How to invest HSA Funds?

[FrugalInvestor]

I'm preparing to move some fairly significant amounts from my and my wife's HSA accounts at HSA bank to our linked TD Ameritrade accounts. Our HSAa are essentially an extension of our traditional IRAs which are 100% bonds (stocks are in our taxable accounts) and I don't expect to utilize the HSA funds until I begin RMDs and SS in about ten years. Given this I am leaning toward putting the funds into a Vanguard bond fund - probably Vanguard Intermed Term Investment Grade (VFICX) - unfortunately I don't see that I can access Admiral shares through TD.

Am I thinking about this correctly? Would there be other investment options that may be more appropriate for our HSA dollars? If so, what would suggestions be?

Also, is it the case that TD does not offer Admiral shares of Vanguard funds or am I overlooking something?

[livesoft]

You are overlooking ETFs. My spouse uses BIV in her TDAmeritrade IRA. She has automatic dividend re-investment going on, too.

[FrugalInvestor]

You are overlooking ETFs. My spouse uses BIV in her TDAmeritrade IRA. She has automatic dividend re-investment going on, too.

You are absolutely correct...and that's why I asked...thank you! I've been a mutual fund investor for so long that I don't even think about ETFs. It looks like the ETF expense ratio is nearly the same as admiral shares (0.11% for ETF compared to 0.10% for fund) so that would definitely be the way to go.

Now the question remains as to whether I am overlooking funds (or ETFs) that may be a better fit given my intention for these funds not to be touched (but will be added to) for about ten years and to be positioned in a bond or bond-like investment.

[alisa4804]

I was just looking at investment options from HSA bank also. TD Ameritrade has a list of "no-fee" ETFs which includes many Vanguard ETFs - sounds like a great way to go with HSA funds.

[FrugalInvestor]

I was just looking at investment options from HSA bank also. TD Ameritrade has a list of "no-fee" ETFs which includes many Vanguard ETFs - sounds like a great way to go with HSA funds.

When I checked on Intermediate Term Investment Grade Bond Fund through TD they said that there would be a $25 fee on each end of the trade (buy and sell) for the fund. Does "commission free" mean that those fees do not apply to the ETF (BIV is on the commission-free TD list) or are there other commissions involved? I typically buy funds only and directly from Vanguard.

The TD website also says that you need to be "enrolled in the program." What does that mean? If there is in fact no cost for handling these funds how does TD make their money? Are they being paid something by Vanguard?

[livesoft]

You should feel comfortable enough with TDAmeritrade to call them up and ask those questions. Or walk into the local office and ask those questions.

[FrugalInvestor]

You should feel comfortable enough with TDAmeritrade to call them up and ask those questions. Or walk into the local office and ask those questions.

Yes I can call (no office close to me) but thought someone here who has dealt with them may know.

[alisa4804]

My understanding, from reading the HSA Bank website, is there may be no fees setting up transfers directly from HSA Bank balances to TD Ameritrade investments, if you choose ETFs - but I haven't tried it myself yet. In the HSA Bank website, log into your account, click on your account number, then you can click on Investments, and TD Ameritrade options are described along with the lame Deviner Mutual Fund selections. There is a TD Ameritrade Enrollment Application, which you fax back to HSA Bank, then apparently make the transfer. But perhaps you've already done this since you mention "linked" accounts. Anyway, I think/hope there will not be fees transferring HSA Bank funds to TD Ameritrade ETFs, or fewer fees than investing with TD Ameritrade directly. I do wonder whether I will get dinged for any low (below $3000) HSA Bank balance remaining, since my employer pays the HSA Bank "monthly and setup fees." Hope this is helpful; let us know what you learn.

[FrugalInvestor]

alisa,

In talking with HSA bank and Ameritrade re: the mutual fund I was told that there is no HSA Bank fee for transferring the funds to TD but there is a $25 fee imposed by TD for both the purchase and sale of the fund.

I will call them today re: the "commission free" ETF and report back on what I find out.

[alisa4804]

The last page of the HSA Bank/TD Ameritrade Enrollment Application, section 1. Commission & Transaction Fees, says No Load - $25, Load - No Fee, NTF - No Fee. I think that NTF/No Transaction Fee funds is the "free ETFs" so let us know if Ameritrade confirms this. Also hope any dividend reinvestments don't trigger fees.

Edited to add: Right below that, it says TD Ameritrade receives remuneration from fund companies, answering your earlier question on how they make money.

