority
- PayFlex - Investing in Your HSA high
- Best investment option in hsa payflex
- #3 Everyone Else
- Open Enrollment Toolkit
- Health Savings Account (HSA)
Use Your HSA as an Investment Vehicle – How to Maximize Your Health Savings Account Value
The vast majority of people with Health Savings Accounts (HSA) use them as pass through accounts for the tax advantages they provide. Most people defer taxation on their earnings by contributing to the HSA, place the money in a savings account, and later take it out tax-free for qualified medical expenses.
The standard use of an HSA misses an opportunity to invest these funds which can accumulate years or decades of tax-free growth.
This sounds great but can be challenging.
Because so few people invest their HSA accounts, this is a small niche market.
The big brokerages don’t fight for a piece of this small pie. Many companies that offer HSAs have substandard investment options and high fees. This leaves few good options to invest an HSA.
I recently opened an HSA and searched for the best place to invest my money.
This is what I found.
Defining the “Best”
Best is a subjective word, and it depends on your individual needs. My objective is to provide a resource for those wanting to use an HSA as an investment vehicle.
The Best HSAs for Investing in 2019
I spent hours researching this topic and narrowed choices to a couple great options.
If you are not clear on the advantages of investing in an HSA, first read my earlier post on the topic and the robust conversation in the comments to determine if this is a good choice for you.
There are articles reviewing a large selection of HSA providers.
Some that I found particularly thorough are Morningstar’s “The Best HSA Investment Accounts”, Mom and Dad Money’s “How to Find the Best Health Savings Account”, and White Coat Investor’s “The Best Health Savings Account”.
The above articles are provided as a resource for those of you who prefer to use your HSA in a more traditional manner, disagree with my criteria for defining the best HSA, or are looking for a more comprehensive review of HSA providers.
What I Considered
I hate investing fees that eat away at returns, paying particular attention to avoid assets under management (AUM) fee structures.
Understanding that investment companies need to make money, I favor companies that charge a flat fee.
If it costs a fee of $50 to service an investment account of $6,900 (the 2018 HSA contribution limit for a family), this equates to an expense of .7% of investments.
Assume investments and additional contributions grow to $100,000 over the next decade. It is no more work to service the larger account.
Frequently Asked Questions
The same $50/year flat fee would be only .05% on that sum.
Contrast this with a company that charges .5% to manage your HSA, a common fee structure among HSA providers. It would cost $34.50 in the first year based on the same $6,900 balance, an initial savings of $15.50.
However, on that same $100,000 investment down the road, the .5% management fee would equate to an annual fee of $500/year.
When assessing investment options, pay attention to the impact of recurring fees that increase over time, as opposed to short-term savings of a few dollars.
The goal is to grow investments. A flat fee structure, where fees don’t grow with investment balances, benefits investors over time.
I eliminated providers which use an AUM structure, even if some were cheaper initially. This narrowed the list quickly.
I hate nickel and dime fees to open, close, or transfer accounts, so I downgraded those with opaque or complicated fee structures.
This further narrowed the list.
I prefer a buy and hold, passive approach to investing. My rankings favor companies that provide access to low-cost index mutual funds or exchange traded funds (ETF) consistent with my investment objectives.
If you have a more exotic or active investment approach, other providers may better serve your needs.
First Dollar Investing
Many HSA providers require you to keep a minimum balance in a savings account with low interest rates.
This causes cash drag, which is essentially another expense. Assume you are required to keep $1,000 in a savings account paying only .5% or $5/year. If you can invest that $1000 at an average annual return of 6% it would generate $60/year, a difference of $55 annually.
I favor HSA providers that allow first dollar investing. This avoids the drag of having money sitting in a savings account.
Ease of Use/Customer Service
As a do-it-yourself investor, I value a simple, easy to understand website.
An easy to navigate investment platform is also important.
A responsive team able to answer questions and help me navigate the investing process and accessing funds is a bonus.
I pay particular attention to how I am treated prior to becoming a customer. If a company is not responsive when they are vying for my business, I have little confidence they will be responsive when I am a customer needing help.
What I Didn’t Consider
I plan to keep my HSA fully invested. Interest rates of savings accounts are irrelevant with this approach.
If you prefer to keep some money in a savings account, then you can find superior interest rates elsewhere.
Quantity of Investment Options
Several HSA ratings compared the number and variety of investing options available.
It’s challenging to build a substantial balance in an HSA.
Frequently Asked Questions
For most people, an HSA will be a small percentage of their overall portfolio and can be held in one or two funds.
I didn’t give extra weight to companies that offered many investing options over those that offered a couple that fit my criteria of broad based, low-cost, passive index mutual funds or ETFs.
My plan is to do one transaction/year in my HSA by contributing the maximum allowable amount as a lump sum.
This approach makes trading fees and commissions of minimal concern.
If you favor a more active investing approach or will dollar cost average contributions over the year, these fees may be of greater importance to you.
Given those criteria, here are the best places to invest an HSA.
I chose to open my HSA with Lively, a recent startup partnering with Choice Financial bank.
Lively had several features that pushed them to the top of my list.
Fees are extremely low, transparent, and prominently displayed on their website.
Opening and holding the account is free. Investing costs $2.50/month ($30/year).
Investing is done using TD Ameritrade.
The Best Health Savings Account
They offer low-cost commission-free ETF options. You may also elect to pay $6.95/trade to select from their full investment line-up.
Lively’s customer service team was also far and away the most responsive and helpful of any company I researched.
My primary concern with Lively is that they are a new, small, startup company. There is no guarantee their business model is viable in the long-term. Fees could increase or they could exit the market.
Ultimately, I felt comfortable enough to give Lively my business.
How To Compare HSA Fees, HSA Investment Options And More
Even if Lively fails, my deposits pass through FDIC insured Choice Financial bank and my money is invested at TD Ameritrade.
#2 The HSA Authority
The HSA Authority is another excellent option for investing an HSA.
PayFlex - Investing in Your HSA high
They are operated by Old National Bank with investments through Devenir, a registered investment advisor.
The base cost of having your account with The HSA Authority is only slightly more than Lively’s.
An account costs $36/year and their fees and conditions are prominently displayed on their website.
Best investment option in hsa payflex
I liked several features of the HSA Authority better than Lively. The HSA Authority offers an assortment of low-cost Vanguard mutual funds among their investment options. For anyone who must have Vanguard funds or prefers index mutual funds to ETFs, this option is less expensive than Lively.
The HSA Authority offers access to their investment platform once you have $1,000 to invest, and they do not require you to keep anything in a savings account once you begin investing.
I ultimately favored Lively because they had superior customer service, but I don’t think you would go wrong selecting to invest your HSA with either of these providers.
#3 Everyone Else
After sifting through HSA providers while researching this topic, I found Lively and The HSA Authority head and shoulders above everyone else for investing an HSA account.
Although many companies offer HSA accounts, none offer the combination of low fees, passive index investing options, and first dollar investing like these two. Lively’s responsive customer service team pushed them to the top of the list and is why they earned my business.
[Contributing Editor Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41.
Open Enrollment Toolkit
After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet?
Chris' writing has been featured in MarketWatch, Doughroller, Business Insider and RockStar Finance. He is also the primary author of the forthcoming book Choose FI: Your Blueprint to Financial Independence. You can reach him at [email protected].]
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Health Savings Account (HSA)
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