One of the financial products gaining a lot of attention lately is the Health Savings Account (HSA). This is because the HSA makes it possible for you to set aside money for your medical expenses without a lot of trouble. And because HSAs are connected to high deductible health plans (HDHP), they are usually used in conjunction with lower health insurance premiums.
I am pretty happy with my HSA. I have an HDHP, so I pay more out of pocket until the deductible is reached. However, I pay half the monthly premium that I used to. I put the money I save into an HSA, to use to help fund the out of pocket medical costs. As a result, more of my money is mine, instead of going to the insurance company.
That’s the important thing to remember about the HSA. The money is yours. No matter who is offering the account, the money is yours. It’s even possible for you to open an HSA with a custodian that isn’t your employer’s choice, or your health plan’s choice. And you can rollover your HSA to another custodian as you like.
And, unlike Flexible Savings Accounts, the money is your HSA does not expire at the end of the year. You can leave your money in your HSA indefinitely, even if your health care plan changes and you are no longer eligible to contribute to an HSA.
In essence, if you do it right, having your HSA can be like having another investment account.
How to Invest in Your HSA
The first thing you need to do is qualify for a Health Savings Account. You should be able to review your health care plan to see if you are eligible. HSA eligible health care plans are becoming more popular with employers and employees alike because they tend to offer lower premiums than other health care plans.
But you can also find HSA eligible health care plans if you do not have an employer-sponsored health care plan. Many plans offered on the Affordable Care Act exchanges offer HSA eligible plans, as do many individual health care plans you can find through companies such as eHealthInsurance.
The next step is to open an HSA. I opened mine at HSA Bank, which offers a lot of flexibility, low fees, and the ability to link your account with a TD Ameritrade investment account (TD Ameritrade ranks among our top-rated brokerage firms). Here are the criteria I looked at when opening an HSA.
Once you open your HSA, you can invest your funds accordingly. I find it easier to invest in an HSA when your bank automatically links your HSA to an investment account. It can be done in other ways, but I find this to be the easiest to maintain a clear link to your HSA.
Benefits of Investing in an HSA
An HSA combines the best elements of a Traditional IRA (tax deduction for contributions) with the best of a Roth IRA (tax-free growth). Additionally, it’s possible to hold various investments in an HSA. Most HSA custodians offer money market type assets. These returns aren’t always the best, but they are a stable way to invest your funds. So it may be a good idea to look at this option if you may need to use your funds soon.
However, many some independent HSA custodians will allow you to choose to hold various investment types, such as index funds (there are a few custodians that offer low-cost Vanguard funds), ETFs, stocks, bonds, and other investments. So you can use your HSA as an extension of your overall investment portfolio and allocate your funds accordingly.
The money grows in your HSA as it would in an IRA. However, you do have to be careful about how you use the money. You can withdraw the funds — contributions and earnings — anytime for qualified medical expenses penalty-free. If you use the money for non-medical expenses, though, you will have to taxes and penalties. Withdrawals are taxed as regular income. And you will have to pay a 10% early withdrawal penalty on top of that.
Happily, though, once you reach age 65, you no longer have to worry about the 10% penalty. At age 65, that penalty is waived, and your HSA becomes just like another Traditional IRA, and you only pay your regular income tax on the amount you withdraw. If you don’t have a lot of health care expenses, you can save up money over time, rather than paying extra for health insurance that you don’t use very often.
How to Max Out Your HSA Plan Contributions – and Why You Should
The IRS establishes the annual HSA contribution limits each year. In most years, the contribution increases, even if it is a nominal amount. Here are the current HSA contribution limits, along with the limits from some of the recent tax years:
| Tax Year | Individual | Family | Catch-Up Contributions (age 55 and over) |
|---|---|---|---|
| 2020 | $3,550 | $7,100 | $1,000 |
| 2019 | $3,500 | $7,000 | $1,000 |
| 2018 | $3,450 | $6,900 | $1,000 |
| 2017 | $3,400 | $6,750 | $1,000 |
| 2016 | $3,350 | $6,750 | $1,000 |
| 2015 | $3,350 | $6,650 | $1,000 |
| 2014 | $3,300 | $6,550 | $1,000 |
| 2013 | $3,250 | $6,450 | $1,000 |
| 2012 | $3,100 | $6,250 | $1,000 |
| 2011 | $3,050 | $6,150 | $1,000 |
| 2010 | $3,050 | $6,150 | $1,000 |
As you can see, the HSA contribution limit for family plans is $6,900 in 2018 (the limit for singles is $3,450). And, even though the HSA is similar to an IRA, it is not considered the same thing, so it doesn’t count against your eligible IRA contribution limits.
Contributing the max to your HSA allows you to shelter a large amount of money from your taxes each year, and it will grow tax-free until you decide to use it. This makes the HSA a flexible and powerful way to invest your money.