[FrugalInvestor]

I just spoke with TD and here's what I learned (not terribly straightforward):

First, there are indeed no trading fees associated with TD's commission free ETFs which include BIV providing that you are enrolled in the commission free ETF program. I received instructions on how to find that election within my TD profile and need to do that myself. Here are the instructions:

Log into account
Go to Home Page
Click on "My Profile"
Find "Commission Free ETFs" on middle right of screen and click on "Learn More" link to the right of it
Click on "Enroll"
Read and agree to terms

Second, I can elect to participate in auto-reinvestment for either my entire account or ETF by ETF (since I will only hold one ETF in my entire account it makes no difference for me). To participate in the DRIP program the representative needed to enroll me, I could not do this myself. I did, however, receive instructions on where to look within my account setting to confirm that it is enrolled as follows:

Log in
Go to "Accounts" Tab
Click on "Online Cash Services" immediately below and to right of "Accounts"
View enrollment status near top and at far right of screen - is should read "You are fully enrolled in DRIP"

So asking this question just saved me $50 in immediate trading fees (I was originally looking to make two mutual fund purchases at $25 each, one for my account and one for my wife's - I will now purchase the BIV ETF in both accounts at no cost), at least $50 in future trading fees (selling the funds) and the difference between 0.20% and 0.11% expense ratio for the life of the investment.

Thank you to Livesoft for the excellent tip and to Bogleheads for bringing us together!

I'm now making a $50 contribution to the site to express my (continued) appreciation for it and for those who provide such useful information through it.

[alisa4804]

What a convoluted process - thanks for sharing what you learned with us!

[livesoft]

Thanks for making the phone call to TDAmeritrade.

One can also sign up for dividend reinvestment by sending a message requesting that from within your account. It is easy to do because one of the standard "subject" lines to choose is "DRIP" or "dividend reinvest" or something like that. But a phone call is also easy.

And sometimes when you open a TDAmeritrade account, they give you a number of free trades for a limited time. This apparently does not apply to the HSA/TDAmeritrade deal. But in a case where you get free trades, then one would not need to immediately sign up for the commission-free ETF program, since the trades would be free anyways.

[FrugalInvestor]

What a convoluted process - thanks for sharing what you learned with us!

FYI, I've added specific instructions in my post above.

[Easy Rhino]

BTW Frugalinvestor are you in a state that is also tax-exempt for HSAs? I ask just because I'm in California, where we're not, much to my chagrin. It might affect which type of bond you want to hold.

[FrugalInvestor]

BTW Frugalinvestor are you in a state that is also tax-exempt for HSAs? I ask just because I'm in California, where we're not, much to my chagrin. It might affect which type of bond you want to hold.

Thanks for the heads up. There is no state income tax where I live (thankfully).

[grabiner]

The last page of the HSA Bank/TD Ameritrade Enrollment Application, section 1. Commission & Transaction Fees, says No Load - $25, Load - No Fee, NTF - No Fee. I think that NTF/No Transaction Fee funds is the "free ETFs" so let us know if Ameritrade confirms this. Also hope any dividend reinvestments don't trigger fees.

NTF funds are mutual funds which the brokerage lists as "no transaction fee", typically because the fund company has paid a fee to the brokerage. Vanguard funds are not NTF at any brokerage, because Vanguard does not pay such fees.

There is a separate list of which ETF can be traded commission-free; you can look that list up on the TD Ameritrade web site. (However, ETF trades still aren't free because of the spread, which may cost more than the commission if you make a large trade or trade an illiquid ETF.)

[FrugalInvestor]

The last page of the HSA Bank/TD Ameritrade Enrollment Application, section 1. Commission & Transaction Fees, says No Load - $25, Load - No Fee, NTF - No Fee. I think that NTF/No Transaction Fee funds is the "free ETFs" so let us know if Ameritrade confirms this. Also hope any dividend reinvestments don't trigger fees.

NTF funds are mutual funds which the brokerage lists as "no transaction fee", typically because the fund company has paid a fee to the brokerage. Vanguard funds are not NTF at any brokerage, because Vanguard does not pay such fees.

There is a separate list of which ETF can be traded commission-free; you can look that list up on the TD Ameritrade web site. (However, ETF trades still aren't free because of the spread, which may cost more than the commission if you make a large trade or trade an illiquid ETF.)

Is there some way I can determine in advance if I'm paying more through the spread or the commission? In other words, how do I determine the spread in advance of the trade?

[grabiner]

Is there some way I can determine in advance if I'm paying more through the spread or the commission? In other words, how do I determine the spread in advance of the trade?

When you are ready to place an order, the real-time quote will tell you the spread. If an ETF has a bid at $19.98 and an ask at $20.02, then you will lose four cents a share if you buy it and then immediately sell it back (with a market order, or limit order to buy at the ask), so you should assume that you are losing two cents per share on a single transaction. If you want to buy 1000 shares of this ETF, that is a cost of $20; you will pay $20,020 for stock that the midpoint estimate says is worth $20,000.

