Are HSA Brokerage Accounts Right for You?
Just because you can doesn’t mean that you should. The financial industry has a voracious appetite for your dollars constantly creating products to attract your attention and bring those dollars to them.
Some products make sense, some not so much. One of the latest targets for Wall Street is your Health Savings Account or HSA.
In early June, Charles Schwab announced it was partnering with giant health care financial service firms Optum Bank and Discovery Benefits to offer access to Schwab’s Health Savings Brokerage Account.
Think of Schwab’s offering as an HSA within an HSA.
Health Savings Accounts have been around for almost 20 years, first introduced in the early 2000s to provide tax favored accounts to people with high-deductible health plans. An HSA allows you to put away money each year and defer income taxes on the money contributed.
Gains, dividends and interest accumulate tax free in a Health Savings Account. More importantly no taxes are due on withdrawals used for qualified medical expenses, prescriptions, and (as-of January 2020), over-the-counter medication costs.
Because of the short-term nature of health care expenses, banks were the natural landing for those wanting to set up a Health Savings Account. When one thinks of savings, one thinks of banks and the savings account.
Given that most individuals opening HSAs want that money to be there when it is needed for medications or unexpected medical care expenses, products like a savings account or certificate of deposit make sense for HSA deposits.
According to Devinar Group, there were approximately $66 billion in HSA assets at the end of 2019. Of that amount there were $50.2 billion in deposits and $15.7 billion in investments.
Schwab, already in the HSA business with $7.4 billion in HSA investments at the end of 2019 according to the company’s press release announcing the partnership with Optum and Discovery, wants more. The opportunity to shift even a portion of that massive $50.2 billion safely deposited at banks and other institutions to the investment side is too attractive to ignore.
The question for the individual is should you, too, be willing to move an HSA invested in a traditional bank product like a savings account or certificate of deposit to the wild, wild west of thousands of investment opportunities offered by brokerage firms like Charles Schawb.
The answer depends entirely on your personal situation.
When we help people decide how to invest their HSA money, we typically recommend they utilize a Health Savings Brokerage Account option only after they have accumulated and can maintain 1-3 years’ worth of health expenses in cash.
Until you reach that point, staying with your bank savings account or certificate of deposit ensures that money is the prudent decision. Once you have a balance above the 1-3 years’ worth of known and estimated health expenses, we suggest utilizing fixed income securities like bonds for your HSA funds. The vast choices at a brokerage firm like Schwab is certainly enticing, but also may be risky if you make the wrong decision.
Bonds are attractive compared to mutual funds and exchange traded funds, as an investor is able to match maturities with the estimated time of future health expense needs. In addition, because bonds should be held until maturity, an investor in bonds may be insulated from market risk and the gyrations of interest rate moves.
Your health and expenses associated therein is not something to gamble with in our opinion. While in some cases it may make sense to add risk to your HSA, we find the more conservative approach of owning individual bonds to be the wise course for most individuals.
We only recommend that people move beyond cash and bonds – into stock ownership within their Health Savings Brokerage Account after gaining reasonable confidence that their accumulation of cash and bonds can cover many years’ worth of known and potential health expenses.
If you are able to utilize a Health Savings Account and are wondering if it makes sense within your broader financial plan to utilize a Health Savings Brokerage Account option or would like help investing HSA money, please do not hesitate to get in touch with us.