Should you invest your HSA? How do you know which HSA is best? Read the ins and outs of the HSA, and how to hack it as a secret retirement account! | MissFunctional Money

A few months ago, I wrote a post defining health savings accounts, and the basics of how they can serve you.

OK, so you’ve done your research, talked to your provider, tried not to visibly nod off in your company's open enrollment review snoozefest. You’ve decided, for whatever reason, that a high-deductible health plan (HDHP) is right for you/your family. You’ve seen “HSA hack” floating about the blogosphere, but you aren’t sure how to tap into that. Or if you even want to.

You’re in the right place!

This isn’t an exhaustive analysis that breaks down each and every possible situation or comprehensively compares fees. This HSA post is more of a jumping off point so that you have an idea of the questions you should even be asking. Let’s dive in.

Before I married my husband, I didn’t know I should even be asking how I can hack an HSA to work as a “stealth retirement account.” Because I didn’t know what an HSA was. Must’ve missed that personal finance class in high school.

I still don’t have it all figured out, but at least I’m asking the right questions now. And I’m documenting them in the hopes that you never have to feel as small as I did when I Googled, “What is an HSA?”

Quick recap on the function of an HSA:

Your HSA’s main role is to act as a savings account that offsets the costs of a high-deductible health plans. There is no “use it or lose it” provision like with a flexible spending account, so the money in your HSA rolls over from year to year.

The contributions go in tax free.
The money grows tax free.
You can withdraw the money tax free when used on qualified health expenses.

Quick recap on the function of the HSA as a retirement account:

Instead of using your HSA for qualified medical expenses, you cashflow those costs, meaning you pay out of your regular ol’ savings account. If your HSA is smartly invested, it can stay put and continue to grow. More on that in a sec.

As a wise philosopher once said,

“There's no rule that says you have to take out the money at the time of your qualified medical expense, or that you have to pay it from the HSA within a certain amount of time. Essentially, as long as the qualified medical expense happened after your HSA was opened, you can withdraw money from the HSA to reimburse yourself 30 seconds or 30 years after the expense is incurred — it doesn't make a difference.”
— SC, HSAs Part 1

So, instead of paying for that $1,000-worth of contact lenses for the year out of your HSA, you pay out of pocket. Your $1,000 stays invested. It grows. You withdraw the new sum after age 65 with NO taxes and NO fees for qualified medical expenses (and you’re old now. There will be qualified medical expenses). Or, you get it with regular taxes taken out if you want to spend it on a boat or a self-steering lawn mower.

OK, recap over.

How do I invest an HSA?

Step 1:

How to ask your employer if you can open an HSA:
Is it just me, or does anyone else look forward to dealing with complicated HR conversations about as much as a root canal? I get panicky because I think I’m going to sound dumb or something.

But that’s so silly!

They are in HUMAN resources. I am a human. Therefore I qualify to ask for resources. (Beep boop, no I’m not.)

After a firm chat with myself about standing up for my own needs and not letting money or typo-ridden emails scare me, and that I really should stop leaving the dishes in the sink, I sent the following:

(Note: the graphic hack job subtle red marks are to protect my privacy/the name of my company.)

how to ask your employer if you can open an HSA to save more for retirement

Fun fact: I’ve never spelled ‘separately’ correctly on the first try a day in my life. And I used to be a proofreader. Neat!

The answer?

No.

My company “does not sponsor HSAs at this time, but you can open one on your own.”

After sending this courageous email, I ate ice cream as a prize I did some research and came up with the following:

The HSA belongs to the individual — not the employer — and any eligible individual may open an HSA, as long as they are covered under a high deductible health plan (HDHP).

Boom.

Your HSA is yours, regardless of your employment situation.

Don’t have an employer? It’s cool — really the only requirement here is that you have an HDHP. Employers that offer to contribute to actual health savings accounts through a third-party bank are likely doing so as part of the employee’s benefits package. For which they should feel #BlessedAndGrateful.

Mine doesn’t, but I am able to get in on my husband’s like the leech that I am.

Step 2: Open an HSA

After high-fiving yourself for talking to your HR department, the next logical step is to compare banking institutions that offer HSAs.

Here are some things you should consider when comparing the best HSAs for investing:

Yearly fees
What do they charge to manage your money? Most charge a monthly fee that totals somewhere in the neighborhood of $30-$75 per year. In general, yearly fees are something that make me roll my eyes and run away, but it’s worth it at a certain point. Don’t forget to factor in yearly “trade fees” and “closing fees” and other financial hogwash that will ultimately cost you money. But again, this nominal fee typically pays off.

RELATED READ: HSAs: What You Need to Know About Secret Retirement Accounts
Easily navigable website.
Let’s face it: It’s 2018 and I need my entire interaction with your website to be easy, pleasant and helpful. Banking institutions: Stop burying your personal account access point under complex sub-menus. Stop making it impossible for me to get an answer to my FAQ. And for the love, PLEASE make it easy to navigate. (And the room of UX designers gives a resounding AMEN!)
Same goes for your customer service. Are you helpful? Are you easy to get a hold of? Are you going to make me sit through nineteen hours of grainy violin music only to tell me every 30 seconds that my call is very important to you, and to please continue holding? It matters. I wish it didn’t, but it matters. Don’t make this process any harder than it needs to be.
First dollar investing
There are many factors to how much an HSA account will cost you to invest besides fees, like how high the threshold is to invest. In other words, how much money do you have to have in the account before you can invest it? Though some accounts allow you to invest the first dollar, many have a “threshold” of something like $1,000-2,000 before you can invest, and others require that you keep certain portion of your fund in “savings” (non-invested), even if you invest the rest.
Investment options
The account you choose will impact your options for investing. To be 100% transparent, I have no current desire to get fancy with this. I just want a low-risk Vanguard index fund that I don’t have to think about. And I don’t want it to cost me a lot.

