A health savings account (HSA) provides a tax-advantaged opportunity to grow funds to cover future medical expenses. The funds can be contributed tax-free, grow tax-free and be withdrawn tax-free for qualified medical expenses. But it’s important to find HSA investments that maximize this opportunity. Let’s explore what HSA investments might make sense for your own portfolio. If you want a more personalized look at HSA investments for your financial future, then we can connect you with a financial advisor who can help.
HSA Investments: What’s the Right Approach?
When you select an HSA provider, it’s important to choose the right fit for your investment comfort level. The options include a managed or self-guided approach. Here’s what you need to know about each.
Managed Approach
In some cases, a managed approach is the right move.
With a managed HSA, the provider will take your risk tolerance and goals into account when selecting investments for you. Essentially, you can expect to answer some questions about your goals and risk tolerance before the provider takes over for you.
A managed HSA is the right approach for someone that wants to tap into the tax advantages of building an investment portfolio in their HSA but doesn’t have the time or ability to build the portfolio on their own.
Beyond building an investment portfolio that aligns with your goals, a managed HSA option often takes care of rebalancing for you. Since rebalancing is a critical part of a long-term investment plan, you can breathe easy knowing that your HSA provider is keeping your asset allocation within your preferred levels.
Here’s a quick look at the advantages and disadvantages of using a managed approach.
Starting with the pros:
- Potential for higher returns
- Professional managing the risks
Now for the cons:
- Higher costs
- Risk of not keeping up with the market
Self-Guided Approach
If a managed approach isn’t your style, then you can choose a self-guided approach.
In this case, you would have the flexibility to choose individual investments for your portfolio. You may choose to invest in stocks, bonds, ETFs, mutual funds and more.
A self-directed approach puts more responsibility on your shoulders. But if you feel up for the challenge, then a self-directed HSA could be the right move.
Here’s a quick look at the advantages and disadvantages of using a self-guided approach.
Starting with the pros:
- Flexibility to choose individual investments
- Complete control over choices
Now for the cons:
- More responsibility
- More time consuming to manage
Robo-Advisor Approach
Some robo-advisors can digitally manage your investment portfolio within an HSA. A robo-advisor will handle all the investment details for you. Since there is not a human component to a robo-advisor, you’ll often find that this option is a more affordable option for those seeking a managed portfolio approach.
Here’s a quick look at the advantages and disadvantages of using a robo-advisor approach.
Starting with the pros:
- Lower costs
- Put your portfolio on autopilot
Now for the cons:
- Lack of personalization when saving for specific goals
- No emotional support for the ups and downs of the market
HSA Investment: Tips to Stay on Track
When selecting your HSA investment strategy, there are some tips you can implement to stay on track. Here’s what you should keep in mind about HSA investments.
Choose the Right Approach
The first step to building a portfolio that aligns with your goals is to consider what amount of time you have to dedicate to your HSA investment portfolio. You’ll need to choose between a self-directed or managed HSA approach. The right choice will depend on your unique time restraints and skill set.
Make Regular Contributions
A key part of making the most of an HSA is to contribute as much as possible. As of 2023, the contribution limit for an individual account is $3,850 (up from $3,650 in 2022) or $7,750 for a family account ($7,300 in 2022). But if you are over 55, you can contribute an additional $1,000 to your health savings account. You might not be able to make the maximum contribution. But making your HSA contributions a priority in your budget can pay off in the long run.
Consider a Rollover
If you have funds stored in an individual retirement account (IRA), you can roll the funds into your HSA. Although this is allowed, the amount rolled over will count against your contribution limit for the year. For example, let’s say that you roll over $2,000 from your IRA into your HSA in 2023. With that, you’d only be able to contribute $1,850 more for 2023. It’s important to complete this rollover correctly. Otherwise, you could face negative tax implications.
Don’t Forget to Rebalance
Your asset allocation represents the mix of investments you have in the portfolio and reflect your risk tolerance, timeline and goals. The most appropriate asset allocation changes as you approach retirement. Although you may initially set up your portfolio with the correct asset allocation, unbalanced growth across asset classes leads to the need for an occasional rebalance so it’s important to regularly rebalance.
Leverage the HSA’s Tax Efficiency
The triple tax advantages of an HSA means tax efficiency is less of a concern than it would be if you were investing with a taxable brokerage account. For example, whereas in a taxable account you might need to consider tax-free securities like municipal bonds and iBonds for the fixed-income portion of your portfolio to boost its tax efficiency, investing with an HSA could entail more choices of securities because you wouldn’t have the same worries about possible tax consequences as you would investing with a taxable account.
Bottom Line
Whether you choose to self-direct your HSA investment portfolio or work with an account provider that manages your portfolio for you, investing in an HSA is a smart move. Consider working with a financial advisor to make the most of the triple tax-advantaged account.
Tips on HSA Investments
- Choosing the right mix of HSA investments is easier said than done. A financial advisor can help you choose the right investments for your financial goals. 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 interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Need help visualizing your asset allocation in relation to your risk tolerance? Check out our asset allocation calculator.
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