I used to think an HSA was just a special checking account. God, I was so stupid, because an HSA is soooooooo much more than that. I never maxed out my contributions, and I never invested my HSA, so I missed out on some huge tax savings AND potential investment gains.
But last year, I opened an HSA again, and this time it’s gonna be different. Because I’m a lot smarter now and I know how to actually make the most of it 😁
In this blog:
- I’m going to briefly touch on what an HSA is
- Then I’m going to talk about how HSAs work specifically at Fidelity
- I’ll also talk about how to prioritize your HSA vs other accounts like your Roth IRA and 401k
- And last but not least, I’ll talk about how to invest your Fidelity HSA for maximum profit. I can’t tell you what to invest in (because you’re an adult and you can make your own decisions), but I will show you how I’m investing MY Fidelity HSA, so you can see a real-life example of what it could look like for you.
So if you’re interested in learning how to be smarter with your HSA, and to make sure you’re getting as much benefit out of it as possible, then keep reading!
What is an HSA?
Ok, let’s start off with a little HSA 101. The HSA stands for Health Savings Account. The name is kind of misleading because Health Savings Account sounds like some sort of bank account. That’s why for the longest time, I didn’t know that you could invest your HSA.
But HSAs are NOT bank accounts. They are full-blown investment accounts, just like any other brokerage account, that are designed specifically to help you pay for healthcare.
HSAs come with really awesome tax benefits. In fact, they’re the ULTIMATE investing tax loophole, because they allow you to make pre-tax contributions, enjoy tax-free growth, AND make tax-free withdrawals (as long as those withdrawals are for health-related expenses).
Compare that to the Traditional IRA: Traditional IRAs allow you to make pre-tax contributions, enjoy tax-free growth, but NOT tax-free withdrawals. So HSAs offer a tax shelter in 3 instances, whereas Traditional IRAs only offer a tax shelter in 2 instances.
For a helpful guide on how the HSA compares to other types of accounts, download my Ultimate Guide to IRAs, 401k, and HSAs. It took me a long time to finally understand the difference between these retirement accounts, and more importantly, which ones I should prioritize in my own finances. So to make it easy for you, I’ve created a PDF that summarizes the benefits of each account. It has examples, recommendations on which ones to prioritize, as well as where to open them! It has literally everything you need to set up your investment accounts for maximum profit.
Ok so back to HSAs – HSAs are NOT substitutes for health insurance. They are in addition to your insurance. You also need to have an insurance plan that allows HSAs, otherwise, you can’t open one.
When I went self-employed, I was shocked by how expensive health insurance is if you don’t get coverage from a job. That’s why I went for a really cheap plan that allows HSAs. I pay low monthly premiums, and the insurance covers pretty much nothing, so if and when I need to see a doctor, I can pay for it out of my HSA.
Man, I don’t even know why I pay for health insurance! I know if something horrible were to happen, I’d be glad to have it, but meanwhile, it costs $350 a month and I barely use it. It makes no sense.
That’s a rant for another day… Anyway! So that’s pretty much my HSA 101. I have whole other thoughts about HSAs right here, so check it out if you want a more in-depth explanation.
What’s cool about HSAs offered at Fidelity is that it’s the most flexible HSA that I’ve seen out there. Meaning that when you open a Fidelity HSA, it looks no different from any other Fidelity brokerage account, and you get access to the full range of stocks, bonds, ETFs, mutual funds, and investment products offered at Fidelity. This is great because many of the other HSA companies out there such as HSA Bank and Devenir only give you a limited menu of investments to choose from. So I definitely appreciate the flexibility of my Fidelity HSA.
A Fidelity HSA is like a hybrid between a checking account and an investment account. Because as long as you have cash in there that’s not tied up in investments, you can spend it health-related expenses using this debit card.
That’s why I invest my Fidelity HSA a little different from how I invest say, my Fidelity Roth IRA. Because unlike my Roth IRA, which I’m not going to touch until I’m much older, I need to spend some of my HSA right now on an ongoing basis.
And I’ll show you how I invest my Fidelity HSA in just a minute, but first I also wanted to touch on how to prioritize your HSA vs your other accounts.
