Use an HSA as an investment tool.
Health savings accounts have several benefits. For starters, individuals can lower their medical expenses and tax rate because contributions are tax free. Since HSAs also operate like individual retirement accounts, they are another way for people to increase their savings. The unused funds roll over each year, and individuals can tap into the money for nonmedical expenses after age 65. "Relative to an IRA, this is the best option one can have as you get both tax deductions from contributions and tax-free growth in capital gains or income," says Yale Bock, a portfolio manager for Interactive Advisors in Boston. Here are six mutual funds or exchange-traded funds that investors could add to an HSA.
JPMorgan Ultra-Short Income ETF (ticker: JPST)
HSAs are one tool to help save for surprise medical expenses and a vehicle to help with "growing the money you do save," says Daren Blonski, managing principal of Sonoma Wealth Advisors in California. "One never knows when they will encounter medical expenses. Making sure that an HSA is invested in a conservative fashion is important to grow while protecting the assets." One investment to consider is the JPMorgan Ultra-Short Income ETF. The fund offers a yield of 2.27%, "a far cry from most bank rates," he says. The fund has about $11 billion in assets under management and offers less volatility than "perhaps you might find by parking your HSA in something like dividend stocks," Blonski says. A relatively low expense ratio of 0.18% makes the investment appealing.
Invesco S&P 500 Pure Growth ETF (RPG)
An allocation to large-cap companies with pure growth factors will prove to be a "superior investment decision as the economy battles with the effects of COVID-19," says Andrew Smith, chief investment strategist of Delos Capital Advisors in Dallas. "We utilize the Invesco S&P 500 Pure Growth ETF to capture an allocation to companies that exhibit higher sales and earnings growth," he says. "RPG has produced an annualized total return of 12.78% over the last 10 years (as of April 30) compared to the SPY with 11.57%." The expense ratio is 0.35%. HSAs are a great multipurpose savings vehicle that not only offer triple tax advantages from tax-deductible contributions, tax-free growth and tax-free withdrawals for qualified medical expenses, but they also have the potential to become an enhanced IRA, Smith says.
Vanguard Balanced Index Fund Admiral Shares (VBIAX)
The Vanguard Balanced Index Fund Admiral Shares provides diversification and lowers the amount of risk by incorporating both stocks and bonds, while providing a reasonable 10-year return of 8.58% and a low cost with an expense ratio of 0.07%, says Stuart Michelson, a finance professor at Stetson University. The fund invests 60% in stocks and 40% in bonds and tracks two indexes that are broad barometers for the U.S. equity and taxable bond markets. Investors who are seeking both growth and income could also include this asset as a core holding in a portfolio, since it is less volatile than an all-equity fund.
Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)
The Vanguard Mid-Cap Index Fund Admiral Shares provides diversification and more growth opportunities. Mid-cap stocks can provide higher rates of return compared with large-cap companies that do not grow as quickly. One drawback to mid-cap stocks is they are more sensitive to interest rate changes and the economy and could have to cope with greater volatility. The 10-year return is 9.94% with an expense ratio of 0.05%. The initial minimum investment is $3,000, but an ETF version where only one share needs to be purchased is also available through Vanguard Mid-Cap ETF (VO). The fund provides better returns than a balanced fund. "The fund has very good returns in the current market environment and provides great diversification," Michelson says.
iShares Core S&P Total U.S. Stock Market ETF (ITOT)
The ITOT ETF provides exposure to the U.S. equities market from small-cap to large-cap stocks with a low expense ratio of 0.03%. The five-year return is 11.3%, while the 10-year return is 13.4%, nearly mirroring the ETF's benchmark index. Investors can max out their HSA and also take advantage of tax-deferred growth, says Chris Osmond, chief investment officer at Prime Capital Investment. Investors can invest their HSA funds in equities, ETFs or mutual funds to lower the cost of health-related expenses and create a bucket for deferred retirement funds.
iShares MSCI ACWI ETF (ACWI)
The ACWI ETF offers exposure to the global market for investors seeking a diversified basket of stocks of companies in both developed and emerging markets. The ETF has an expense ratio of 0.32% with a five-year return of 8.6%. Investors who do not plan on having to spend money on major medical procedures could invest a larger percentage in equities, says Viraj Desai, senior manager of portfolio construction at TD Ameritrade. "If an individual is on the cusp of a tax bracket, making higher pretax deductions can also put that individual into a lower tax bracket, resulting in a potentially higher tax refund," he says.
Consider these funds for your HSA:
-- JPMorgan Ultra-Short Income ETF (JPST)
-- Invesco S&P 500 Pure Growth ETF (RPG)
-- Vanguard Balanced Index Fund Admiral Shares (VBIAX)
-- Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)
-- iShares Core S&P Total U.S. Stock Market ETF (ITOT)
-- iShares MSCI ACWI ETF (ACWI)
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