A health savings account is a valuable tool for saving money while receiving the medical care and treatment you need. But paying for doctor’s bills and prescription drugs aren’t the only ways you can use your HSA. You can use the savings to invest and prepare for future medical costs during retirement. Here’s a look at how that works:
Are you maxing out your HSA?
As of this year, the IRS set the maximum HSA contribution limit for every individual at $3,650 annually. If you can afford to set aside that much money every year, you definitely should. Why? When you route money into your HSA, you’re essentially saving up money to cover future medical costs. Those needs may arrive this year or they may arrive decades from now.
And whatever portion of your paycheck you send to your HSA, you won’t lose it if you don’t spend it right away. According to Louise Norris of HealthInsurance.org, that’s a key difference between an HSA and an FSA. “With an HSA, there’s no ‘use it or lose it’ provision. If you put money in your HSA and then don’t withdraw it, it will remain in the account and be available to you in future years.”
How can you invest with your HSA?
Once you stock your HSA with sufficient funds and wait a certain period of time to qualify, your provider may give you the option of investing a portion of the account. Every provider offers different options for how and if you can invest your HSA money, so you’ll need to contact your company for details on your plan.
Essentially, the money in your HSA could earn interest just like a retirement plan does by being invested in mutual funds, stocks, or bonds. Imagine how your savings could compound over time if you allocate $3,650 annually and it increases at 5 percent while the balance continues to grow tax-free year after year!
“Some HSAs offer tools that help you choose your investments and provide automatic rebalancing, so your portfolio stays within your preferred allocation,” explains Alana Benson of NerdWallet. “Others allow you to select from specific investments, such as stocks, bonds, mutual funds and ETFs.”
Just keep in mind there’s no guarantee investing your HSA funds will result in a positive yield. Plus, the administrative and investment transaction fees also vary, so consider the cost and risks of investing before deciding.
Why invest with your HSA?
How is an HSA different from a standard retirement investment account? Money you allocate to your HSA is tax-free and reduces your taxable income. As Robert Farrington explains for Forbes, “On the front end of the equation, the contributions made to an HSA account are tax-advantaged, meaning they reduce your taxable income. This means you'll pay less in income taxes in the years you contribute to an HSA.”
If you’re worried you may overeagerly allocate more money to your HSA than you’ll need in the long run, you don’t have to worry about that being a problem. You can still withdraw that money and spend it as you please once you reach a certain age. Farrington reassures, “You can take it out and use it for anything you want (including to supplement your retirement) without a penalty starting at age 65. You'll just have to pay ordinary income tax rates on the money you take out.”
The vast majority of people with HSAs aren’t taking advantage of them by investing the funds. According to 2019 study by Devenir, a little over four percent of all health savings accounts have at least a portion of their funds invested. If you’re one of the countless people who has an HSA but isn’t using it to its full potential, talk with your provider to explore what investment options they offer.