How to prioritize your HSA vs other accounts
When you have X amount of money to do whatever you want with, you have a lot of options. For example:
- You can pay down debt
- You can put it in your 401k
- You can put it into a Roth or Traditional IRA
- You can just stash it away in your bank account
- You can invest it in a taxable brokerage account
- Or you can just spend it
So where does the HSA fit in with these priorities? There’s no black and white answer, but here’s how I think of it. When you’re trying to decide where to allocate your money, there are two considerations:
- Where can I get the highest after-tax return on my money?
- And: When do I need to access the money?
For the highest after-tax return on your money, the obvious answers are any type of tax-advantaged retirement account, like HSAs, 401ks, IRAs, etc. But with accounts like these, your money is more or less locked up until you retire.
Another place where you could get the highest after-tax return on your money is also paying off credit card debt. Most credit cards charge crazy interest rates like 20% or more, so paying that off and keeping that 20% for yourself might be a lot more profitable than saving that money in a retirement account.
You also need to consider when you need to access that money. Like if you really want to invest and save money to buy a house, then an HSA or an IRA isn’t the place to do it.
So to help you decide where your HSA fits in your list of priorities, the question to ask yourself is: What is your #1 financial goal right now? For me, my #1 financial goal is to get the highest after-tax return on my money to create a million-dollar net worth as soon as possible. I’m ok not touching that money until I’m retired because I have other sources of income in the meantime, so for me, I prioritize my HSA and my Roth IRA.
The annual HSA contribution limit for 2020 is $3,550 and for 2019 it was $3,500. And I always max out my HSA before I max out anything else, even over my Roth IRA. That’s just me though.
A savvy investor ALWAYS takes taxes into consideration. Taxes eat up at least 20-30% of your earnings, and with the HSA and its triple tax savings, you don’t have to worry about any of that. So although I don’t know your exact situation, I’d say the HSA should be pretty high up there on your list of financial priorities.
If you don’t invest with the right accounts, you’re going to end up paying way more taxes than you need to. So don’t forget to grab my Ultimate Guide to IRAs, 401k, and HSAs to make sure you’re not leaving any money on the table. The download link is right HERE.
How to invest your Fidelity HSA
And finally, let’s talk about how to invest your Fidelity HSA. Just to be clear, you don’t HAVE to invest your HSA. You can use it as a straight spending account for your health expenses, you can use it as a wealth-building investment vehicle, or you can use it for both – which is what I do.
For 2019, the annual HSA contribution limit was $3, 500. So I divided this amount by 12, and starting Jan 1, 2019, I started making automatic monthly deposits of $290. That way, I know that by the end of the year, I would have made 12 deposits totaling $3500 maxed out my full HSA benefit.
As for investing that money – I used Fidelity’s Automatic Investing feature to set it up so that my monthly deposits automatically buy more shares of the index funds that I already own.
The key is that the index funds have to be mutual funds, and you already have to own them. You can’t automate your investments with investments that you don’t already own.
If you want some ideas on which index funds to buy for your Fidelity HSA in the first place, check out this blog right here. It goes a lot more in-depth about how to pick the right funds, and it’s really good, so definitely check it out!
So anyway, back to my $290 monthly HSA deposit. As soon as the money from my checking account hits my Fidelity HSA, $200 of it goes towards automatically buying more shares of my index funds, and the remaining $90 stays uninvested in cash.
That $90 keeps accumulating every month, so that the next time I need to buy more contact lenses or pay for a doctor visit, I can just swipe my Fidelity HSA debit card without having to sell any stocks to cover the expense.
Next year, I’d really like to get LASIK, so I’ll probably cut back on investing and keep more of my HSA in cash. So for you, if you know you have some big medical expenses coming up in the next year or so – whether it’s having a baby, getting surgery, or just getting LASIK like me, then feel free to use your HSA as a savings account. You do NOT have to invest it. In fact, you probably shouldn’t, because investing in stocks is really meant for longer time horizons.
In case you haven’t noticed by now, I’m a big fan of Fidelity because, in addition to the HSA, Fidelity offers all kinds of other accounts and services for all your financial needs.
Not only do I have my HSA at Fidelity, but I also have my checking account there, my Roth IRA there, and at one point, I even had a Fidelity credit card.
Something that really helped me in my financial journey is having all my accounts in one place. It kept me organized, and it was less work to manage.
Many of you have an old 401k lying around somewhere from a previous employer, and one of the smartest money moves you can make right now is to roll over that 401k into an IRA.
In my next blog, I’m going to talk all about how to do a Fidelity Rollover IRA.