Maximizing Your Health Savings: How to Invest Your HSA Account

Health Savings Accounts (or HSAs, for short) are more than just a place to stash cash for doctor’s visits and unexpected medical bills. They’re also a powerful investment tool that can help you along your journey towards financial independence.

With tax advantages that outshine most other accounts, HSAs can serve as a critical component of your long-term financial planning. This guide will show you how to harness the full potential of your HSA, transforming it into a vehicle to grow your wealth while ensuring you’re covered for health expenses along the way.

What is an HSA and why is it important?

An HSA is a special type of savings account in which you can set aside money to pay for qualified medical expenses like prescriptions, glasses, dental care and more. Unlike a traditional savings account, though, an HSA is tax-advantaged. So the cash that you contribute to it ultimately lowers your taxable income. You can think of it as similar to a 401k in this regard.

The triple threat advantage

However, the benefits don’t stop there. When you invest your HSA, your account effectively becomes triple tax advantaged (at the federal level). Those three tax advantages are:

1. Your contributions lower your taxable income (as we mentioned above).
2. Investment growth in your HSA is tax-free.
3. Qualified withdrawals for medical expenses are also tax-free.

How does an HSA work?

You transfer money to your HSA just as you would a normal savings account. If you have an employer-sponsored plan, then your contributions are taken out of your paycheck.

Then, you use that account to pay for qualifying medical expenses, including the deductible for your insurance coverage (but not your premium).

The amount that you can contribute to your HSA each year depends on factors like your insurance coverage, age, and various other things. In 2024, the maximum that you can contribute is $4,150 for individuals and $8,300 for families.

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While other types of health-focused savings accounts require you to use your funds by the end of the year, an HSA rolls over any remaining balance indefinitely. So, fortunately, if you don’t use it, you won’t lose it.

Do I qualify for an HSA?

Even though an HSA is chock full of positives, it does come with a few requirements, mainly:

1. High-deductible health plan. You must use a high-deductible health plan (HDHP) as your insurance coverage. As of the time of writing, the IRS defines an HDHP as a plan with a:
   1. Minimal annual deductible of $1,600 (self) or $3,200 (family)
   2. Maximum annual deductible and out-of-pocket expenses of $8,050 (self) or $16,100 (family)
2. No other coverage. You’re not allowed to have any other health coverage (with limited exceptions).
3. No Medicare. You can’t be enrolled in Medicare.
4. Not a dependent. You can’t be claimed as a dependent on someone else’s tax return.

How to invest your HSA account

Most HDHPs have a partner that you can use to set up and invest your HSA account. If you don’t have that option, numerous banks and brokerages also allow you to set one up on your own.

Each brokerage has its own rules, but most of them allow you to invest your HSA funds as you please. And some even pay you interest for the uninvested cash you hold with them.

Investing for retirement

Because of the HSA’s triple tax advantage, many people use it as an alternative retirement account when aiming to achieve financial independence.

You may be wondering, “I thought that I could only use the funds in my HSA for medical expenses?” That’s correct for the most part, but the rules start to change once you reach 65.

Before turning 65, any non-medical withdrawal you make is subject to income tax and a potential 20 percent penalty tax.

Once you turn 65, you’ll still owe income tax on your non-medical withdrawals. But you no longer owe the 20 percent penalty - making the HSA a rather nifty option and something you should consider when you budget for retirement.

What are the best practices for HSA investing?

As with other types of investment accounts, investing your HSA funds isn’t just about selecting the right stocks or mutual funds. It’s also important to consider:

• Diversification: Many experts recommend diversifying your HSA investments to manage risk over the long-term. A popular choice among folks on their financial independence journey are index funds.
• Assessment: You should regularly review your investment choices and adjust them as necessary to align with your financial goals and market conditions.
• Fees: Be aware of any fees associated with your investment options, as these can eat into your returns over time.

Should you invest your HSA account?

Because of the need for a high deductible health plan, an HSA isn’t right for everyone. However, if you’re relatively healthy and don’t expect to have substantial healthcare needs throughout the year, it could be a good choice for you.

An HSA’s triple tax advantage and rollover capabilities make it a juicy option for retirement investing, and it’s something that you should at least consider when building your roadmap to financial independence. As with all things personal finance, though, be sure to thoroughly research your options before adjusting your game plan.

Want to learn more about other retirement-focused accounts? Check out our guide on the Roth IRA vs. Traditional IRA.

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