A health savings account (HSA) offers the opportunity to build an investment portfolio to cover future medical expenses. This specialized account could be a game-change in retirement with the right investment strategy. Let’s break down how you could use your HSA as an investment tool for retirement.
A financial advisorcould help you create a financial plan for your investment needs and goals.
What Is an HSA?
An HSA is a specialized savings account that is designed to help you save for future medical expenses. In recent years, HSAs have become a more popular option offered to employees.
Essentially, when you have an HSA combined with a high-deductible health plan, you can lower your monthly premiums significantly over a traditional healthcare plan. Hopefully, your budget allows you to put those savings directly into your HSA.
As you build savings within this account, you can invest the funds for long-term growth. Plus, take advantage of plenty of special tax benefits. And combined with other investments, an HSA can help boost your retirement savings.
HSA Investment Strategy
The details of an appropriate HSA investment strategy will vary for everyone. Here are four key things to consider:
Consider the value. Before you jump into an HSA investment strategy, it is critical to consider the value this type of account brings to the table. Otherwise, it can be challenging to find the motivation you need to build savings in this unique account.
The tax rules surrounding HSAs are a big part of the value an HSA offers. Specifically, your contributions reduce your taxable income, and your money will grow tax-free. Plus, you can even make tax-free withdrawals if the money is used for a qualified medical expense. That’s a triple tax benefit worth pursuing.
Contribute as much as possible.With the tax savings opportunities in mind, it makes sense to prioritize your contributions to an HSA. But how much can you contribute?
In 2022, you can contribute up to $3,650 as a single person with a high deductible health plan (HDHP). Or up to $7,300 as a family with HDHP coverage.
Of course, you might not have the means to max out your HSA contributions. And that’s okay! But it is a good idea to contribute what you can regularly. For example, let’s say you save $50 per month by switching from a traditional health plan to an HDHP. If possible, funnel those savings directly into your HSA.
Choose an asset allocation that reflects your risk tolerance. An appropriate asset allocation will vary based on your risk tolerance. That fact doesn’t change when you are investing through an HSA.
Here are three common allocations:
- 60/40 portfolio: You’ll split your assets with 60% in stocks and 40% in bonds.
- 80/20 portfolio: You’ll split your assets with 80% in stocks and 20% in bonds.
- Age-based: As you age, your risk tolerance declines. And with that, your asset allocation may need some adjustments along the way.
In many cases, you may decide to put your HSA dollars into a less risky strategy. That’s because at least some of these funds need to be available for when you incur a healthcare expense.
Reimburse yourself later. An HSA is designed to cover your health care costs. But there is no timeline for your reimbursem*nt requirements. You can hang on to healthcare receipts and reimburse yourself when you actually need the funds.
For example, let’s say that you have a $500 medical bill this month. Instead of pulling the funds out of your HSA, you can cover the cost with your monthly income. So, you hold on to the receipt. In 10 years, you have an expense that requires dipping into your HSA. At that point, you can turn in the $500 receipt and pull out the funds without paying taxes on the withdrawal.
So why would you wait to reimburse yourself?Reimbursing yourself later means that the funds invested in your HSA can continue to grow. Since time is on your side as an investor, the hope is that your portfolio will be allowed to reach its full potential if you can avoid taking out any funds.
Bottom Line
An HSA can help you build savings for medical expenses in retirement. If you are choosing to invest in an HSA, make sure that your investment strategy aligns with your financial goals. And don’t forget to make regular contributions to watch your HSA grow.
Tips to Build HSA and Retirement Investments
- An HSA is a great way to build a portfolio to cover future medical expenses. Consider working with a qualified financial advisor to map out the best retirement savings strategy.SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to figure out whether you are saving enough for retirement, SmartAsset’s free retirement calculator can help you determine how much you will need.
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FAQs
If you plan to use the money in your HSA to pay for qualified medical expenses within the next two to five years, it's best to invest it in low-risk, liquid assets such as high-yield savings accounts, money market funds or CDs.
What is the best investment strategy for HSA? ›
If you plan to use the money in your HSA to pay for qualified medical expenses within the next two to five years, it's best to invest it in low-risk, liquid assets such as high-yield savings accounts, money market funds or CDs.
