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How to Invest With an HSA


Understanding how to invest with a health savings account (HSA) can provide an opportunity for individuals looking to save for medical expenses, while also building wealth. HSAs provide a triple tax advantage: your contributions are tax-deductible, your earnings grow tax-free and your withdrawals for qualified medical expenses are tax-free. When considering HSA investment options, you have a variety of choices, such as stocks, bonds, mutual funds and more. Some HSA providers may also offer pre-built investment portfolios that you can choose based on your risk tolerance and financial goals.

Do you need help with financial planning via an HSA or other retirement accounts? Speak with a financial advisor today.

What Are HSAs?

The funds in an HSA are versatile and can generally be used for a wide range of medical expenses. These include doctor’s visits, prescription medications, certain types of dental and vision care and even some over-the-counter medications. This flexibility allows account holders to use their HSA for both routine healthcare needs and unexpected medical costs. Additionally, HSA funds can be used for long-term care expenses and certain health insurance premiums, further enhancing their utility.

HSAs are not just for current medical expenses, as they can also be a strategic component of a larger retirement plan. After age 65, HSA funds can be withdrawn for non-medical expenses without penalty, though such withdrawals will be subject to income taxes, similar to pre-tax retirement accounts like a 401(k) or IRA. This feature makes HSAs a valuable supplemental savings tool, allowing individuals to save for both healthcare and general retirement needs at once.

However, the primary allure of HSAs lies in their tax efficiency. When you contribute to an HSA, you can deduct those contributions from your taxable income, reducing your overall tax liability in the current tax year. Then, the funds within the account grow via their investments tax-free, allowing your savings to compound over time without the intervention of Uncle Sam. Lastly, when you withdraw funds to cover qualified medical expenses, these withdrawals are not subject to taxation. This “triple tax advantage” is the hallmark of HSAs.

How to Start Investing With Your HSA

investing with an HSA

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). Most banks, credit unions and financial institutions offer HSA accounts, and many health plans are also partnered with specific institutions where you can open one.

The process for opening and HSA is straightforward: you’ll need personal identification, proof of HDHP enrollment and possibly a minimum opening deposit. Once your account is active, you can start contributing funds immediately.

Funding an HSA can be done in several ways. Contributions can come directly from your paycheck, your employer or personal deposits. The annual contribution limit for 2024 is $4,150 for individuals and $8,300 for families, with an additional catch-up contribution of $1,000 allowed for those 55 and older. Any unused funds roll over each year, building your savings over time.

Once you’ve funded your HSA, it’s time to start investing your money. Many HSA providers offer various investment choices, including mutual funds, index funds and individual stocks. Before investing, ensure you have sufficient liquid cash in your HSA to cover any immediate medical expenses. Most experts recommend keeping at least one year’s worth of medical expenses in cash before investing the rest. Remember, the primary purpose of your HSA is to cover medical expenses, so it’s essential to balance investment growth with you and your family’s liquidity needs.

Investment Strategies for HSAs

HSA investing typically starts with a basic cash account, similar to a traditional savings account, that offers often minimal interest-earning potential. However, the other half of your HSA is called an investment account, and it’s where you’ll actually invest the rest of your funds.

Common HSA investment options include mutual funds, exchange-traded funds (ETFs) and individual stocks and bonds. Generally speaking, mutual funds and ETFs are popular choices due to their inherent diversification, which can reduce risk while providing potential for growth. Individual stocks, while riskier, allow for greater control and the possibility of higher returns. Bonds, on the other hand, are extremely safe, but often come with weaker return potential.

Customizing your HSA investments starts with assessing your risk tolerance and financial goals. If you’re risk-averse and prefer stability, you might lean towards bond funds or cash accounts. These options tend to be less volatile and can offer more reliable, albeit lower, returns. On the other hand, if you’re comfortable with more risk and are aiming for higher returns, you might opt for equity funds or individual stocks. This approach can lead to significant growth, but comes with the possibility of greater fluctuations as the stock market moves with more volatility.

A balanced approach can be effective for many HSA investors. Combining a mix of safe and growth-oriented investments can provide balance. For example, you might allocate a portion of your HSA to a stable bond fund, while investing the remainder in a diversified stock index fund. This strategy helps in managing risk, while taking advantage of some of the market’s riskier opportunities.

Regularly monitoring and adjusting your HSA investment portfolio is always important. Financial markets change, and so do your personal circumstances and healthcare needs. Periodically reviewing your investments ensures they remain aligned with your goals. Consider rebalancing your portfolio annually or when there are significant changes in the market or your personal life as well.

Drawbacks of Investing With an HSA

One major drawback of an HSA is that to qualify for one, you must be enrolled in a HDHP. These plans typically have lower premiums, but higher out-of-pocket costs. This might not be suitable for everyone, especially those with regular medical expenses, so this requirement can be a barrier for some consumers.

Beyond that, investing HSA funds will also carry the same risks as other investment accounts. Market fluctuations can affect the value of investments, and there is no guarantee of returns. Additionally, some HSA providers charge maintenance fees, which can eat into the account’s balance and returns. It’s important to understand these costs and choose an HSA provider that aligns with your needs.

Investing With HSAs vs. 401(k)s and IRAs

investing with an HSA

When comparing HSA investment options to those of 401(k)s and IRAs, several key differences emerge. HSAs often allow a range of investments similar to IRAs, including stocks, bonds and mutual funds. However, the primary goal of an HSA is to cover medical expenses, so they offer the ability to save for both healthcare and retirement. Their triple tax advantage also includes withdrawing for qualified expenses before retirement, which is something IRAs and 401(k)s can’t provide.

In addition, 401(k)s, while typically having fewer investment choices, benefit from employer matching contributions, which HSAs often don’t have. IRAs offer the broadest range of investment options, giving individuals more control over their retirement strategy, but again, IRAs lack the healthcare-specific perks.

Strategically using HSAs alongside 401(k)s and IRAs can be a beneficial route to look towards. For instance, you could contribute enough to your 401(k) to get employer matching, utilize an IRA for their investment flexibility and have an HSA for their unique tax benefits.

Bottom Line

For those considering HSA investment options, you’ll want to think about the account’s potential and downsides as part of your broader financial strategy. HSAs provide tax advantages such as tax-deductible contributions, tax-free growth and tax-free withdrawals for qualified medical expenses, which is hard to beat with any other tax-advantaged accounts. These also not only cover immediate healthcare costs, but also serve as a strategic investment option for long-term growth.

Tips for Managing Your Retirement Money

  • A financial advisor can help you with managing many types of investments, even they’re in an HSA. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • There are a number of different ways you can manage your money before and during retirement. Here are a wide range of different retirement strategies you can check out.

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