Health savings accounts, or HSAs, are becoming increasingly popular as a way to save for future medical expenses and even boost retirement funds. In 2023, almost one-third of covered workers were enrolled in health insurance plans with a savings option, up from 17 percent in 2011, according to the Kaiser Family Foundation. HSAs offer many benefits, including the opportunity to invest and grow funds tax-free.
Here are some tips on how to invest your HSA and other important information about these savings vehicles.
Understanding HSAs and Tax Breaks
An HSA is a health savings account available to individuals with high-deductible health insurance plans to help cover out-of-pocket medical expenses. In 2024, the minimum deductible for a High Deductible Health Plan (HDHP) is $1,600 for individuals and $3,200 for families.
HSAs offer a triple tax benefit that makes them attractive savings options:
- Contributions to HSAs are tax-deductible, with individuals able to contribute $4,150 in 2024 and families able to contribute $8,300. Individuals aged 55 and older can make an additional catch-up contribution of $1,000.
- Any earnings on the account remain tax-free if used for qualified medical expenses such as deductibles and copayments.
- Funds can be withdrawn tax-free at any time for qualified medical expenses. The money rolls over from year to year, allowing for long-term savings.
If HSA funds are used for non-qualified expenses, a 20 percent bonus penalty is applied, in addition to income taxes on the withdrawal. However, once the account holder reaches age 65, the penalty disappears, and the funds can be withdrawn for any reason, although income tax will apply. Many people view their HSA as a retirement account and use it to cover medical expenses while enjoying tax-free withdrawals.
Best Strategies for Investing Your HSA
Investing HSA funds is a great way to maximize the account’s benefits, yet only 13 percent of HSAs were invested in 2023. One reason for this low number may be the high account minimums required by HSA providers. Once these thresholds are met, it’s important to consider investment options based on individual circumstances.
Investment choices should align with risk tolerance and future medical needs. For those using an HSA for retirement savings, high-return investments may be suitable. Here are some investment options to consider:
Money Market Funds
For individuals with a small HSA balance or regular account withdrawals, low-risk money market funds can provide stability. It’s advisable to keep short-term expenses in a money market fund and invest long-term amounts in higher-return options.
Stocks and Funds
Stocks can offer long-term growth potential for HSAs, especially for those with minimal medical expenses in the near future. It’s crucial to maintain a cash reserve or invest in money market funds for short-term needs to mitigate stock market volatility.
Consider investing in index funds, dividend funds, or individual stocks for HSA growth:
- Index Funds: Diversified funds that track market indexes with low fees, such as S&P 500 or Russell 2000.
- Dividend Funds: Funds holding dividend-paying stocks for stability and potential growth.
- Individual Stocks: Riskier option for potentially higher returns, requiring careful research and monitoring.
Fixed Income
For conservative investors or those anticipating future medical expenses, short-term bond funds offer stability and some income. It’s essential to balance risk and return based on individual needs.
While an HSA can serve as a retirement savings account, it’s crucial to ensure adequate funds for medical expenses. Avoid poor investment decisions that may jeopardize healthcare coverage.
Robo-Advisor
For hands-off investors, some HSA providers offer robo-advisor services to manage investments based on risk tolerance and goals. These automated services typically have lower fees than traditional financial advisors.
Fidelity Go is a robo-advisor option that manages HSAs with no fees for Fidelity Flex mutual funds for accounts under $25,000 and a 0.35% fee for higher values. It’s a convenient choice for those seeking professional investment management.
Retirement and HSA Funds
Upon reaching age 65, HSA funds can be withdrawn for any purpose. Withdrawals for non-qualified expenses are subject to income tax, with an additional penalty before age 65. While contributions to an HSA typically cease when enrolled in Medicare, funds can still be used for qualified medical expenses tax-free.
Conclusion
Maximizing the investment potential of HSAs is essential for maximizing benefits. For long-term growth, consider investing in stocks, while short-term needs may be best met with fixed-income investments. By aligning investments with individual goals and risk tolerance, HSAs can serve as valuable savings vehicles for both medical expenses and retirement.