How to Invest Your HSA Funds

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

Written By

Reviewed By

Updated on Tuesday, January 19, 2021

Health savings accounts (HSAs) are tax-advantaged accounts designed to help you pay for medical expenses, used in conjunction with high-deductible health plans (HDHPs). They often earn interest on your balances, 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 offer myriad tax benefits. We’ll walk you through how to invest your HSA funds, explain the benefits of doing so and help you determine if it’s right for you.

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. Unlike several other investment vehicles, an HSA investment has the potential to grow tax-free. 

Make sure you 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 become more doable as you accumulate money in your HSA over the years.

Consider paying for medical costs out of pocket so you can invest more

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.”

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.

Don’t forget to hang on to 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 the future. You might also consider maintaining a spreadsheet that tracks everything you use your HSA for so it’s even easier to refer back to later.

Should I invest my HSA funds?

HSA Investment Pros and Cons

Pros

Cons

  • Higher returns than a deposits account APY
  • Additional source of investment income
  • No required minimum distributions
  • Potential tax-free retirement savings
  • Need an HDHP, which doesn’t make sense for every individual
  • Less viable for individuals with higher medical costs
  • Increases out-of-pocket spending for medical expenses

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,” said Darin Shebesta, a CFP at Jackson/Roskelley Wealth Advisors, Inc. in Scottsdale, Ariz.

You can grow your HSA funds significantly more by investing them rather than letting them sit in your account. For example, let’s say you contribute the maximum amount of $3,600 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.

Compare that sky-high amount with the $265,185 you’d earn if you kept your money in an HSA with a 2% APY, making the same $3,600 contributions. This calculation 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.

Of course, the strategy is more possible for some to take advantage of than others. In general, HSA investing is most advantageous in the following scenarios:

  • Those who 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 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.
  • Younger individuals who want to start setting aside money for future medical expenses: As an added benefit in this scenario, younger workers can benefit from having years ahead of them during which their money can grow. 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.

Where do I make an HSA investment?

You likely have a few investment HSA options available to you including:

  1. Your HSA bank: 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.
  2. Other banks that have partnerships with investment firms: For example, HSA Bank has a partnership with TD Ameritrade. This setup can 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.
  3. Outside options: 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. Optum Bank, for example, offers an HSA investment option.
  4. Investment firms: You also can find accounts, like the Fidelity HSA, that offer HSA investments.

How to choose your HSA investments

  • Think of your HSA investments as an extension of your other retirement savings accounts: You should generally treat your HSA investments in the same manner as you would your other retirement savings accounts. In other words, 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.
  • Be sure to check each investment account’s fees: Investment accounts can charge custodial fees, monthly fees and expense ratios, and many also have minimum balance requirements. If you don’t keep these fees in mind when selecting an account, you could undo some of the benefits of stashing money there by losing it to high fees.

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 remember that you must have an HDHP to have an HSA, and that HSAs have their own contribution limits.

HSA Contribution Limits for 2020 and 2021
20202021
HSA contribution limitSelf-only: $3,550
Family: $7,100
Self-only: $3,600
Family: $7,200
HSA catch-up contributions$1,000$1,000
HDHP minimum deductiblesSelf-only: $1,400
Family: $2,800
Self-only: $1,400
Family: $2,800
HDHP maximum out-of-pocket amountsSelf-only: $6,900
Family: $13,800
Self-only: $7,000
Family: $14,000

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. 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.