Enrolled in a high-deductible health plan, or HDHP? For those with a large annual deductible of at least $1,500 for individuals or $3,000 for families, opening a health savings account, or HSA, could lead to additional savings and tax advantages. For those that qualify, an HSA possesses a unique set of features that make it a worthwhile consideration in addition to the usual 401(k) and Roth IRA.
“HSAs are popular investment vehicles for covering medical costs due in part to their triple tax advantage: contributions are deductible; investment growth is tax-deferred; and withdrawals are tax-free for qualified expenses,” says Sabino Vargas, senior financial advisor at Vanguard.
For those approaching retirement or expecting health issues, the tax-free withdrawals from an HSA can offer some peace of mind.
“People use HSAs to pay for all types of health care expenses, from over-the-counter medicines, menstrual care products, hearing aids, hospital services, lab fees, acupuncture, smoking-cessation programs and more, ” says William Sweetnam, legislative and technical director at the Employers Council on Flexible Compensation. For a full list, investors can refer to IRS publication 502.
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Like most retirement accounts, HSAs have contribution limits. “The amount of your contribution is limited to a certain dollar amount based on whether you have single coverage or family coverage,” Sweetnam says. For 2023, investors can contribute $3,850 for individual coverage, or $7,750 for family coverage. Once an investor hits age 55, they can contribute another $1,000 as a catch-up amount.
In summary, the contributions to an HSA can lower taxable income, grow tax-free and be withdrawn to pay for medical expenses without being taxed. However, they can also be used to augment traditional retirement accounts, especially for those in good health.
“An HSA can be used as an additional ‘off-label’ retirement account,” Vargas says. “For those already maximizing contributions to tax-favored retirement accounts, funding an HSA and treating it like a retirement savings account can allow those assets to grow as long as possible.”
Like any other retirement account, HSAs can hold a variety of assets, which include popular choices like mutual funds. “HSAs are administered by custodians, and each offers an investment lineup just like in a 401(k),” Vargas says. Investors can then pick and choose among the available options in their plan to create the optimal portfolio for their HSA.
Here’s a look at six of the best funds to add to an HSA:
| Fund | Expense Ratio |
| Vanguard Federal Money Market Fund (ticker: VMFXX) | 0.11% |
| Vanguard Target Retirement 2030 Fund (VTHRX) | 0.08% |
| Schwab Total Stock Market Index Fund (SWTSX) | 0.03% |
| Fidelity 500 Index Fund (FXAIX) | 0.015% |
| Fidelity Short-Term Bond Index Fund (FNSOX) | 0.03% |
| Vanguard Balanced Index Fund (VBIAX) | 0.07% |
Vanguard Federal Money Market Fund (VMFXX)
“Consider focusing on your risk tolerance as well as the expected timing of future health care expenses when choosing your HSA investments,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. “Are you comfortable with taking on higher volatility, or do you prefer to be more conservative? Do you have an expensive medical procedure planned?”
For older investors who may need to make a withdrawal to cover medical expenses in the near future, a money market ETF like VMFXX may be ideal. These funds are designed to maintain a constant net asset value, or NAV, by investing in high-quality, short-term fixed-income investments like U.S. Treasury bills and repurchase agreements. VMFXX pays a 7-day SEC yield of 4.8% and charges a 0.11% expense ratio, or $11 annually per $10,000 investment.
Vanguard Target Retirement 2030 Fund (VTHRX)
“Some investment funds will automatically tailor the mixture of stocks versus bonds over time, so that your funds in the HSA may be more easily spent in the future,” says Jordan Taylor, financial advisor at Core Planning. These are called target-date funds, and they hold a mix of stocks and bonds that automatically adjust over time to become more conservative for withdrawals.
For investors planning to retire or incur medical expenses in or around 2030, a good HSA holding could be VTHRX. This fund is currently 38% U.S. stocks, 26% international stocks, 25% U.S. bonds and 11% international bonds, which is a fairly balanced asset allocation. As 2030 moves closer, VTHRX will steadily increase its bond allocation. The fund charges a 0.08% expense ratio.
Schwab Total Stock Market Index Fund (SWTSX)
When screening for funds, Taylor offers some suggestions for how to look. “Funds with a positive trailing five- and 10-year return at a minimum are often good places to start, as are those with expense ratios below 0.5%. Look for straightforward funds with simple explanations, clear strategies and investment goals that you can easily understand,” he says.
A great example of such a fund is SWTSX. This fund tracks the Dow Jones U.S. Total Stock Market Index, a popular benchmark used to measure the performance of the overall U.S. stock market. With over 3,500 large-, mid- and small-cap stocks from all 11 stock market sectors, SWTSX offers high diversification. The index methodology also keeps portfolio turnover and fees low, at 2.4% and 0.03%, respectively.
Fidelity 500 Index Fund (FXAIX)
“Assuming you have at least 20 years until retirement, a good investment choice would be to buy a fund tracking a low-cost, broad-market index like the S&P 500,” says Georgia Bruggeman, founder and CEO of Meridian Financial Advisors LLC. “These types of funds tend to be low cost but beware of some brokers that may charge a commission or sales load to buy them.”
To track the S&P 500 index, investors can buy FXAIX, one of Fidelity’s most long-standing funds. Having been in operation since 1988, this fund has returned an annualized 10.4% as of March 31, 2023. Like many Fidelity funds, FXAIX charges no transaction fees and does not require a minimum investment. Best of all, it charges a rock-bottom expense ratio of just 0.015%.
Fidelity Short-Term Bond Index Fund (FNSOX)
“If you know you will need to spend some of the funds in a HSA for health care expenses within the next year, then consider leaving those funds either in cash equivalents or an ultra-short-term bond fund,” Bruggeman says. “The longer you can leave the money alone, the more risk you can take.”
In other words, investors should match the riskiness of their investments with their time horizon.
For investors looking for a slightly higher risk/return profile than money market funds, a short-term bond fund like FNSOX could make sense. While 63% of this portfolio is comprised of Treasury bonds, the remainder is held in higher-yielding investment-grade corporate bonds. Thanks to its indexing methodology, FNSOX manages to come in at a low expense ratio of 0.03%.
Vanguard Balanced Index Fund (VBIAX)
“When choosing which investments to use, cost matters, so consider a low-cost, diversified investment so that you can keep more of your investment returns,” Vargas says. “The lower the expense ratio, the harder your HSA can work for you.”
A cheap, highly diversified pick here is VBIAX, which offers the classic 60/40 portfolio allocation of stocks and bonds in a single ticker at a 0.07% expense ratio.
Currently, this mutual fund holds thousands of stocks and bonds tracking the CRSP US Total Market Index and Bloomberg U.S. Aggregate Float Adjusted Index, respectively. Aside from odd years like 2022 when stocks and bonds simultaneously performed poorly, 60/40 funds like VBIAX offer a great blend of risk and return. As of March 31, 2023, the fund has returned an annualized 6.3% since its inception in 2000.
[Read: How a Health Savings Account Can Help You Save for Retirement.]
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6 Funds to Add to Your HSA originally appeared on usnews.com
Update 04/13/23: This story was previously published at an earlier date and has been updated with new information.
