If you’ve ever used a Health Savings Account or HSA, you know how nice it is to have a dedicated pot of money you can dip into to help pay for a doctor’s visit.
For those who need a quick refresher: A HSA is where you can stash some funds and use them to pay for qualified medical expenses. That’s IRS-speak for things like prescriptions, doctor visits, therapy, etc. Basically, it’s a dedicated savings account for health care costs.
You have to have a high deductible health plan and meet other requirements in order to open and fund a HSA. But we won’t rehash those details here – you can check our article “Got an HSA?” to learn more.
What we want to talk about is investing your HSA.
Not many people are aware (or they forget) that they may have the option to invest all or a portion of their account balance. And who can blame them? The “savings account” part in the name can kind of throw you off!
So let’s go over the basics of HSA investing. Once you have a better idea of how it works, you can decide if it’s right for you.
It can be easy to think of your HSA as nothing more than a glorified savings or checking account, where you can move money in and out to pay your medical bills.
But it’s important not to forget that HSAs bring something a little extra to the table – specifically, their much-touted triple tax advantages.
Given these potential tax benefits, investing your HSA could play an important part in your overall retirement strategy. Any tax-free earnings could help boost your health care savings and build wealth over time.
Here’s something else you may not know: After you turn 65, you can use your HSA money for things not related to health care. You’ll have to pay ordinary income tax on the withdrawals, but there’s no penalty for using your money to cover nonqualified expenses.
In this way, a HSA is similar to a 401(k) or traditional IRA, which you could tap into for retirement.
But unlike those retirement accounts, HSAs have no required minimum distributions (RMDs). While that may not seem like a big deal at first, it means your money can stay invested until you need it.
Bottom line? Not only could a HSA be a great savings tool for your current health care expenses, it could also help you invest for the future.
Good to know: There are a lot of tax rules surrounding HSAs. It’s a good idea to check in with a tax professional if you have any questions before you start investing.
Now that you have an idea of some of the potential benefits of investing your HSA, let’s look at how you could get started.
If you have a HSA already – like say, through your employer’s health plan – you can contact your HSA administrator or provider to learn more about your investment options.
Depending on your provider, you may be able to choose and manage your own investments (like stocks, bonds, ETFs, mutual funds, etc.) through a self-directed account.
More of a hands-off type? (We feel you.) Some HSA providers also offer managed accounts with pre-selected investment funds you can choose from. You can decide how you want your money to be allocated based on your risk tolerance.
Some accounts may also give you the option to sign up for automatic rebalancing so that your portfolio stays within your original asset allocation.
If you’re looking to open a HSA account from scratch, it helps to do a little comparative shopping. (But first double-check and make sure you’re actually qualified to open and contribute to a HSA – see IRS Publication 969.)
A quick search will show the many HSA providers you can choose from. Some key details you’ll want to pay attention to are the investment options, fees and any account minimums.
For instance, some HSA accounts require you to have a minimum balance before they give you the option to invest some of your savings.
On investment fees: If you’re an avid reader of our articles, you probably know what we’re about to tell you. Let’s say it together: Generally, the less you have to put towards fees, the more money you could keep invested.
So, take a look at the account fees and see if they make sense to you given the services being offered. A percentage point here or there in fees may not seem like a big deal at first, but fees can really add up over time and eat into your overall returns.
Remember when we mentioned earlier that you usually have the option to invest some or all of your HSA account balance? At this point, you may be wondering how much you should invest and how much you should keep in cash.
There are no hard-and-fast numbers for this one because it depends on your health care needs in the near term.
And really, health spending can be a little hard to predict. Some costs you can anticipate – for instance, regular prescription refills, routine doctor visits or maybe your kid is getting braces this year. But you also never know what can sneak up on you – a cold here, a sprain there. Some expenses might come as a surprise.
Still, you can figure out an appropriate “cash target” – that is, the amount you want to have on hand to cover your medical expenses, expected or unexpected. And once you have your cash target, you could consider investing the rest over the long term.
To estimate your cash target, consider taking these two steps as a starting point:
Review your health care spending and see how you’ve used your HSA in the last few years. What were some routine medical bills you had? How much did you have left over in the account at the end of the year?
Think about adding a cash cushion for any unexpected medical expenses that might come up.
Also keep in mind…
No estimation is going to be perfect. Hey, life happens. And from time to time, you may have to rely on your other savings, like your emergency fund, to help cover any unexpected costs.
Basic investment principles still apply when you invest through a HSA. That means you don’t want to pull money in and out of your HSA investments for emergencies or treat it like an ATM.
For any portion of your HSA balance that’s been invested, it’s a good idea to keep it invested for the long term. Generally speaking, staying invested for the long haul puts you in a good position to reach your goals.
If you need help coming up with your cash target, consider talking to a financial advisor who could review your overall financial situation and suggest an appropriate number.
Triple tax advantages, investment growth potential, no RMDs – what’s not to like?
While investing your HSA makes sense for some people, it may not be right for everyone. For instance, if you have a lot of medical expenses and need to dip into your HSA often, you may want to keep that money on hand rather than investing it and then having to pull money in and out of the market.
Another important thing to remember: While investing could help grow your money over the long run, it does involve risk, and returns are not guaranteed. And market volatility, while normal, could mean ups and downs for your HSA balance. If you know you’ll need that money in the short term, it may be best to keep it saved.
All this is to say, take a look at how you’ve used your HSA in the past as well as your overall financial health. Let that be your guide as you decide whether it makes sense for you to invest any portion of your HSA money.
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