Fees bad. Growth good. Nailed it.

In all seriousness, the White Coat Investor has done a lot of the legwork for us, and has a fairly comprehensive comparison of fees and investment options for HSAs.

It’s a great place to start if you aren’t sure where to find an HSA to invest.

Quick recap:

When researching which HSA is best for the purpose of investing, you need to hone in on finding the one with the lowest fees and the best investment options. Following that, find out what the investment threshold is. Finally, customer service and an easy-to-use website, while not critical, are a factor.

Step 3: Contribute

OK, ***sqqueerrrkkkkkkkeehhh***

“SC, you just started rambling about index funds. Back it up a bit”

Sure.

How do I contribute to my HSA?

You can contribute money to your HSA in one of two ways:

Automatic payroll deductions: Easy, peasy, brainless saving -- funds are moved from your paycheck, pre-tax, into an HSA. But you gotta hit up your HR lady again.
Direct contributions: You can manually add funds to your HSA online (or I think via check, but I’m actually having a hard time fact-checking that … ) or set up recurring contributions. choose to add funds to your HSA at any time. If these aren’t being deducted from your paycheck, they aren’t technically going in tax-free, but they can be deducted on your tax return.

How much can I contribute to my HSA?

(The maximum contribution amount for 2018 is:

$3,450 for an individual
$6,850 for a family

Note: If you are age 55 or older as of 12/31/2018, you may also contribute an extra $1,000 as a catch-up deduction.

Step 4: Invest

How to invest your HSA:

We already hit the high points when discussing how to choose the right HSA, but here’s the gist:

Once you’ve reached a designated threshold, you can invest your HSA (or a portion of your HSA) in mutual funds.

And when you set up your investment account, you have the option to choose how you want your HSA funds allocated among the available mutual funds. If you’re just starting out, this isn’t going to make or break you. Like most long-term investments, the important thing is that you simply START. You will have the capability of changing your investment elections and transferring funds down the line. (Though the limit on that probably varies by bank.)

While bank accounts, money markets, mutual funds and stocks are all on the “yes to invest!” list, here are things you are not allowed to invest your HSA money in: collectibles, art, automobiles or real estate.

Sorry, Cézanne.

Step 5: Chill.

OK, so you maintain enough cash in your regular savings account to cover regular and emergency health expenses, you contribute to an HSA and invest those funds, and then you relish in decades of tax-free investment growth.

Then, years later, you can then withdraw your big, fat HSA without a penalty tax or fee when you need to spend it on health expenses in your old age (or with regular tax if you want to spend it on a yacht instead).

Of course, this is a moot point because by the time I am 65, the standard trip to the doctor will be closing my eyes and asking my Virtual Brain Assistant to fetch the doctor, who will scan my body remotely and diagnose via the chip that Elon Musk tried to insert in my brain.

Siiiiike. Elon Musk can implant a chip into my cold, dead body, and only then.

Cool story, SC, but is your money where your mouth is?

Currently, our HSA is through Optum, which was previously a segment of Wells Fargo. (My husband used to have accounts with Wells Fargo before we had a come-to-Jesus meeting about their systemic corruption and tone-deaf advertising).

For now, we are sticking with the one we have, namely because we are literally still in the process of merging our finances. #Romance (If you’ve never had to legally change your name on what feels like every single document, ID, passport and license you’ve ever had in your whole life, you’ll just have to give us a pass. The Social Security Administration required my electric bill, my 4th grade report card and my left kidney to get my new name, but it’s fine. My husband didn’t have to wait in any long lines, but it’s fine. I’m fine. Really.)

And want to know a secret? We aren’t investing our HSA right now. Why? Well, see above about the joys of Marital Money Merging.

But here’s the other reason why we haven’t invested our HSA yet: It’s low. There’s not quite $5,000 in there. To some, that number is extraordinary, especially at a young age. But it just hasn’t been that long since we started REALLY working, and we are shoveling a large amount to student loans on the other end at the same time. So while we are contributing to our retirement accounts and the HSA, we are also aggressively paying down debt. Read: We’re trying our best, people.

Investing our HSA is on our list, though, and at the top!

Quick recap:

We currently have about $5,000 in our HSA. We haven’t been maxing out our HSA OR investing it because ugh, adulting, but we will start doing both once our finances are fully merged. Which, assuming all goes well, should be November 1.

Both of our deductibles for our HDHPs are $5,000, and we have plenty of cushion saved elsewhere before insurance kicks in should a tragedy occur. That way, we can completely cash flow our health expenses and invest our HSA. And then some time after that, we can finally retire to a goat farm where my husband goes fishing every day with our 19 dogs, and I spend my time healing injured sea otters and writing the next great American novel.

Perfect. Thanks, HSA!

We will likely stay put with Optum for the time being, but are considering changing over to Lively or HSA Authority.

Should we change? Convince me in the comments!

Disclaimer: Reminder that I am not a financial expert, I just ask a lot of questions and talk about robots. Don’t base your financial future entirely in someone who rambles about conspiracy theories and goats. Use this post as a tool and a resource to do some more research of your own! Here are a few other good places to start:

HSAs are Amazing Retirement Accounts ... Unless You Live in AL, NJ, or CA

High Deductible Health Plan vs PPO (HSA Explained)

The Problem with the HSA (Health Savings Account) Isn’t the HSA