A health savings account is an often overlooked tool for building wealth. In addition to serving as an emergency fund for medical expenses, many HSAs offer investments similar to that of a workplace retirement plan.
Investing in an HSA is especially valuable because of the triple tax break — contributions, earnings, and withdrawals are not taxable as long as your money is held in the account or used for qualified medical expenses.
To sweeten the deal, funds in an HSA don’t expire at the end of the year like they do in flexible savings accounts. That means you can invest in stocks or bonds over a long period of time and still legally avoid taxes.
Unfortunately, most people with HSAs don’t take advantage of this benefit. According to a recent Employee Benefit Research Institute (EBRI) analysis of 11.4 million HSAs, 91% of account holders in 2020 held their balance in cash.
Contributing to an HSA is a smart way to save on taxes and set aside money for medical expenses now or in the future. But anyone looking to get the most out of their HSA should consider investing at least some of their money, or work toward that goal if they’re unable to invest right now.
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How to invest in your HSA
If you’re covered by a high-deductible health plan through your employer or a private insurer, you have access to an HSA. Some state laws require people covered by HDHPs to be automatically enrolled in an HSA. Other states leave it up to individuals to open an account.
If you were previously covered by a HDHP but aren’t anymore, you can still spend and invest your HSA money, you just won’t be able to actively save. You can keep the HSA as long as you want.
In 2021, individual account holders covered by an HDHP can contribute up to $3,600 to their HSA, while individuals with family coverage can contribute up to $7,200 for the year. If you’re 55 or older, you can add an extra $1,000 to your account annually. Contribution limits will increase in 2022, according to the IRS.
HSAs come with a debit card so you can easily access your cash balance to pay for qualified medical, dental, and vision expenses. That doesn’t include paying for the premiums that keep your policy active, but does include doctor visits, therapy, prescriptions, surgery costs, and more. During the COVID-19 pandemic, the federal government added personal protective equipment and menstrual products to the list of qualified medical expenses.
While rules among HSA providers vary, many require a minimum balance in your account before you can start investing, typically around $1,000 but sometimes more. If any portion of your HSA balance is invested, that amount will be separated from the money you can access by debit card or online transfer to pay bills.
You can buy investments directly through your online account. When you sell an investment, the money will be added back to your cash balance — tax free! — and available for you to spend on qualified medical expenses, though cashing out can take several days.
What to invest in
Investment options in HSAs vary by provider, but commonly include mutual funds, individual stocks and bonds, and ETFs. If you plan to invest, shop around to compare investment options and fees at different HSA providers before settling on one.
Unlike an employer-sponsored 401(k), your employer can’t dictate where you keep your HSA, even if they provide the health coverage that makes you eligible for one. You can change HSA providers as often as you want. The easiest way is by asking your current provider to move your balance to a new provider in a trustee-to-trustee transfer. If you already have investments, be aware that some institutions don’t allow portfolio transfers so you may have to liquidate your holdings before moving to a new provider.
Keep in mind that returns on investments are never guaranteed, but the stock market generally gains value over time. In their analysis of millions of HSAs, Jake Spiegel, a research associate at EBRI, and Paul Fronstin, director of the Health Research and Education Program at EBRI, found that account holders with some HSA money invested in the stock market had higher balances than those without investments.
Spiegel and Fronstin found that during 2020’s bull market, the average HSA with investments grew by $3,420. Meanwhile, the average HSA without investments grew by $170. HSA cash balances earn a small amount of interest, similar to a traditional savings account. They noted, however, that accounts with invested assets also had higher employer and employee contributions. They predicted that greater contributions may have made savers feel more comfortable investing some of their cash than those with fewer contributions.
When it’s a good idea to invest & when it’s not
Investing through an HSA can be a smart supplement to your retirement plan, says Annette VanderLinde, chief client officer at fee-only financial advisory firm Portfolio Solutions.
“Future medical needs and illness are unpredictable, making it extremely challenging to budget for healthcare expenses,” VanderLinde says. Since HSAs are earmarked for medical expenses, she says, contributing as much as you can and investing that money for maximum growth now could reduce some of the pressure on your retirement portfolio to produce income later. There’s no “spend by” date for your HSA money or expiration date for your investments, but once you’re covered by a non-HDHP, including Medicare, you have to stop adding money to your account.
But investing isn’t the best choice for just anyone with an HSA. If you don’t have sufficient cash flow or savings to cover out-of-pocket medical costs, it’d be wise to keep a portion of your HSA balance in cash. Otherwise, you run the risk of having to sell investments on a whim, potentially during a market lull, to come up with the money.
You can play it safe by reviewing your health insurance policy to see what your out-of-pocket maximum and keeping at least that amount in cash in your HSA. An out-of-pocket maximum is the most you would have to pay annually for healthcare before insurance fully kicks in. This year, the federally set limit is $8,550 for individual plans and $17,100 for family plans, but yours may be lower.
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