New HSA investment elections

[LearnMS]

I have about 4k in HSA that I can invest. I haven't done it in the past because I didn't like the investment options back then. I now see some Vanguard options which is great. But the list is big.

I am in mid-30s and not a huge investor other than this HSA and 401k usual elections. Which among the Vanguard ones in the list attached are good options to go for? Expense ratio starts from 0.13% and shoots up.

Thanks!

[I know this is no Bogleheads, but I thought it would be helpful to anyone else as well]

 

[Josh F]

This is a solid article in my view: www.bogleheads.org/wiki/Three-fund_portfolio

From a purely technical perspective, since an HSA is tax-free you'd want to put the highest tax-liability funds in there and have lower tax-liability funds in other (e.g. taxable accounts) and across all your accounts have your desired asset ratios. I find that approach too complicated, especially in an HSA where you may need to draw the funds unexpectedly - so I keep all my funds relatively "balanced" in each account to my desired asset ratio.

For my HSA, I'm roughly 80% VTI and 20% BND (using a more simplistic 2 fund portfolio for my HSA). VFTSX would be good for US Stocks and WFBIX or VAIPX seems to be the only option for Bonds (I'm not familiar with these funds really). You could mix in VTWSX if you wanted international stock exposure in your HSA (looks about 55/43 US vs International Stocks). With $4K - I personally would keep it to 1 or 2 funds only.

I'd make sure you have a "reserve" for medical expenses first and not investing 100% of your $. You'd hate to have to pull the $ if the market dips. Depending on your HSA there may be fees too, some of which may be waived if you meet certain minimums.

I'm sure other people will have different opinions, just my investment strategy.

 

[LearnMS]

This is a solid article in my view: www.bogleheads.org/wiki/Three-fund_portfolio

From a purely technical perspective, since an HSA is tax-free you'd want to put the highest tax-liability funds in there and have lower tax-liability funds in other (e.g. taxable accounts) and across all your accounts have your desired asset ratios. I find that approach too complicated, especially in an HSA where you may need to draw the funds unexpectedly - so I keep all my funds relatively "balanced" in each account to my desired asset ratio.

For my HSA, I'm roughly 80% VTI and 20% BND (using a more simplistic 2 fund portfolio for my HSA). VFTSX would be good for US Stocks and WFBIX or VAIPX seems to be the only option for Bonds (I'm not familiar with these funds really). You could mix in VTWSX if you wanted international stock exposure in your HSA (looks about 55/43 US vs International Stocks). With $4K - I personally would keep it to 1 or 2 funds only.

I'd make sure you have a "reserve" for medical expenses first and not investing 100% of your $. You'd hate to have to pull the $ if the market dips. Depending on your HSA there may be fees too, some of which may be waived if you meet certain minimums.

I'm sure other people will have different opinions, just my investment strategy.

Thanks for that. What's your definition of highest or lowest tax liability funds? Is it just the ERs?

 

[Josh F]

Thanks for that. What's your definition of highest or lowest tax liability funds? Is it just the ERs?

No. Expense Ratios are totally separate, those you want to keep as low as possible in every fund. Expense Ratios you "pay" regardless of what type of account it is (401k, Roth, HSA, General Investment Accounts, etc.)

This article is really good on the concept of tax liability/efficiency: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement
Scroll down to the table/graph within the "Tax efficiency of various asset classes" section.
I don't worry about this personally. I don't have any holdings in the "Very inefficient" category and minimal holdings in the "Moderately inefficient" category - some bond funds (which straddle the efficient line anyhow). Maybe if I was holding a lot of inefficient funds it would be worth my while to care more.

 

[ILikePoints]

If the net ER and fees is high at your current HSA provider, look into doing a trustee-to-trustee transfer to another HSA provider. Those ERs really eat away at your gains!

Fidelity announced a free HSA account.