If you have a Health Savings Account (HSA), you may already know it’s a powerful tool for managing healthcare expenses. But did you know it can also double as a stealth retirement account?
Most people use their HSA just like a regular savings account—contributing money and spending it tax-free on medical expenses. But there’s a hidden opportunity: you can invest the money in your HSA and grow it over time, tax-free. And when done right, this strategy can unlock serious long-term value.
Let’s break down how to invest your HSA funds and why it’s so important.
First, What Is an HSA?
An HSA is a tax-advantaged savings account available to individuals with a high-deductible health plan (HDHP). It allows you to:
- Contribute pre-tax dollars
- Use the money tax-free for qualified medical expenses
- Grow your savings tax-free if you invest the funds
That’s a triple tax advantage—which no other account (not even a Roth IRA or 401(k)) can offer.
Why You Should Invest Your HSA Money
Most people keep their HSA funds in cash. That’s fine if you have short-term medical expenses coming up. But for those with time on their side, investing offers a huge advantage:
- Compound Growth
If you’re not using the money for a few years (or even decades), you could miss out on the potential for compound growth. For example, $10,000 invested in a simple index fund with a 7% return could grow to over $19,000 in 10 years.
- Tax-Free Earnings
Unlike a traditional brokerage account, you won’t pay capital gains tax on investment earnings in an HSA—if you eventually use the money for qualified medical expenses.
- Healthcare Costs in Retirement
Fidelity estimates that a 65-year-old couple retiring today will need around $315,000 for healthcare expenses in retirement. Investing your HSA now can help you cover those costs later—without dipping into your 401(k) or IRA.
How to Invest Your HSA Money
- Check If Your HSA Allows Investing
Not all HSA providers offer investment options. Some only offer basic savings accounts. Look for providers that allow you to invest in mutual funds, ETFs, or even individual stocks.
If your current provider doesn’t offer investing, consider transferring to one that does. Popular investment-friendly HSA providers include Pinnacle, Health Equity, and HSA Bank.
- Understand the Investment Threshold
Many HSA providers require you to keep a minimum cash balance (e.g., $2,000) before you can start investing the rest. Be sure to meet that threshold so you can start investing. When you need to use funds to pay medical expenses, most providers will automatically pull the necessary funds from the investments to maintain that cash threshold.
- Choose Your Investment Strategy
If you don’t need the funds soon, consider a long-term investment strategy like:
- Low-cost index funds or ETFs (e.g., S&P 500)
- Target-date funds based on your retirement age
- Diversified mutual funds with a risk profile that suits you
Avoid risky, short-term speculation. Treat your HSA like a retirement account: the goal is long-term growth.
- Keep Records
You can reimburse yourself for qualified medical expenses at any point in the future, if the expense was incurred after your HSA was opened. This means you can let your money grow and choose when to take withdrawals—just keep good records and receipts.
Pro Tip: Save, Don’t Spend (If You Can)
To truly maximize your HSA, pay out-of-pocket for current medical expenses if you can afford it. This way, your HSA funds stay invested and continue to grow tax-free. You can always reimburse yourself later.
Final Thoughts
An HSA is more than just a savings account; it’s one of the most powerful investment vehicles available. If you’re healthy and have a long investment horizon, consider investing your HSA funds rather than spending them. The triple tax advantage and long-term compounding can make a meaningful difference in your financial future, especially when it comes to covering healthcare costs in retirement.
Don’t leave that money sitting idle, put it to work.
If you would like assistance setting up an HSA or learning more about investing your HSA funds, reach out to Silberman Group. We would love to help you.
