Are you currently enrolled in a high-deductible health plan (HDHP)? If so, there’s a silver lining: You may be eligible to open a health savings account, or HSA.
To be eligible, you must not be enrolled in Medicare, claimed as a dependent on someone else’s tax return or have other health coverage, barring a few exceptions.
Additionally, your HDHP must have a minimum and maximum annual deductible of $1,500 or $7,500, respectively, for self-only coverage, or $3,000 or $15,000 for family coverage.
Assuming these qualifications are met, opening an HSA can unlock a new range of tax savings and investment opportunities.
“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.
This makes HSAs not only a tool for health care cost savings but also a strategic component of a broader financial plan alongside the usual Roth IRA and 401(k), especially for those looking to maximize their tax-advantaged investing opportunities.
Contrary to what the name might suggest, an HSA is actually highly versatile and can hold a variety of investment options beyond just traditional savings products like certificates of deposit or cash.
“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.”
For 2024, if you qualify for an HSA, you can contribute up to $4,150 for self-only coverage and $8,300 for family coverage. Additionally, investors aged 55 and older are allowed an extra $1,000 as a catch-up contribution. Putting these contributions to work in the right funds can mean the difference between investment growth or losing value to inflation long-term.
Here are six of the best funds to add to an HSA, if offered by a plan provider.
|Vanguard Wellesley Income Fund Investor Shares (ticker: VWINX)
|Vanguard Balanced Index Fund Admiral Shares (VBIAX)
|Fidelity Freedom Index 2050 Fund Investor Class (FIPFX)
|Schwab S&P 500 Index Fund (SWPPX)
|Fidelity Money Market Fund (SPRXX)
|Schwab U.S. Treasury Money Fund — Investor Shares (SNSXX)
Vanguard Wellesley Income Fund Investor Shares (VWINX)
When it comes to screening for the best HSA fund picks, Jordan Taylor, independent financial advisor at Core Planning, suggests looking for these features: “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 fairly conservative fund that ticks all of these boxes is VWINX. This Vanguard fund features an allocation of one-third in dividend stocks and two-thirds in investment-grade bonds. Since its inception in July 1970, VWINX has provided a strong 9.2% annualized return. The fund’s high 4.1% 30-day SEC yield makes it great for the tax-sheltered nature of an HSA. VWINX charges a 0.23% expense ratio.
Vanguard Balanced Index Fund Admiral Shares (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 great example of a fund that offers both high diversification and low fees is VBIAX, which holds a portfolio of 60% stocks and 40% bonds for a 0.07% expense ratio.
The stock side of VBIAX tracks the CRSP U.S. Total Market Index, whereas the bond side tracks the Bloomberg U.S. Aggregate Float Adjusted Index, providing growth and stability, respectively. Over the trailing 10-year period, this fund has returned an annualized 7.7%. However, as a Vanguard Admiral Shares fund, it does require an initial $3,000 minimum investment.
Fidelity Freedom Index 2050 Fund Investor Class (FIPFX)
“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 Taylor. “By investing in these funds, investors can better match their portfolio’s level of risk to their time horizon, or when they expect to cash out and spend their investment.”
Investors who are looking to retire around 2050 can use a target-date fund like FIPFX in their HSA. This fund will automatically adjust its allocation of stocks and bonds to become more conservative as the target date nears. This can be beneficial for older investors who prioritize protection of principal as health care issues become more likely with age. FIPFX charges a 0.12% expense ratio.
Schwab S&P 500 Index Fund (SWPPX)
“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. According to the latest update from the S&P Indices Versus Active, or SPIVA, scorecard, 92.2% of all U.S. large-cap funds failed to beat this index over the last 15 years.
To track the S&P 500 cheaply, investors can buy SWPPX if it is offered in their HSA. This mutual fund holds all the constituent stocks comprising the S&P 500 to replicate its returns and risk. It charges a very affordable 0.02% expense ratio, which works out to just $2 in annual fees for a $10,000 investment. It also has no minimum investment requirements, making it very accessible.
Fidelity Money Market Fund (SPRXX)
“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?”
Investors who have ongoing health issues or near-term anticipated medical expenses may wish to allocate their HSA for capital preservation. A great fund to use for this role is SPRXX. As a money market fund, SPRXX is designed to maintain a stable net asset value, or NAV, of $1 per share and pay out monthly interest. Currently, investors can expect a 5.1% seven-day SEC yield and a 0.42% expense ratio.
Schwab U.S. Treasury Money Fund — Investor Shares (SNSXX)
“If you know you will need to spend some of the funds in an 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.” For another safe but more affordable alternative to SPRXX, consider SNSXX.
This money market fund from Schwab holds a portfolio of U.S. government-issued Treasury bills, which possess a combination of high liquidity, excellent credit quality and short maturity. Because short-term rates are elevated right now, investors who buy and hold SNSXX can expect a decent seven-day SEC yield of 5%. The fund charges a 0.34% expense ratio and comes with no investment minimum.
More from U.S. News
Update 01/23/24: This story was published at an earlier date and has been updated with new information.