HSA Investment: Best Options and Tax Benefits

HSA Investment

If you’re like most people, you might think of your HSA as a way to pay for current-year eligible medical expenses like doctor visits or prescriptions. But did you know that HSA can also work as a long-term investment vehicle, playing an even larger part in your overall wealth and retirement strategy? Saving in an HSA for retirement investment provides you with a tax-advantaged account devoted to potential medical expenses. Also, the HSA contributions can be used for many investment options, and sometimes they can be tax-free. So in this article, we’ll discover how HSA investments work and how they can be tax-free.

How Do Health Savings Accounts(HSA) Investments Work?

Health savings accounts (HSAs) are without a doubt the best medical savings accounts available. However, if you don’t completely understand how HSA investments work, you might be losing out on their fantastic tax-saving benefits. Here’s the rundown on all HSA:

What Exactly is an HSA?

A health savings account is a tax-advantaged savings account. When combined with a high-deductible health plan (HDHP), it will assist you in paying for medical expenses both now and in the future.

Your HSA usually begins as a cash account that collects interest in the same way as a savings account does. However, once you hit a certain balance, you can convert your HSA into an investment account that works similarly to an IRA.

In most instances, I am a massive supporter of HSAs. Why is this so? That if they work with you and your family, they will save you money on health care. Not only that, but they will also assist you in saving for retirement.

Here are a few reasons why you should look into a health insurance package that is HSA-eligible:

#1. Lower monthly premiums save you money.

If you have an HSA-qualified, high-deductible insurance plan, you can pay less in annual premiums than if you had a standard health plan. The disadvantage of a higher deductible is that you will have to spend more before your insurance will kick in.

However, if you and your family are well and seldom visit the doctor, an HSA is the ideal plan for you.

Furthermore, contributing to your HSA investment regularly is equivalent to creating a new emergency fund specifically for medical expenses. It will help you pay your premiums and any other out-of-pocket expenses that arise.

#2. HSAs have some incredible tax advantages.

Do you remember the old adage that “good things come in threes”? That appears to be the case with HSAs. Through an HSA, you can take advantage of not one, not two, but three amazing tax breaks. This can help you save for potential medical expenses:

  • When you contribute to an HSA, you are not charged.
  • Your HSA investment money grows tax-free.
  • When you withdraw money to pay for medical bills, you are not charged.

In addition to the triple tax benefit, your HSA contributions will reduce your tax bill by lowering your taxable income. For example, if you contribute $2,000 to an HSA investment in a year, your taxable income is reduced by $2,000. That’s a great deal, everyone!

#3. Your HSA is yours, and it rolls over next year.

What happens to your HSA money if you don’t use it all by the end of the year? What if you quit a job with an HSA-qualified health plan?

The benefit of an HSA is that it is entirely yours. So, if you change jobs or health insurance plans, you keep your HSA. You have the option of transferring the account to the current employer’s plan or leaving it alone. In any case, those funds are yours to use on eligible expenses.

One of the most common misconceptions about HSAs is that any money left in the account at the end of the year is lost. But that is not the case! Your HSA balance rolls over from year to year. Hence, you can still access all of the funds in the account.

The First Step: Eligibility

To make HSA payments, you must be protected by an HSA-qualified high deductible health plan (HDHP) and meet other IRS eligibility criteria. These provisions essentially ensure that you are not covered by any other disqualifying healthcare plans or services, such as Medicare or an FSA. More information about HSA eligibility criteria can be found here.

Okay, I’m eligible. So, what now?

You can now begin contributing to your HSA for your investments! There are a few options to contribute to your HSA. However, the easiest way is to get funds deducted from your paycheck by your employer. When you do this, your donations are not only excluded from federal and state taxes (in almost every state), but you also do not have to pay FICA taxes on them.

You will apply to your HSA after-tax if your company does not have payroll withholding set up. If you do, you can subtract the cost of your donation on your tax return, but you are still liable for FICA taxes. Furthermore, anybody can donate to your HSA. If anyone other than your employer contributes, you can receive a tax deduction for those donations.

