Note: This is the second of a 3-part series of blog posts. A previous blog post discussed contributing to an HSA, and a subsequent post will discuss distributing (or spending) HSA funds.
Since 2003, when they were created, millions of Americans have taken advantage of health savings accounts (HSAs) to save money for healthcare expenses and retirement.
One major advantage of an HSA is that accountholders can grow their HSA funds tax-free.1 And because HSA funds roll over every year, those funds can grow all the way into retirement, saving a lot of money in taxes over time.
Below are three basic ways HSA owners can grow their funds:
1. Contribute the maximum annual amount each year
The easiest way to grow funds in your HSA is to simply contribute to it. This can be done through tax-free payroll deductions, employer matches and, in some cases, participating in company wellness programs where dollars are contributed into the HSA based on defined activities.
For 2018, the total, maximum contribution amounts are $3,450 for individuals and $6,900 for a family. (Accountholders age 55 or older can contribute an additional $1,000 annually.)
2. Earn interest on HSA funds
Accountholders can also earn interest on funds in their HSA. The interest rate depends on the HSA provider, so that is something to research before deciding which HSA provider to choose.
3. Invest HSA dollars
Many HSA providers offer the option to invest your funds once you have a minimum balance in your HSA.2 Investments are not without risk, so it is important to talk to a financial advisor about your investment options. It’s also important to review an HSA provider’s investment options as well as the fees they charge.
A Devenir Research report indicated that, as of the end of 2017, only about 4% of accountholders invested their HSA funds, but they held more than 26% of HSA assets in the market overall. In addition, investing accountholders had an average total balance of $16,457 in their HSA, which is 8.6 times more than non-investors.3
Conclusion
Growing the funds in an HSA is an important part of saving money for healthcare expenses or for retirement. Any increase in the funds, either through contributions, interest or investing, is not taxable,1 so accountholders may want to explore all three options to take full advantage of the tax savings available.
1 HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-free with very few exceptions. Please consult a tax advisor regarding your state's specific rules.
2 Investments available to HSA holders are subject to risk, including the possible loss of principal invested and are not FDIC-insured or guaranteed by HealthEquity, Inc.
3 Devenir Research, 2017 Year-End HSA Market Statistics & Trends
Nothing in this communication is intended as legal, tax, financial, or medical advice. Always consult a professional when making life-changing decisions.
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FAQs
HSAs are tax-advantaged accounts. So long as you use it correctly, money that moves in and out of an HSA is 100% tax-free. HSA funds do not expire, and they roll over from year to year. It is not a use-it-or-lose-it account like other common health spending accounts.
What you should know about an HSA? ›
A Health Savings Account (HSA) is a type of personal savings account you can set up to pay certain health care costs. An HSA allows you to put money away and withdraw it tax free, as long as you use it for qualified medical expenses, like deductibles, copayments, coinsurance, and more.
What are 3 advantages of an HSA? ›
6 Benefits of choosing an HSA plan
- Save on taxes. Your HSA contributions go into your account before taxes. ...
- Save on your medical expenses. Use your HSA funds to pay coinsurance, copays and your deductible (all tax-free). ...
- Your money works harder in an HSA. ...
- You're in control. ...
- An HSA is an investment. ...
- Save for retirement.
HSA Tax Advantages
Health Savings Accounts offer a triple-tax advantage* – deposits are tax-deductible, growth is tax-deferred, and spending is tax-free. All contributions to your HSA are tax-deducible, or if made through payroll deductions, are pre-tax which lowers your overall taxable income.
What are the advantages and disadvantages of an HSA? ›
You pay less out-of-pocket due to the lower deductible and copay, but pay more each month in premium. HSA plans generally have lower monthly premiums and a higher deductible. You may pay more out-of-pocket for medical expenses, but you can use your HSA to cover those costs, and you pay less each month for your premium.
What is one downside of an HSA? ›
What Is the Main Downside of an HSA? The main downside of an HSA is that you must have a high-deductible health insurance plan to get one.
What's one potential downside of an HSA? ›
"Potential tax drawbacks: Prior to age 65, HSA funds withdrawn to pay for nonmedical expenses are considered taxable income. The IRS also levies a 20 percent penalty. Expenses can be audited by the IRS so you should keep receipts for all payments made with HSA funds.
What is an HSA for dummies? ›
A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your out-of-pocket health care costs.
Who benefits most from HSA? ›
You're eligible regardless of your income
Unlike deductible IRAs or Roth IRAs, there are no income limits associated with an HSA. This means that higher wage earners can take 100% advantage of a federally tax-deductible account unlike others they may not qualify for.
What is an HSA and why is it beneficial? ›
“HSAs are intended to help you save pre-tax or tax-deductible dollars to pay for qualified medical expenses — both now and in the future — that aren't covered by insurance,” says Jennifer Goldsmith, director and head of Health Benefit Solutions at Bank of America.
You can also use HSAs to help pay for dental care. While dental insurance can help cover costs, an HSA can also help cover any out-of-pocket expenses resulting from dental care and procedures.
Are HSAs worth it? ›
HSAs have risen in popularity over the past few years because, in combination with high-deductible health plans (HDHPs), they can vastly reduce the monthly premium you and your employer pay. A higher deductible means lower premiums and that could mean huge savings for you and your employer.
Should I use my HSA or pay out-of-pocket? ›
Use HSA funds to pay for emergency medical costs.
A better option is to pay with other funds and keep track of expenses. Medical claims never expire, so money can be withdrawn tax-free in retirement in order to reimburse medical expenses that were paid out-of-pocket years before.
Why you should invest in HSA? ›
HSAs are triple tax advantaged, making them an effective savings and investment account: Withdrawals for qualified medical expenses are income tax-free. All contributions to an HSA are income tax-free. And, any interest earnings and investment growth from deposits are income tax-free.
What can I use my HSA for? ›
By using pre-tax dollars in an HSA to pay for deductibles, copayments, coinsurance, and other qualified expenses, including some dental, drug, and vision expenses, you can lower your overall health care costs. You can contribute to an HSA only if you have an HSA-eligible plan.
How do you take advantage of an HSA? ›
Contributing the maximum annual contribution and investing for the long term is the best way to get the most benefit from your HSA. Avoid using the HSA as your emergency fund because nonqualified withdrawals are subject to ordinary taxes and possibly penalties.
Is it worth investing in an HSA? ›
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.
Is an HSA a good way to save money? ›
HSAs are triple tax advantaged, making them an effective savings and investment account: Withdrawals for qualified medical expenses are income tax-free. All contributions to an HSA are income tax-free. And, any interest earnings and investment growth from deposits are income tax-free.
How much should you keep in an HSA? ›
The short answer: As much as you're able to (within IRS contribution limits), if that's financially viable. If you're covered by an HSA-eligible health plan (or high-deductible health plan), the IRS allows you to put as much as $3,850 per year (in 2023) into your health savings account (HSA).
Should I invest everything in my HSA? ›
Try to invest as much of your HSA money as possible while ensuring that you keep enough cash to cover your qualified medical expenses. Consider where your other retirement plans are invested as well to make sure that your HSA investments provide diversification. Avoid taking out funds from your HSA as much as possible.
