How to Invest Your HSA Funds

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Updated on Tuesday, September 3, 2019

You may know health savings accounts (HSAs) as tax-advantaged accounts designed to help you pay for medical expenses, used in conjunction with high-deductible health plans (HDHPs). These accounts earn interest on your balances, too, so your money grows bit by bit.

But did you know that you can also invest your HSA funds? HSA investments can grow your money at a higher rate and help you save toward more long-term goals like retirement. Plus, HSAs are a rare triple-threat when it comes to tax benefits — your contributions are tax-deductible, your money grows in the account tax-free and your withdrawals are tax-free as long as you use the funds for medical expenses, which makes it an ideal savings and investment vehicle throughout your lifetime.

Below, we’ll walk you through how to invest your HSA funds, explain the benefits of doing so and help you determine whether it’s the right choice for your financial situation.

How do I make an HSA investment?

When you make an HSA investment, you place your HSA money in stocks, bonds, mutual funds and the like, instead of letting it sit in an interest-earning deposit account. This strategy allows for potentially greater returns and offers a solid long-term savings alternative.

For example, let’s say you contribute the maximum amount of $3,500 to your HSA each year from age 21 to 65. Let’s also assume that the account is invested to gain an average of 8% per year. By age 65, you’ll have about $1.45 million saved. This doesn’t account for catch-up contributions, which you’ll become eligible for at age 55, or normal increases over the years to the contribution limit. Compare that sky-high amount to the $255,441 you’d earn if you kept your money in a 2% APY HSA, making the same $3,500 contributions.

Meet the required minimum

There’s no right or wrong way to invest your HSA funds, and you can invest any amount you desire and invest in whatever you choose. However, there is typically a minimum amount that you’ll have to meet in your liquid HSA before you can start investing. This amount varies by HSA provider, so be sure to check your provider’s terms. For example, your HSA must have at least $1,000 in it to start investing any funds. Then, while that $1,000 remains in the account, everything above that amount can be invested.

“I recommend that clients keep their deductible in the cash portion of the HSA account, as they may need it in the current year, and invest the remaining balance,” said Samuel Boyd, CFP and senior vice president with CAPITAL Asset Management Group in Alexandria, Va. This will be more doable as you accumulate money in your HSA over the years.

Pay for medical costs out of pocket

Many financial advisors suggest not spending any of your HSA money and investing it all instead. “For individuals that can afford to do so, we often recommend maxing out HSAs each year and paying for medical expenses out of checking/savings accounts,” said Mike Giefer, CFP and private wealth manager at Creative Planning in the Minneapolis-St. Paul area. “That way, the money can be invested in the HSA and continue to compound annually.”

You can even start small, by paying minor medical costs out of pocket instead of taking on big charges right from the start. Bryan Lee, a CFP at Strategic Financial Planning in Plano, Texas, offered a handy tip when it comes to medical costs. “Doctors may be able to treat you like a cash-pay patient for a discount if you have an HDHP,” he said. “You can get 50% off the original price of a doctor’s visit if you pay with cash or a credit card — and if you’re willing to negotiate.”

Hoard your receipts

By keeping the receipts for medical expenses that you’ve paid for yourself, you can “reimburse” yourself for past medical expenses if you ever need the HSA funds in future. Darin Shebesta, CFP at Jackson/Roskelley Wealth Advisors, Inc. in Scottsdale, Ariz., suggests keeping a spreadsheet in addition to your receipts. “If you’re able to keep track of your medical records, everything you use the HSA for up to that amount is tax-free,” he said.

Of course, paying for medical expenses out of pocket isn’t always a viable option, particularly for low-income individuals and families who rely on HSA funds to pay for health care costs.

Where do I make an HSA investment?

First, check whether your HSA bank allows for investing. If your employer has set up your HSA with a bank, the bank might allow you to transfer your HSA funds into a CD or money market account rather than a true investment account. Other banks may have partnerships with investment firms, like HSA Bank does with TD Ameritrade, that help you transfer your funds more seamlessly. In this case, you might be required to keep a minimum amount in cash while you invest the rest.

If your bank doesn’t offer an easy investment option, then you’ll have to turn elsewhere. You don’t have to keep your HSA wherever your employer chooses to house the account initially. You can move it to a bank of your choosing for your convenience, like Optum Bank for example, which also offers an HSA investment option. You can also check out investment firms to find accounts, like the Fidelity HSA that offers HSA investments.