How Should You Invest with Your Health Savings Account?
How you invest in your HSA will depend on the same factors you should consider when you invest in any account – your timeline, risk tolerance, and overall asset allocation.
If you plan to use your HSA for your current medical expenses, then you will most likely want to keep your HSA funds in a savings account, money market, or Certificates of Deposit. This will preserve your spending power and expose your funds to the least amount of risk.
If you don’t currently have a lot of anticipated medical expenses, or you believe you can pay for your medical expenses out of your cash flow, then you may decide to invest your HSA funds much as you would invest in an IRA. That means you can gear your investments more toward equities such as stocks, mutual funds, or ETFs.
Whichever method you choose, be sure to reevaluate your HSA needs regularly. If your situation changes and you may need access to the funds shortly, then you may wish to change your asset allocation in your HSA toward more of a cash equivalent to preserve the value for when you need the funds. And the best part—because your HSA investments are tax-deferred, you won’t have to pay taxes on gains when you make trades inside your HSA account. So you can run up the score and let your HSA investments compound over time, then convert some or all of the funds to cash equivalents when you want to take some money off the table, or preserve the value for use in the near future.
In other words, you can invest in your HSA as you would invest in an IRA. But don’t take too much risk with funds you may need soon!
How to Allocate Your HSA Investments In Your Portfolio
As mentioned above, your main determining factors should be your timeline and your risk tolerance. If you decide you can let your money grow for a long time, then you may wish to include your HSA investments with your overall asset allocation.
Asset allocation is easy when you only have one or two investment accounts. But it can get complicated when you have multiple investments or multiple retirement accounts. I fall in the latter category, with a Roth IRA, 401k, taxable investment account, an HSA used as an investment account, and my wife’s retirement accounts.
To make things easier, I use a free online tool called Personal Capital to manage my investment portfolio. Personal Capital aggregates your financial data and helps you analyze it. It gives you a free and powerful tool to help you understand how all of your investments work together. This is important when you may have multiple financial and investment accounts working together.
Personal Capital analyzes your investments and shows your asset allocation across all of your accounts. From there, you can easily make decisions regarding how you should change your asset allocation.
You can learn more in our Personal Capital review, comparison to Mint.com (another money management tool), or by visiting the Personal Capital website.
Summary – Investing in an HSA Can Be a Powerful Addition to Your Investment Portfolio
There are a lot of reasons to love the HSA. It’s a very flexible financial account. It gives you a tax break when you contribute, but it also has the flexibility to grow tax-free, much like an IRA. This flexibility makes it a powerful addition to your investment portfolio.
If you can cash flow your medical expenses, then you may consider it a good idea to invest the money in your HSA to help grow your net worth over time.
If you have a lot of health care expenses, though, this might not be the route for you. You may prefer to keep your HSA funds in cash equivalents for wealth preservation and immediate access. Either way, the flexibility makes your HSA very valuable.
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K.C. says
We have a high deductible plan but it is not associated with an HSA. However, it is still a great value. It was offered as one of three health insurance options tied to my wife’s teacher retirement. The difference in premium between the high deductible plan and the low deductible plan, more than pays for the deductible for one of us. In other words, unless both my wife and I reached out deductibles in the same year, we come out ahead with the high deductible on premium savings alone. And like you, we use the savings to fund a budget account to pay out-of-pocket expenses, which are not that bad since we still get the insurance discounts by staying in our provider network. For example, a routine office visit to our primary physician is billed at $90.00. The insurance discount is $30, so we pay $60. If we had the low deductible plan we would have paid a $25 co-pay. So the difference is only $35.
What we like about a high deductible plan is that we only pay for the services and products we use, even though we pay out of pocket. With the low deductible plan, we would have paid for services and products whether we used them or not through higher premiums. We have been on this plan for 3 years and have saved $10,200 on the difference between premium and out-of-pocket for the high deductible and the premium alone for the low deductible plan we were offered. It looks like I’ll reach the $4,000 deductible for me for the first time this year due to a recent outpatient surgical procedure. Even at that, we are still ahead $6,200.
As you point out, chronic illnesses that require regular hospitalization or surgical or other expensive procedures, or are associated with expensive maintenance or therapeutic drugs could eliminate the savings potential in a high deductible plan. Still, it’s worth the time to run the numbers. Depending on premiums, deductibles, co-pays, and other provisions, the high deductible plan might still be the best choice.
Mr. GoTo says
To further clarify your article, HSA funds can be used to pay for any eligible medical expenses that were incurred while your HSA account was in place. Thus, you can use HSA funds to reimburse past expenses years later, after you have allowed the account to grow tax free. This is why I never use HSA funds to pay for current medical expenses. I want that tax free growth on tax-free deposits.