How Much Can I Contribute?

Each year, the IRS establishes annual limits on how much you can add to your HSA. If you exceed the contribution cap, you must withdraw the excess donations or face a tax penalty. The contribution limits for 2021 are $3,600 if you have self-only health insurance (you are the only one covered) and $7,200 if you have family health insurance (at least one other person is covered besides you). Furthermore, once you reach the age of 55, you will contribute an additional $1,000 to your HSA per year as long as you are HSA-eligible.

What Happens If I Am No Longer Qualified for an HSA?

If you lose your HSA eligibility, you must prorate your contributions for the months you were eligible. If you were eligible for 8 months out of the year, multiply your annual contribution cap by 8 (the number of months you were eligible for) and divide by 12. (total months in the year). This is your prorated donation limit. You will still be unable to make any further donations until you regain eligibility.

However, even if you are not HSA-eligible, any funds in your account are yours to use. You will never be unable to withdraw funds from your HSA.

Is it necessary for me to use my HSA funds right away?

Unlike FSAs, HSAs have no use-it-or-lose-it restrictions; you can let your funds expand year after year if you prefer. This means you can let the interest accumulate tax-free (in almost all states) and then remove it once it has risen. If you can pay for covered medical costs out of pocket, saving your HSA assets is a smart way to save for medical expenses in retirement. So, you don’t have to dip into your 401(k) to cover them.

Remember that when you withdraw your 401(k) savings after retirement, you will be charged. So, if you used 401(k) contributions to pay for eligible medical costs, you’d have to pay taxes on top of the expenses. You will pay for potential healthcare expenses tax-free and save thousands of dollars by creating a retirement medical nest egg with your HSA.

Retirement HSA Investments: The Health IRA

We all know who the superstars are in professional basketball. Guys like LeBron James and Stephen Curry get a lot of attention—and rightly so! But the often-overlooked sixth man is just as crucial to any team’s success. He’s the guy who comes off the bench and performs admirably as the starters take a breather.

If your 401(k) and Roth IRA are the stars of your retirement package, the HSA is the sixth man—an essential additional teammate who helps you score extra points on the way to victory.

One of the things I like most about HSA investments works is that you can invest your HSA funds for them to expand over time. Consider an HSA to be a “health IRA,” and when you reach the age of 65, it will work similarly to a conventional IRA.

At that point, you can withdraw money for whatever purpose you want, but you’ll have to pay taxes on it, just as with a traditional IRA. However, you can also use your HSA to pay for medical expenses tax-free! As a result, using an HSA is the best choice for covering healthcare expenses during the retirement years.

Another change that occurs as you reach the age of 65 that affects how you use your HSA is that you become eligible for Medicare coverage. Since your HSA is not a high-deductible insurance plan, you can no longer contribute to it until you enroll in Medicare. But don’t be concerned. You can also use the money in your HSA for medical expenses tax-free.

Having an HSA also ensures you don’t have to make a minimum allocation. You can hold funds in an HSA for as long as you want.

Read Also: Health Savings Account Rules (HSA Rules) 2021 (Updated!)

Which HSA Investment Options Do You Consider?

That’s an excellent topic. I want you to hear me out on this one as well: there is no need to get fancy when it comes to investing your HSA money.

Your provider will provide you with many HSA investment options, but I want you to keep it easy. Seek out good growth stock mutual funds and diversify your HSA investment across four categories: growth, growth and income, aggressive growth, and international.

There are several ways to invest with an HSA, so consult with an investment professional before making your HSA investments.

Options for HSA Investment


Investing in HSA funds has many tax advantages and can be an additional way to prepare for long-term health care costs and financial goals. When your HSA hits a certain balance, usually $2,000, you can opt to invest a portion of your HSA funds.
You have two excellent HSA investment options.

Option 1: Self-directed mutual funds from Optum Bank:

You can choose from over 30 mutual funds, including life stage funds. Choose those that have an average Morningstar rating of four stars. Also, choose from some of the lowest expense ratios in the industry. The Asset Allocation Calculator will assist you in determining which funds are best for you.