How to choose your HSA investments

When you invest your HSA funds, consider it an extension of your other retirement savings accounts, so you should generally treat it as such. Your HSA investments should look very similar to your 401(k) or IRA assets.

Align your asset allocation to your own risk tolerance and timeline. For example, if you’re young and just starting to save for retirement, you have some room to take on a bit more risk than someone in their 50s. Still, avoid taking on too much risk to protect your assets and ensure you’re using this HSA hack to your fullest advantage. Be sure to diversify your portfolio as much as possible with investments like mutual funds and ETFs.

Lee cautioned that while you can invest in anything you choose, you should still be careful. “There’s a difference between investing and gambling,” he said. “This is not something to gamble with.” Putting HSA funds in individual stocks is a mistake, he added, noting that doing so takes on unnecessary risk.

Lee also advised checking each investment account’s fees. Investment accounts can typically charge custodian fees, monthly fees and expense ratios, and many also have minimum balance requirements. “You’ve undone part of the benefit of putting money in such an advantaged account if you sign up for a high-fee account,” he said.

Using HSA investments for retirement savings

HSAs are a great retirement savings tool to use if you have extra money to save but have already maxed out your other retirement accounts for the year. Just note that HSAs have their own contribution limits. For 2019, individuals are limited to $3,500 and families are limited to $7,000.

According to Fidelity, a couple retiring in 2019, both aged 65, should expect to spend an estimated $285,000 on health care in retirement — and that excludes any long-term care costs. Using the $1.45 million example at the top of the article, you can see how investing your HSA funds over the years could be a great way to fund this cost in retirement.

There are no required minimum distributions on HSAs, so you can access the funds when you need them, not according to a government deadline. You can even start using HSA funds for non-medical expenses after the age of 65, as well. In that case, however, you’ll miss out on one of the HSA’s tax benefits, since you’ll have to pay income tax on whatever you use. Your withdrawals are only tax-free when used for medical expenses.

This is where saving your receipts for medical expenses over the years will come in handy. Once you reach retirement and are ready to start withdrawing money from the HSA, your withdrawals can be considered “reimbursements” for your previous medical expenses as long as you have records to prove that your purchases were made on eligible medical costs. That way, you can avoid paying income tax on any HSA withdrawals after age 65 even when you’re not currently using that money for a medical reason.

Should I invest my HSA funds?

When asked about HSA investment, financial advisors across the country showed strong support for the strategy.

“For people who aren’t living paycheck to paycheck, there’s a real opportunity to use the HSA as a supplemental retirement vehicle,” Shebesta said.

Other advisors have echoed his sentiments, adding that they advise most clients to take advantage of HSAs when possible. “We recommend them to nearly all our clients that qualify, regardless of life stage,” said Autumn K. Campbell, CFP and president of Financial Planning Association NexGen in Tulsa, Okla., and New Orleans. Again, you qualify for an HSA if you have an HDHP and don’t have other low-deductible coverage.

Generally, HSA investments work best when you don’t depend on the funds in the account to cover your medical expenses. This could apply if you’re healthy and don’t visit the doctor often. However, it also applies to high-income individuals who have available cash flow outside of the account to fund any medical costs. For this reason, financial advisors may recommend HSA investment only to their high- or middle-income clients.

If your income is on the lower side or you know you’ll have a high medical expenses, there’s a greater chance you’ll be more reliant on the HSA to cover those costs. HSA investments become less viable in this situation because there’s not much room for you to pay out of pocket without overextending your own finances.

HSA investing is also a good option for younger individuals who want to start setting aside money for future medical expenses. “Grow that HSA now while you’re healthy,” Lee said.

Plus, young workers can benefit from having years ahead of them during which their money can grow. “A young investor could sock funds away and allocate these savings toward stock investments that have the highest long-term growth potential, essentially looking to grow this pool of funds to the moon,” said Robert D. Greenman, CFP and lead advisor and partner at Vista Capital Partners in Portland, Ore. The long-term game plan would be to have a pool of funds that has enjoyed tax-free growth over the years that you can then use in retirement.

The bottom line

On the whole, investing your HSA funds is a smart financial move for most folks. You’ll need to have an HDHP and an HSA to start, and you must also make sure you can safely afford to cover your medical expenses without the HSA funds. Even if you can’t cover all of your projected medical costs in a year, you can start small by covering only low-cost expenses out of pocket. No matter where you start, HSA investment allows you to invest in your future over the long-term and supplement your retirement savings in a big way.

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