In­vest­ing with HSA As­sets

In­vest­ments as a per­cent­age of HSA as­sets are growing, but clients need a com­plete pic­ture of risks and re­wards.

Financial Planning - - Contents - BY CHARLES PAIKERT

In­vest­ments as a per­cent­age of HSA as­sets are growing, but clients need a com­plete pic­ture of risks and re­wards.

Should clients use the money in their health sav­ings ac­counts for long-term in­vest­ing?

Bol­stered by a triple tax ad­van­tage (tax-free con­tri­bu­tions and growth and tax-free with­drawal if used for qual­i­fied med­i­cal ex­penses), the al­lure of HSAS as a long-term in­vest­ing ve­hi­cle is growing.

Over $8 bil­lion in health sav­ings ac­counts is now used for in­vest­ments, rep­re­sent­ing 18% of to­tal HSA as­sets, up from $1.7 bil­lion, or 11% of to­tal HSA as­sets, just five years ago, ac­cord­ing to Devenir Re­search.

“In­vest­ments have be­come a big com­po­nent of HSAS,” says Devenir’s pres­i­dent and co-founder, Eric Rem­jeske.

“Aware­ness that health sav­ings ac­counts can be used for in­vest­ing is growing, and our pro­jec­tions for this year and 2019 show that in­vest­ment dol­lars will be an even larger per­cent­age of HSA as­sets,” ac­cord­ing to Rem­jestke.

The long-run­ning bull mar­ket is mak­ing it more tempt­ing than ever for clients to try to re­al­ize long-term tax-free earn­ings growth within HSA ac­counts.

That strat­egy can of­ten make sense, fi­nan­cial pro­fes­sion­als say, but fi­nan­cial ad­vi­sors should make sure clients fully un­der­stand the range of their op­tions.

“Clients will have vary­ing goals, and it’s ex­tremely im­por­tant to ed­u­cate ac­count hold­ers about what HSAS can and can’t do, be­cause it can be con­fus­ing,” Rem­jeske says.

“Gen­er­ally, the triple tax ad­van­tage out­weighs the lim­i­ta­tions of the [HSA] ac­counts,” says Jeff Birn­baum of On Point Fi­nan­cial.

To be sure, the start­ing point for any HSA dis­cus­sion must be a client’s par­tic­u­lar cir­cum­stances.

“I’m very bullish on the po­ten­tial of HSAS for in­vest­ing, but each client has to be viewed on a case-by­case ba­sis,” says Jeff Birn­baum, a fi­nan­cial plan­ner with On Point Fi­nan­cial in New York City.

“I have a new client who is mak­ing a lot of money, has ex­cess cash flow and min­i­mal med­i­cal ex­penses,” he notes. “For him, it made sense to put the max­i­mum amount into an HSA and in­vest the money as a tax-free com­ple­ment to his other in­vest­ments.”

Birn­baum is care­ful to note that HSAS have higher fees and fewer in­vest­ment op­tions than another tax-fee ac­count like an IRA.

Nonethe­less, he says, “Gen­er­ally, the triple tax ad­van­tage out­weighs the

lim­i­ta­tions of the ac­counts.”

The case for us­ing HSA ac­counts as a ve­hi­cle for re­tire­ment sav­ings was bol­stered by a re­cent Fi­delity study show­ing that an av­er­age re­tired cou­ple age 65 in 2018 would need ap­prox­i­mately $280,000 in after-tax sav­ings to cover health care ex­penses in re­tire­ment, says Jon Robb, se­nior vice pres­i­dent of re­search and tech­nol­ogy for Devenir.

Ad­vi­sors can re­mind clients that if they have enough cash flow, they can pay cur­rent med­i­cal ex­penses out of pocket, Robb says, and pay them­selves back years later out of their HSA ac­count if they keep the re­ceipts.

Peter Stahl, pres­i­dent of Be­drock Busi­ness Re­sults, says he gen­er­ally rec­om­mends us­ing HSA ac­counts for re­tire­ment sav­ings.

“This strat­egy re­quires some ba­sic fi­nan­cial plan­ning, as a bud­get and emer­gency fund need to be in place to fund cur­rent med­i­cal ex­pen­di­tures with­out touch­ing the HSA,” Stahl says. “This then al­lows the HSA to be in­vested ac­cord­ing to the num­ber of years to re­tire­ment and risk tol­er­ance.”

Janet Stan­zak, prin­ci­pal of Fi­nan­cial Em­pow­er­ment in Bloom­ing­ton, Min­nesota, de­scribes her ver­sion of this strat­egy as “a five-year mantra.”

“Don’t in­vest in the mar­ket if you’ll need the dol­lars within the next five years,” says Stan­zak, a for­mer chair­woman of the board of the Fi­nan­cial Plan­ning As­so­ci­a­tion. “Most mar­ket cy­cles are three to five years so this avoids hav­ing to sell when the mar­ket is down.”

If clients don’t like the op­tions in their em­ployer’s HSA, “they can trans­fer the funds as soon and as fre­quently as they de­sire.”

Clients who are in good health and still work­ing are ad­vised to use ex­cess cash flow to cover cur­rent med­i­cal de­ductibles and needs so the HSA can be in­vested and grow, Stan­zak says.

“We en­cour­age clients, while work­ing and in early re­tire­ment, to hold off as long as pos­si­ble be­fore they use their HSA since they’ll likely need every dol­lar of it for health care needs as they age,” she ex­plains.

Another op­tion for clients is to have enough funds avail­able in their HSA cash ac­count to cover out-of-pocket ex­penses and their de­ductible, and then in­vest the ad­di­tional sav­ings, says Chad Wilkins, pres­i­dent of HSA Bank, which is a ma­jor health sav­ings ac­count plan provider.

“Once a safety net is in place, sav­ing and in­vest­ing in the HSA is the best value for clients since funds are con­trib­uted tax-free, earn­ings from in­vest­ments are tax-free, and qual­i­fied health care ex­penses can be paid tax-free,” Wilkins says. “Ad­di­tion­ally, funds can be with­drawn for any pur­pose after 65 at the same tax rate as funds in a 401(k).”

Ad­vi­sors can help clients de­ter­mine “the amount needed for health care in re­tire­ment, how much clients should be in­vest­ing, and what in­vest­ment ac­counts clients should be pri­or­i­tiz­ing in or­der to meet their goals and fu­ture fi­nan­cial needs,” Wilkins says.

Trans­fer­ring Funds

Ad­vi­sors can also let clients know that if they don’t like the sav­ing and in­vest­ment op­tions in the HSA plan of­fered by their em­ployer “they can trans­fer the funds as soon and as fre­quently as they de­sire,” Stahl says.

“Be sure to ask about pos­si­ble trans­fer fees to make pru­dent de­ci­sions on the fre­quency of trans­fers,” he says. “It is also im­por­tant to re­al­ize that an em­ployer can change their HSA cus­to­dian and of­fer mul­ti­ple HSA cus­to­di­ans to em­ploy­ees.”

And of course, ad­vi­sors need to re­mind clients that ba­sic in­vest­ment prin­ci­ples also ap­ply to HSA ac­counts.

“You need to ex­am­ine risk level, di­ver­si­fi­ca­tion and as­set al­lo­ca­tion,” Birn­baum says. “An in­vest­ment in an HSA ac­count can lose money. It can be a neg­a­tive just like any other type of in­vest­ment ac­count.”

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