Health Savings Accounts (HSAs) are one of many types of tax-advantaged accounts. With an HSA, not only do you get a tax deduction when you put the money in, but there is no tax owed when the money is withdrawn and used for qualified medical expenses. Not only are you able to pay for your health care expenses with pre-tax dollars, but you are also able to invest the money in your HSA and watch it grow. This is one of many ways to avoid paying capital gains on stock appreciation.

On account of all of the benefits, you should keep funding your HSA with the maximum annual contribution as long as allowed by law. Your HSA can provide a pre-tax means of self-insuring for your care in retirement. And in the worst case you are allowed to make withdrawals in retirement for non-medical issues and simply pay tax on the amount taken out like you would for an IRA. But unlike an IRA, there are no required minimum distributions.

One of the few drawbacks of HSAs is that custodians don’t make it easy to set an asset allocation and do not offer automatic rebalancing. Here is one strategy for how you could set the asset allocation for your health savings account.

This recommendation assumes that you are following our advice by contributing the maximum allowed by law to your HSA each year and not withdrawing the maximum for your annual expenses. If that is true, your account balance will be increasing each year and you will have additional funds to invest each year.

Since you are adding to your HSA portfolio and you are likely to have these funds until you are well into retirement, your asset allocation would do best if it were 91% stocks (appreciation) and 9% bonds (stability). Until age 65, you should be adding to your portfolio. You are unlikely to need funds for any long-term care episode until about age 85. Given the long time horizon, we suggest investing your HSA for appreciation.

One option is to invest your entire HSA contribution each year in the Vanguard Total World Stock Index Fund Investor Shares Mutal Fund (VTWSX) or a similar exchange-traded fund, the Vanguard Total World Stock Index ETF (VT). We have written about this fund in “The Complete Guide to Automating Your Savings” and “One-Fund Investing.” This fund represents all of the publicly traded stock in the world in exactly the cap-weighted proportions that they exist in the world. Any deviation from this index would strategically over- or under-weight sectors hoping to outperform the global markets. We suggest that you use this index to measure the stock portion of your portfolio returns.

If your HSA balance is small, you can simply invest in VTWSX or VT in order to participate in the global appreciation of stock and keep the investment of your HSA simple.

But if your custodian allows purchases at no transaction cost, you can craft a more sophisticated asset allocation nearer to the efficient frontier. We offer gone-fishing portfolios for Vanguard mutual funds as well as exchange-traded funds with no transaction fees at Charles Schwab. If your HSA is held at one of these custodians, use those calculators setting the stock allocation to 100%.

Although we use Charles Schwab to keep custody of most of our investment assets, my own personal Health Savings Account (HSA) is currently through HSA Bank which holds assets at TD Ameritrade.

As a result, I have created “Marotta’s 2017 TD Ameritrade Gone-Fishing Portfolio Calculator.”

For my HSA, each year I leave more than enough to cover my health insurance deductible in the HSA Bank account and transfer the excess to my TD Ameritrade HSA account to be invested.

Although it uses different funds, this asset allocation is very similar to our 2017 Schwab Gone-Fishing Portfolio with elements of our traditional 2017 Gone-Fishing Portfolio Calculator.

One of the major deficiencies of TD Ameritrade’s list of no-transaction fee exchange-traded funds is the lack of an Energy stock fund.

I have included the Vanguard Energy ETF (VDE), but this fund is not on the no-transaction fee list. If you have sufficient assets and your allocation to this fund is a few thousand dollars, it would justify paying a $10 trade. But if you are only investing $475 as in my example above, a $10 fee represents over 2% of what you are investing. In that case you have two options:

1. You can substitute for the Vanguard Total World Stock Index ETF (VT). This ETF is on the no-transaction fee list and since it represents all publicly traded stocks, its addition will not push the rest of your asst allocation out of balance.

2. You can eliminate this allocation from your portfolio. To compute how much money to invest to all of the other allocations, you can adjust the amount you enter in the calculator. After we eliminate the allocation for VDE/VT, the remaining allocations are 91% of the portfolio. If you were investing $4,800 in the 91% of the portfolio, you could put $5,275 into the calculator. That allocates $475 to VDE/VT and the remaining $4,800 to the rest of the portfolio. You can compute the correct amount to enter into the calculator by taking the amount of money you have to invest and dividing by 0.91. In our example, 4,800 divided by 0.91 equals 5,275.

Photo used here under Unsplash Creative Commons Zero.