Option 2: Betterment digitally controlled investments:

Betterment takes the guesswork out of HSA investing. The betterment option will suggest a tailored portfolio of low-cost exchange-traded funds (ETFs) based on your HSA investment goals. This option will work to help keep your HSA investment on track through auto deposits and automatic rebalancing. If you’re planning for retirement with your HSA, Betterment will help you balance your savings alongside your other retirement accounts to increase your after-tax retirement income.

How much should you contribute to an HSA Investment?

Now, like a 401(k) or an IRA, there is a yearly limit on how much money you can put into an HSA. The maximum amount you will contribute to an HSA in 2019 is $3,500 for individuals and $7,000 for families. If you are 55 or older, you can save an additional $1,000 a year to catch up. How much do you contribute to an HSA per year? This is determined by where you are on your financial path.

A healthy aim is to save enough money in your HSA account per year to cover your annual deductible. Some employers that provide HSA-qualified health insurance can match your HSA contributions up to a certain amount to help you get there. (3) If you can find that match, that’s a great place to start. It’s totally free money!

And if you can cash flow your medical bills without using your HSA, that’s even better. That way, you can deposit money into your account and reap some of the tax-free growth we discussed earlier.

Aside from that, if you’re in good health and feel ready to spend more than 15% of your income in retirement, an HSA is a good place to put some extra cash.

One thing to keep in mind about HSAs: in order to contribute to one, you must be enrolled in a high-deductible health plan.

And don’t bring too much money into your HSA for retirement purposes until you’ve completed simple Baby Steps including saving for college and paying off the property. First and foremost, people!

Are HSA Investments Tax-Free?

A Health Savings Account has three major tax advantages (HSA). The money that goes into and comes out of an HSA investment is tax-free (as long as funds are used to pay for qualified medical expenses).

  1. Contributions to HSA portfolios are not taxed at the federal level.
  2. Income and investment earnings are tax-free when deposited into an HSA.
  3. HSA distributions to pay for eligible medical expenses are tax-free.

Summary

A healthy aim is to save enough money in your HSA account to cover your annual deductible per year. Some employers that provide HSA-qualified health insurance can match your HSA contributions up to a certain amount to help you get there. If that match is open to you, that’s a great place to start. It’s totally free money!

And if you can cash flow your medical bills without using your HSA, that’s even better. That way, you can deposit money into your account and reap some of the tax-free growth we discussed earlier. Aside from that, if you’re in good health and feel ready to spend more than 15% of your income in retirement, an HSA is a good place to put some extra cash.

One thing to keep in mind about HSA investments: to contribute to one, you must be enrolled in a high-deductible health plan. And don’t bring too much money into your HSA for retirement purposes until you’ve completed simple Baby Steps including saving for college and paying off the property. First and foremost, people!

HSA Investment FAQs

Can HSA funds be invested?

The HSA Investment Account allows you to invest in a broad range of mutual funds. The Investment Account is not FDIC-insured, is not bank guaranteed, and may lose value. … Distributions from your HSA that are used for qualified health care expenses are tax-free.

How much should you invest in HSA?

That way, you can pile cash into your account and enjoy some of that tax-free growth we talked about earlier. Beyond that, if you’re healthy and you’ve reached the point you feel ready to invest more than 15% of your income into retirement, an HSA is a good place to put some extra cash

Do HSA funds expire?

All of the money in an HSA (including any contributions deposited by an employer) is owned by the employee even if they leave their job, lose their qualifying coverage or retire. The money in an HSA never expires. Unlike flexible spending accounts (FSAs), all remaining HSA funds roll over each year.

What happens to HSA if you quit?

Simply put, you own your HSA and all the funds in it. What that means is your HSA remains with you no matter what, regardless of job changes, health insurance plan changes, or even retirement. … And when you retire, you can even use the funds for non-medical expenses with no penalty.

  1. Health Savings Account Rules (HSA Rules) 2021 (Updated!)
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