If you see an unusually large spread, you may reduce the spread costs by waiting to make the transaction. If the bid is $19.98 and the ask is $20.45, then if you wait to buy, you might see a bid at $20.41 (so that you don't gain anything by waiting) or an ask at $20.02 (so that you save a lot by not accepting the $20.45).

[livesoft]

I believe the spread is inconsequential for most of the ETFs that one would/should want to buy/sell. See for example this:
viewtopic.php?t=77439&start=50#p1488409

[FrugalInvestor]

I have set up my Ameritrade brokerage account and the funds are currently transferring from HSA bank. I plan to invest the funds in the BIV ETF at Ameritrade. I set up the account for DRIP thinking that would be convenient, however, after doing so I noticed the following message with regard to accounts set-up for DRIP.....

"Once you are enrolled in DRIP
In order to sell fractional shares of a stock position, you'll need to sell all your whole shares of that position.
By choosing to sell all of your whole shares of stock, you will also sell off the remaining fractional shares of that position."

Since this is an HSA it's very possible that I would eventually wish to liquidate a portion of the shares in order to cover a particular expense. As I understand the above statement since I will have likely purchased partial shares through the DRIP this will not be possible.

Am I reading this correctly? If so, it seems that DRIP is not for me. Am I interpreting this correctly?

[grabiner]

I set up the account for DRIP thinking that would be convenient, however, after doing so I noticed the following message with regard to accounts set-up for DRIP.....

"Once you are enrolled in DRIP
In order to sell fractional shares of a stock position, you'll need to sell all your whole shares of that position.
By choosing to sell all of your whole shares of stock, you will also sell off the remaining fractional shares of that position."

Since this is an HSA it's very possible that I would eventually wish to liquidate a portion of the shares in order to cover a particular expense. As I understand the above statement since I will have likely purchased partial shares through the DRIP this will not be possible.

No, this simply means that you cannot sell the fractional shares. If you have 173.24 shares, you can sell 100 shares or 101 shares, but not 100.24. If you sell 173 shares, the .24 DRIP shares will automatically be sold with them, so that you don't have a position of less than one share.


Am I reading this correctly? If so, it seems that DRIP is not for me. Am I interpreting this correctly?[/quote]

[FrugalInvestor]

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[grabiner]

I am still very confused by the terminology. Is a "position" defined as the fractional share plus one whole share? And how does the term "fractional shares" make sense. Wouldn't one own at most one fractional share?

Your position in a stock is the total number of shares you hold, which could be a number such as 173.24. If you hold that amount and the stock pays a dividend of $1 per share, you will receive $173.24 (which you might reinvest through a DRIP).

You can sell any whole number of shares. If you sell all of the whole shares, you will sell the entire position, including the fraction that is left over.

[FrugalInvestor]

Deleted Post

[letsgobobby]

I think it's a waste to invest HSA funds in bonds. The money is tax free going in, and tax free going out. I want to put my highest expected return asset in an HSA, and that means stocks, probably a domestic small value ETF if one is on the no-commission list.

(if you tax-adjust holdings, you'll disregard this post).

[FrugalInvestor]

I think it's a waste to invest HSA funds in bonds. The money is tax free going in, and tax free going out. I want to put my highest expected return asset in an HSA, and that means stocks, probably a domestic small value ETF if one is on the no-commission list.

(if you tax-adjust holdings, you'll disregard this post).

I position my least tax efficient funds in tax deferred accounts and most tax efficient in taxable. Bond funds, to my understanding, are less tax efficient than stock funds.

[letsgobobby]

matter of taste I guess. tax-efficiency matters, too. But given current yields of bonds and stocks, and probable taxation policy going forward (not proposed - can't talk about that here), muni bonds in taxable and stocks in tax-free are much more tax-efficient than taxable bonds in tax-free and stocks in taxable. Plus you have the benefit of high return assets tax free forever.

[FrugalInvestor]

matter of taste I guess. tax-efficiency matters, too. But given current yields of bonds and stocks, and probable taxation policy going forward (not proposed - can't talk about that here), muni bonds in taxable and stocks in tax-free are much more tax-efficient than taxable bonds in tax-free and stocks in taxable. Plus you have the benefit of high return assets tax free forever.

Yes, i understand your reasoning and it's worth consideration. However, even though I treat my HSA as an alternative IRA account, because of my age there is a greater chance of my needing to dip into those funds within the next ten years. Given that, I feel more comfortable having them invested in a less volatile asset.

If I were younger and still accumulating I may prefer your flavor.