Maximize your Health Savings Account: Master the Basics and Build your Portfolio

A health savings account is a great tool for your health and your finances. Commonly referred to as an HSA, a health savings account is a tax advantaged account available for individuals and families enrolled in a High Deductible Health Plan (HDHP).

HSA Overview:

  • Contribution limits 2015:
    • Individual: $3,350
    • Family: $6,650
  • Tax deductible contributions
  • Interest and investment gains are tax free
  • The balance can only be used for qualified health expenses
  • After 65 funds can be used for ordinary expenses, but you need to pay income tax on those distributions. 

The funds in a health savings accounts are all yours. If and when you change jobs or health insurance plans, you take this money with you. You're only eligible to contribute to a HSA if you have a High Deductible Plan. If life happens and you decide on a more comprehensive health plan, you can't add funds to your account. Nothing happens to the dollars in there, they're still yours. You just can't add any more money to your account. 

Important Note - Many health savings account come with monthly or yearly fees. Often your employer pays for this fee as part of your health insurance compensation package. If you leave your job, you'll be responsible for paying this fee. Talk to you employer for more details. 

Step 1 - Save your money

Set your monthly target:

  • $280 dollars per month as an individual or
  • $554 dollars as part of a family plan

High Deductible Health Plans (HDHP) are often the lowest cost option from your insurance provider. Use your savings to fund your HSA.

Step 2 - Minimize your spending, help your fellow Americans

A high deductible plan and health savings account are only great tools if they align with your life and how much healthcare you consume. A high deductible means your footing the bill when you go to the doctor. It can be more expensive than you're use to but that's the point. By paying more, your incentive is to consume less. As consumers and a nation we over consume healthcare because we often bear very little of the actual cost. Only a $10 dollar copay to see the doctor? Yeah you'll probably have that itchy throat looked at. If it costs $175 to see the old MD, maybe you'll wait a week drink some tea and see if things clear up. 

We're here to help you live a healthier and happy life. One of best parts of regular exercise and healthy eating, very few trips to the doctor! They're there if something terrible happens, but less trips to the doctor means more time spent living and having fun.

An apple a day keeps the doctor a way, and also keeps more money in your HSA. 

Preventative care is free and covered by your health insurance provider. Check with your health insurance company for more details but basic preventative services such as a physical don't cost you a dime.

Step 3 - Build a portfolio

With cash in your account and and time on your side, now it's time game plan your asset allocation. Remember this isn't an IRA or 401(k) account. It's there to help pay the doctor bill. That means you'll need a good amount of cash, or liquidity. Selling stocks to pay for surgery is not a situation you want to be in. 

The maximum out-of-pocket in 2015 for an individual is $6,450 and $12,900 for a family. A good place to start would be to ensure you have at least this much in cash. As a smart investor you know that the timeline for holding stocks and bonds is years down the road, so make sure you have enough cash to pay for expenses this year and next. 

Think conservative and capital preservation when deciding how much you want to invest in bonds and stocks. Slow and steady wins the Health Savings Account race. 

Bonds - Consider making bonds your primary asset. They help fight against inflation and through most time periods offer more stable returns than stocks. Reinvest dividends to take full advantage of compound interest. 

Stocks - Keep it simple and buy a Total Market or S&P 500 index fund. Having a small portion of your portfolio in stocks is important given the long time horizon of this account. Typically we spend the most money on health care in the later years of our life. In the long run, stocks provide higher returns than other assets classes. 

Asset Allocation - ideas based on age

20 Somethings - Stable Growth

  • 50% bonds
  • 50% stocks

Make sure you have at least one year of max out of pocket expense in cash ($6,500)

30 Somethings - Stable Growth

  • 55% bonds
  • 45% stocks

Grow you cash balance in addition to adjusting up your concentration of bonds. 

40 - 50 Somethings - Capital Preservation

  • 65% bonds
  • 35% stocks

As we age we tend to consume more health care. As a result, you'll need higher cash balances as trips to the doctor become more frequent.

60 Somethings - Capital Preservation

  • 80% bonds
  • 20% stocks

With modern science and you living a healthy and fit lifestyle, who knows how long you live to. What scary but true possibility is that you outlive your money. By keeping a small portion in stocks, you increase the upside potential of your portfolio. 


Key Takeaways

  1. Set a goal to contribute the maximum amount each year $3,350 (single), $6,650 (family)
  2. Eat well, exercise and live fit to minimize your yearly health care costs.
  3. Keep enough cash to pay for the doctor but build a portfolio to cash in on tax free gains.