Investing Your HSA (and from Fidelity to Lively)

A Health Savings Account is a great way to pay for your health-related expenses.

An HSA is a tax-advantaged account that, in 2020, allows individuals to save up to $3,550 and families up to $7,100 tax-free. If you’re 55 or older, you may save an additional $1,000 in catch-up contributions. You may then spend those funds on your health-related expenses.

The requirement to open and contribute to an HSA is that you carry a high deductible insurance policy.

Many employers offer an HSA as part of their benefits package.

What you may not have known about HSAs – I didn’t until earlier this year – is that you can invest the funds in your HSA, and those funds may grow, tax-free, much like a Roth IRA.

The financial institution administering your HSA is who limits the investment options available to you.

For example, my employer-directed account pays me simple interest for the cash saved in my HSA. I’m then able to invest any amount over $1,000 in a pre-selected mutual fund. If I have over $10,000 in my account, I can link a full-brokerage account and will have access to self-directed stock investing.

These funds have the opportunity to grow, tax-free, over the life of the HSA.

What’s nice about an HSA is that some of the funds you remove from it – those to pay medical expenses – remain tax-free. It is the only method, I’m aware of, where funds remain tax-free from income – to gains – to withdrawal.

The main drawback of using an HSA is that if you make a nonqualified withdrawal before age 65, you will pay income taxes PLUS a 20% early withdrawal penalty. After the age of 65, nonqualified withdrawals are taxed as income but do not have a withdrawal penalty.

You cannot use your funds to cover the cost of premiums, including Direct Primary Care physicians, but this is probably less of an issue after the age of 65 when the withdrawal penalty ends.

Following the FIRE community on Reddit, I learned a small workaround for early withdrawal.

Medical expense reimbursements do not expire.

In 2020, I’ve spent about $1,200 on medical expenses. These include qualified items I’ve purchased at the store and a couple of visits to the doctor.

I am not required to reimburse these expenses from my HSA immediately. I can wait until I need the funds to do so.

Granted, you have to be able to absorb those expenses today, but if you’re able, those funds can remain in your HSA, growing, until the day you need them.

I track my qualified expenses in a spreadsheet and keep a physical and electronic copy of that expense because the IRS can audit your reimbursements.

Earlier I mentioned my employer directed HSA acts as a savings account up to $1,000, a mutual fund up to $10,000, then a self-directed investing after reaching $10,000.

Even under the family contribution of $7,100, it would take over a year for me to get to the self-directed investing level (I’m not currently a fan of interest rates or mutual funds). I was looking for an account I could open and immediately start investing my funds as I see fit.

You may have as many HSA accounts as you wish but combined, you cannot contribute more than the limit mention above. So I can have my HSA with my employer and receive my match, but I can also then have a personal HSA and fill it for the remainder.

So far, there isn’t a whole lot of options. This summer, I found and decided to go with Fidelity. They offer a personal HSA account that you may contribute to and then perform self-directed investing.

Unfortunately, their application asked for a mailing address (I keep a separate mailing and physical address). During the application review, Fidelity notified me they instead needed my physical address. After sending copies of my utility bill and government-issued identification, they still were not able to fully open my account, stating the issue with the address. After six months of back-and-forth with Fidelity, we broke up. The last customer service agent I spoke to said everything was in order with my documentation but didn’t know why Fidelity wouldn’t lift the restriction.

I have since moved to Lively.

The online application was super easy, and my account was up and running within four days. They partner with TD Ameritrade for their brokerage account, which is how you invest the funds you have with them. I haven’t seen a fee or charge for individual accounts as of this writing.

If you have an HSA with your employer, you may transfer the funds from your employer-directed HSA into your Lively HSA account (though it can take 2 to 6 weeks). I’ll likely pull those funds over once per year while filling it with personal contributions.

If you would like to give Lively a try, they’re currently offering up to $25 for new accounts.

It’s quick and easy.

Other services that provide personal HSAs include HSA Bank and Optum. I believe my local Central Bank said they could accomplish it, but it wasn’t quick, easy, or pretty. It would require “workarounds” in their computer system to open a personal HSA.

Be sure to check the investment options with the account you open. Some are limited in their choices, and though you can still move your funds later, you’ll save yourself time and headaches if you do your homework and make sure the account you are opening offers the choices you want.

Using my HSA as an investment vehicle won’t be taking the place of my 401k or my Roth IRA, but it is another tool I’ll happily employ to reach financial independence.

Photo by Jamie Street on Unsplash.

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