How much of my HSA money should I invest? ›
Account holders who don't invest their HSA contributions could be missing an opportunity to earn tax-free returns. We generally suggest keeping two to three years' worth of routine medical expenses in cash, cash investments, or similar low-volatility investments within your HSA.
How do I maximize my HSA account? ›
Contribute enough to cover your expected medical expenses—and then some. Aim to build the account to completely cover one or more years of maximum out-of-pocket costs. Only draw on the account for large or unusual medical expenses, not the routine ones.
What should my HSA investment threshold be? ›
Investing basics
Once your HSA reaches the investment threshold (typically $2,000), you may choose to invest a portion of your HSA dollars in mutual funds — just like you would with a 401(k). You can choose from a wide variety of mutual funds at optumbank.com.
What is 1 potential downside of investing in an HSA? ›
The main downside of an HSA is that you must have a high-deductible health insurance plan to get one.
How do you build wealth with an HSA? ›
Think of your HSA as a home for your medical money. Just like a brokerage account or an IRA, you'll need to put money into the account before you buy investments. Then, after you fund the account, you can start investing.
What happens to unused HSA funds? ›
Unlike many flexible spending accounts (FSAs) and health reimbursem*nt arrangements (HRAs), unused HSA funds automatically carry over to the following year. Even if your employer provided the account and made contributions, the account belongs to you — so any remaining funds are carried over every year.
Should I max out my HSA every year? ›
Contribute as much as you can afford to an HSA. The tax advantages of a health savings account (HSA) are unique, even better than any IRA or 401(k) plan. As a result, an HSA is like a “super IRA,” and you should contribute as much as you can afford, subject to IRS limits on HSA contributions.
Is HSA better than 401k? ›
The triple-tax-free aspect of an HSA makes it better for tax management than a 401(k). However, since HSA withdrawals can only be used for healthcare costs, the 401(k) is a more flexible retirement savings tool. The fact that an HSA has no RMD gives it more flexibility than a 401(k).
Keep in mind that you can reimburse yourself for any expense at any point, as long as it was incurred after your HSA was established. So if you had an expense that you paid out-of-pocket last year after your HSA was established, but want to reimburse yourself for it this year, you can do so without penalty.
What happens to my HSA when I turn 65? ›
If you have money in your HSA when you turn 65, you can spend it on anything you want — but if you aren't spending it for a qualified medical expense, it will be taxed as income at your then current tax rate. You must stop contributing to your HSA when you enroll in any part of Medicare.
Can I use HSA for gym membership? ›
Gym memberships. While some companies and private insurers may offer discounts on gym memberships, you generally can't use your FSA or HSA account to pay for gym or health club memberships. An exception to that rule would be if your doctor deems fitness medically necessary for your recovery or treatment.
When should I stop contributing to my HSA? ›
If you are retiring at the age of 65 ½ or older, to avoid potential tax issues, you want to STOP YOUR HSA CONTRIBUTIONS so that you have 6 months of NO contributions before you FILE FOR MEDICARE.
Should you spend your HSA or save it? ›
How you use your HSA really depends on your health care needs and longer‑term goals. It's all about balance: Spend when you need to and save as much as you can to take advantage of the benefits of your HSA that can help you be ready for the future.
How to avoid HSA bank monthly fee? ›
Monthly account fees for HSAs are generally less than $5, and many HSA administrators have no monthly fee at all. And it's common for monthly account fees to be reduced or waived if you maintain a minimum account balance, which is usually in the range of $1,000 to $5,000.
Is it worth investing your HSA account? ›
Comparing HSA to 401(k)
But your HSA can be one of the best accounts for saving for retirement. Not only can you invest1 your HSA and potentially capitalize on tax-free growth, but your HSA also delivers powerful tax advantages you can't find anywhere else.
Should I use HSA money or let it grow? ›
If you don't spend the money in your account, it will carryover year after year. Your HSA can be used now, next year or even when you're retired. Saving in your HSA can help you plan for health expenses you anticipate in the coming years, such as laser eye surgery, braces for your child, or paying Medicare premiums.
Are target date funds good for HSA? ›
Investors who are looking to retire around 2050 can use a target-date fund like FIPFX in their HSA. This fund will automatically adjust its allocation of stocks and bonds to become more conservative as the target date nears.
