Use Your HSA as an Investment Vehicle: How to Maximize Your Health Savings Account Value

One of the financial products gaining a lot of attention lately is the Health Savings Account (HSA). The HSA allows you to set aside money for your medical expenses without a lot of trouble. 

HSAs are connected to high-deductible health plans (HDHP). HDHPs require you to pay more out-of-pocket until you reach the deductible, but you also pay a lower monthly premium. 

You can use HSA funds to cover your out-of-pocket medical costs and continue saving your HSA money. 

That’s the critical thing to remember about the HSA. The money is yours. No matter who offers the account, the money is yours. You can even open an HSA with a custodian that isn’t your employer’s or your health plan’s choice. And, you can roll over your HSA to another custodian as you like.

Unlike Flexible Savings Accounts, the money in your HSA does not expire at the end of the year. You can leave your money in your HSA indefinitely, even if your health care plan changes and you are no longer eligible to contribute to it.

If you do it right, having your HSA can be like having another investment account.

How to Invest in Your HSA

Review your health care plan to see if you are eligible for a health savings account. HSA-eligible health care plans are becoming more popular with both employers and employees because they tend to offer lower premiums than other health care plans.

You can also find HSA-eligible health care plans if you do not have an employer-sponsored plan. Some of these plans exist on the Affordable Care Act exchanges. Many individual health care plans you can find through companies such as eHealthInsurance are also HSA-eligible.

Once you open your HSA, you can invest your funds accordingly. Investing in an HSA can be easier when your bank automatically links your HSA to an investment account.

I opened mine at HSA Bank, which offers flexibility, low fees and links your account with a TD Ameritrade investment account (TD Ameritrade ranks among our top-rated brokerage firms). Here are the criteria I considered when opening an HSA.

Benefits of Investing in an HSA

An HSA combines the best elements of a traditional IRA (tax deduction for contributions) with the best of a Roth IRA (tax-free growth). Additionally, it’s possible to hold various investments in an HSA. Most HSA custodians offer money market funds and similar assets. While the returns aren’t always the highest, they are a stable way to invest your funds. Money market funds may be a good option if you think you’ll need to use your funds soon.

Some independent HSA custodians allow you to hold various investment types, such as index funds, ETFs, stocks, bonds and other investments. So, you can use your HSA as an extension of your overall investment portfolio and allocate your funds accordingly.

The money grows in your HSA as it would in an IRA. However, you must be careful about how you use the money. You can withdraw the funds – contributions and earnings – without penalty at any time for qualified medical expenses. If you use the money for nonmedical expenses, though, you will have to pay regular income taxes and a 10% early withdrawal penalty.

The 10% penalty is waived once you reach age 65. At that age, your HSA becomes just like another traditional IRA. You’ll only pay your regular income tax on the amount you withdraw.

How and Why You Should Max Out Your HSA Plan Contributions

The IRS establishes the annual HSA contribution limits each year. In most years, the contribution increases. 

Here are the current HSA contribution limits, along with the limits from some of the recent tax years:

Tax Year Individual Family Catch-Up Contributions
(age 55 and over)
2023 $3,850 $7,750 $1,000
2022 $3,650 $7,300 $1,000
2021 $3,600 $7,200 $1,000
2020 $3,550 $7,100 $1,000
2019 $3,500 $7,000 $1,000
2018 $3,450 $6,900 $1,000
2017 $3,400 $6,750 $1,000
2016 $3,350 $6,750 $1,000
2015 $3,350 $6,650 $1,000
2014 $3,300 $6,550 $1,000
2013 $3,250 $6,450 $1,000
2012 $3,100 $6,250 $1,000
2011 $3,050 $6,150 $1,000
2010 $3,050 $6,150 $1,000

As you can see, the HSA contribution limit for family plans is $7,750 in 2023 (the limit for individuals is $3,850). And, even though the HSA is similar to an IRA, the IRS doesn’t consider it to be the same thing, so it doesn’t count against your eligible IRA contribution limits.

Contributing the maximum to your HSA allows you to shelter a large amount of money from your taxes each year, and it will grow tax-free until you decide to use it. This makes the HSA a flexible and powerful way to invest your money.

How You Should Invest With Your Health Savings Account

How you invest in your HSA depends on the factors you should consider when investing in any account – your timeline, risk tolerance and overall asset allocation.

If you plan to use your HSA for your current medical expenses, then you will most likely want to keep your HSA funds in a savings account, money market or certificate of deposit. This will preserve your spending power and expose your funds to the least risk.

If you don’t have a lot of anticipated medical expenses or you believe you can pay for your medical expenses from your cash flow, then you may decide to invest your HSA funds much as you would invest in an IRA. That means you can gear your investments more toward equities such as stocks, mutual funds or ETFs.

Whichever method you choose, be sure to reevaluate your HSA needs regularly. If your situation changes and you need access to the funds shortly, then you may wish to change your asset allocation in your HSA. 

Because your HSA investments are tax-deferred, you won’t have to pay taxes on gains when you make trades inside your HSA account. So you can invest in your HSA as you would invest in an IRA, but don’t take too much risk with funds you may need soon.

How to Allocate Your HSA Investments in Your Portfolio

As mentioned above, your main determining factors should be your timeline and your risk tolerance. If you decide to let your money grow for a long time, you may wish to include your HSA investments with your overall asset allocation.

Asset allocation is easy when you only have one or two investment accounts. But it can get complicated when you have multiple investments or multiple retirement accounts. To make managing your investment portfolio easier, you can use a free online tool called Personal Capital. Personal Capital aggregates your financial data and helps you analyze it. It gives you a free and powerful tool to help you understand how all your investments work together. This is important when you have multiple financial and investment accounts working together.

Personal Capital analyzes your investments and shows your asset allocation across all your accounts. From there, you can easily decide how to change your asset allocation.You can learn more in our Personal Capital review, comparison to (another money management tool), or by visiting the Personal Capital website.

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