How to Invest with Your HSA

Investing Advice How to Invest with Your HSA

Getting ahead financially is a game of inches. It’s about finding every trick, tip, and loophole you can find to maximize the growth potential of your money. There’s no topic where the phrase “work smarter, not harder” is more relevant.

It’s true that hard work is important, but grinding away at your job can only go so far. To build real wealth, you need to take advantage of every opportunity available to let your money do the hard work for you. In short, that means looking into nontraditional investing options once you’ve maxed out your regular accounts.

That’s why some people choose to invest with their Health Savings Account (HSA). Here’s what you need to know about going that route – how to do it, what to watch out for and how to decide if it’s the right option for you.

What is an HSA?

An HSA is exactly what it sounds like – a savings account for healthcare expenses. You can save money in an HSA to pay for lab work, prescriptions, imaging and doctor’s visits. Most medical bills qualify for HSA reimbursement except for elective surgery, monthly premiums and some alternative treatments. You can find a full list of eligible items through your HSA provider.

To open an HSA, you have to be under an eligible high-deductible plan. These plans must have a deductible of at least $1,350 for individuals and $2,700 for families. The out-of-pocket max for individuals must be no more than $6,650 for individuals and $13,300 for families. Typically, the high-deductible plans will have an HSA next to the name. Not every high-deductible plan qualifies for an HSA.

Like IRAs and 401ks, HSAs have a maximum annual contribution limit of $3,500 for individuals and $7,000 for families in 2019. If you contribute the family limit, both you and your partner have to be covered under a high-deductible plan. People 55 and older can contribute an extra $1,000 per year. There is no limit dictating when you have to stop contributing. As long as you’re under a high-deductible plan, you’re eligible.

HSAs famously have a triple tax benefit. You can deduct contributions on your taxes, withdraw money tax-free and let your earnings grow tax-free. There’s no other type of account that combines all three of those aspects.

Why Invest Your HSA?

Your HSA is one of the best savings vehicles available, but most people don’t realize they can use it as an investment account. While there are situations where investing your HSA is a bad idea, the upside is hard to ignore.

An HSA combines the tax benefits of both Roth and traditional IRAs, allowing you to deduct contributions on your taxes. You also don’t have to pay taxes on earnings and withdrawals if you use HSA funds for qualified medical expenses.

How to Invest Your HSA

First, open an HSA if you don’t have one already. Like bank and brokerage accounts, HSA providers are built differently and some companies are better than others. Lively and Fidelity are two of the best for investors because they have the lowest investing fees.

You might already have an HSA through your employer. If you do, look at their investment requirements, rules, and fund selection. Not every HSA provider has a good investment selection, and some have as few as 23 mutual funds while others have thousands. If you don’t like what you find, open a new HSA and transfer money from the employer’s HSA to your own.

Every HSA mandates that you keep at least some portion of your HSA in cash before you can start investing. Usually, the minimum is $2,000, but there are a few where the requirement is only $1,000. With a small handful, the requirement is a full $5,000. Find the lowest minimum possible if investing is the route you plan to take.

Next, pick which funds you want to invest in. If you’re not sure how to pick funds, contact a financial planner who can guide your decision. You can also choose funds similar to your IRA or 401k.

Once you’ve picked your investments, decide how you want to manage your account. Some people save manually every month, while others set up automatic transfers from their regular bank account to an HSA. Saving manually will keep you from overdrawing your account if money is tight, but automatic transfers are the best way to encourage consistent contributions. Choose the method that works best for your situation and personality.

When to Invest with Your HSA

Because HSAs don’t have income limits like Roth IRAs or 401ks, they’re more advantageous to high-income earners with limited access to other retirement plans. You also don’t have to contribute earned money to an HSA as you do with an IRA.

If you’ve already maxed out your IRA and 401k and still have money leftover, the HSA is a better choice than opening a brokerage account. You don’t have to pay taxes on your HSA unless you overcontribute or accidentally use HSA money for non-medical expenses.

If you’re older than 65, you can use your HSA for anything without paying a fine – though you’ll still owe income tax.

There’s no time limit on when you can get medical bills reimbursed through your HSA, as long as you have proof of purchase. If you get surgery at 45 and pay for it out-of-pocket, you’re allowed to reimburse yourself for the cost at 65 with your HSA.

The downside to investing with your HSA is that your value can drop suddenly if the market experiences a downturn. For the same reason that investing your emergency fund is risky, investing your HSA could leave your account balance dwindling when you need it most.

This is only relevant if you’re dealing with recurring medical bills and don’t have enough in the cash portion of your HSA to cover it. If you have major surgery or expensive lab work coming up, leave an appropriate amount in your HSA uninvested.

Tags:

Comments (9) Leave your comment

    1. I didn’t either, I’ll be raising my allowable balance asap. You don’t claim them as income, the author states you simply invest after you’ve reached your accounts minimum investing threshold in $. Whether you deposit automatically or not, it’s a great way to lower your taxable income due to somewhat secure investments. Watch Wolf of Wall Street to understand why it has some volition. Besides that has to be more sounds of a decision then banking on social security more or less.
      I don’t claim to be a smart investor, just savvy with my finances to a certain extent and wish to convey the author’s message a little further for you 🙂 God Bless!

  1. Helpful info! Question- If you deposit money into your HSA account directly through your paycheck, is that money used to fund your HSA pre-taxed or after taxed dollars? TIA

  2. My Saturna brokerage HSA has *no* cash balance requirement before investing. Trade commission is $15. There’s a $1 commission for each dividend automatically reinvested, which with a small balance is proportionally a pretty big expense that cuts into the advantage.

    The big HSA tax advantage is if you make the contributions as paycheck deductions to your employer-sponsored HSA, then there’s no FICA (Medicare and Social Security) tax withheld, which is like a free 7.45%. But to make that actually pay off over the long term, you probably then need to transfer the money to an HSA like Saturna with more advantageous investing structure (low/no cash balance requirement, low commissions, etc.).
    The hassle–researching and opening this other account, setting it up, and annually transferring the money and buying ETF shares–constitutes one non-monetary cost of this approach.

    And on this route, good investments will be ETFs, per share, so there will be some cash left over earning nothing, which is a multiplying disadvantage versus a 401k or IRA with good mutual funds.

    The full tax advantage requires that you eventually reimburse yourself for medical expenses.
    But that advantage is only likely worth much if you stay in the market long enough to have gains.
    To do that you have to pay out of pocket now, then reimburse much later, as in the example above.
    One related cost is the burden of retaining receipts for medical expenses for a long time (though IRS enforcement is generally honor system; you only have to show receipts if audited).

    Basically everybody is going to have medical expenses eventually. Lord, curse me with the problem of having no reimbursable medical expenses and thus having to pay income taxes on non-medical HSA withdrawals instead!

  3. My brokerage HSA has *no* cash balance requirement before investing. Trade commission is $15. There’s a $1 commission for each dividend automatically reinvested, which with a small balance is proportionally a pretty big expense that cuts into the advantage.

    Basically everybody is going to have medical expenses eventually. Lord, curse me with the problem of having no reimbursable medical expenses and thus having to pay income taxes on non-medical HSA withdrawals instead!

Leave a Reply