Health savings accounts are advantageous.
Health savings accounts, or HSAs, can be a great tool to add to your investment strategy. Along with the well-known Roth IRA and the 401(k), the HSA rounds out the U.S. retirement account landscape. A well-funded HSA can help investors pay for costly medical procedures without dipping into other retirement accounts. After age 65, you can also withdraw from an HSA for non-medical expenses without incurring the 20% tax penalty. For young investors in the accumulation phase, consistently putting money toward an HSA can help reduce income tax, as contributions are 100% tax-deductible. Because the growth in an HSA is tax-free, investors with a long time horizon and high risk tolerance should consider optimizing the investment mix in an HSA for growth. If you have anticipated medical expenses in the short term, then lower-risk investments could be ideal as well. Here are six of the best funds to add to your HSA.
Vanguard Target Retirement 2065 Fund (ticker: VLXVX)
Young investors in good health may wish to opt for a more aggressive asset allocation, targeting long-term growth potential. In practice, this means a high allocation of stocks. A great set-it-and-forget-it option is a target-date fund like VLXVX, intended for investors looking to retire around 2065. This fund contains a pre-determined mix of international stocks and bonds which automatically adjusts over time to become more conservative, an automatic rebalancing known as a “glide path.” Right now, VLXVX is approximately 90% stocks and 10% bonds, which is an aggressive allocation best suited for young investors. The fund requires a minimum $1,000 investment and charges a 0.08% expense ratio.
Vanguard Target Retirement 2025 Fund (VTTVX)
On the other hand, older investors looking for a target-date fund may wish to consider one with a more conservative asset allocation. For these investors, safety of principal and steady income tends to trump growth, so a higher allocation of bonds may be more desirable. Because health concerns tend to pop up more frequently as investors age, a more conservative asset allocation can provide more predictable investment results and cash flows. A great option for those retiring around 2025 is VTTVX, which holds global stocks and a basket of bonds and Treasury-inflation protected securities, or TIPS, in a 55/45 allocation. VTTVX also requires a $1,000 minimum investment and charges a 0.08% expense ratio.
iShares Core S&P Total U.S. Stock Market ETF (ITOT)
Some investors may prefer to “slice and dice” their portfolio’s asset allocation to their own liking. Investors who opt for this approach can use low-cost, broad-market exchange-traded funds, or ETFs. A great pick for U.S. stocks is ITOT, which tracks the S&P Total Market Index. This ETF provides exposure to over 3,300 U.S. stocks from all 11 market sectors and is weighted by market capitalization. It’s a great way to capture the returns of the overall U.S. stock market at a low cost via a single ticker. In terms of fees, ITOT charges a rock-bottom expense ratio of 0.03%. Unlike mutual funds, the minimum required investment in ITOT is simply the price of a single share, was $88.68 at market close on Jan. 13.
iShares Core U.S. Aggregate Bond ETF (AGG)
Older investors looking for a complement to ITOT in an HSA can consider AGG, which tracks the Bloomberg U.S. Aggregate Bond Index. AGG is highly diversified, holding more than 10,600 bonds of all maturities. More than 77% of the ETF is held in AAA-rated government Treasurys or agency bonds, while the rest is held in investment-grade corporate bonds rated BBB and above. AGG doesn’t track the entire U.S. bond universe given that it excludes high-yield bonds and TIPS, but it’s more than enough for the average investor. A healthy allocation to AGG has historically helped reduce portfolio volatility and drawdowns, with the exception of years like 2022 when interest rates rose sharply. The ETF charges a 0.03% expense ratio.
iShares Core Moderate Allocation ETF (AOM)
ETF investors desiring maximum simplicity with their HSA investments can opt for asset allocation ETFs. These are all-in-one ETF portfolios professionally managed on your behalf by a fund manager. They contain various stock and bond ETFs held in common preset allocations. Unlike target-date funds, asset allocation ETFs are static, meaning that they do not change their investment mix over time. An option suitable for middle-aged investors is AOM, which is currently roughly 60% stocks and 40% bonds. The ETF is globally diversified when it comes to both equity and fixed-income allocations and will periodically rebalance back to its target mix. AOM charges a 0.15% expense ratio.
Vanguard Balanced Index Fund (VBIAX)
For the mutual fund equivalent of an asset allocation ETF, investors can buy VBIAX, which offers a classic balanced portfolio of roughly 60% U.S. stocks and 40% U.S. bonds. The advantages of a mutual fund include the ability to make purchases in any dollar increment desired, which can help automate contributions more effectively. Unlike the previous Vanguard target-date funds, VBIAX will always rebalance back to a 60/40 allocation and will not become more conservative as time goes on. The fund requires a $3,000 minimum investment and charges a 0.07% expense ratio. Historically, VBIAX has returned an annualized 6.1% since its inception in November 2000.
6 funds to add to your HSA:
— Vanguard Target Retirement 2065 Fund (VLXVX)
— Vanguard Target Retirement 2025 Fund (VTTVX)
— iShares Core S&P Total U.S. Stock Market ETF (ITOT)
— iShares Core U.S. Aggregate Bond ETF (AGG)
— iShares Core Moderate Allocation ETF (AOM)
— Vanguard Balanced Index Fund (VBIAX)
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6 Funds to Add to Your HSA originally appeared on usnews.com
Update 01/17/23: This story was previously published at an earlier date and has been updated with new information.
