One of the financial products gaining a lot of attention lately is the Health Savings Account (HSA). The HSA allows you to set aside money for your medical expenses without a lot of trouble.
HSAs are connected to high-deductible health plans (HDHP). HDHPs require you to pay more out-of-pocket until you reach the deductible, but you also pay a lower monthly premium.
You can use HSA funds to cover your out-of-pocket medical costs and continue saving your HSA money.
That’s the critical thing to remember about the HSA. The money is yours. No matter who offers the account, the money is yours. You can even open an HSA with a custodian that isn’t your employer’s or your health plan’s choice. And, you can roll over your HSA to another custodian as you like.
Unlike Flexible Savings Accounts, the money in 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 it.
If you do it right, having your HSA can be like having another investment account.
How to Invest in Your HSA
Review your health care plan to see if you are eligible for a health savings account. HSA-eligible health care plans are becoming more popular with both employers and employees because they tend to offer lower premiums than other health care plans.
You can also find HSA-eligible health care plans if you do not have an employer-sponsored plan. Some of these plans exist on the Affordable Care Act exchanges. Many individual health care plans you can find through companies such as eHealthInsurance are also HSA-eligible.
Once you open your HSA, you can invest your funds accordingly. Investing in an HSA can be easier when your bank automatically links your HSA to an investment account.
I opened mine at HSA Bank, which offers flexibility, low fees and links your account with a TD Ameritrade investment account (TD Ameritrade ranks among our top-rated brokerage firms). Here are the criteria I considered when opening an 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 funds and similar assets. While the returns aren’t always the highest, they are a stable way to invest your funds. Money market funds may be a good option if you think you’ll need to use your funds soon.
Some independent HSA custodians allow you to hold various investment types, such as index 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 must be careful about how you use the money. You can withdraw the funds – contributions and earnings – without penalty at any time for qualified medical expenses. If you use the money for nonmedical expenses, though, you will have to pay regular income taxes and a 10% early withdrawal penalty.
The 10% penalty is waived once you reach age 65. At that age, your HSA becomes just like another traditional IRA. You’ll only pay your regular income tax on the amount you withdraw.
How and Why You Should Max Out Your HSA Plan Contributions
The IRS establishes the annual HSA contribution limits each year. In most years, the contribution increases.
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) |
|---|---|---|---|
| 2023 | $3,850 | $7,750 | $1,000 |
| 2022 | $3,650 | $7,300 | $1,000 |
| 2021 | $3,600 | $7,200 | $1,000 |
| 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 $7,750 in 2023 (the limit for individuals is $3,850). And, even though the HSA is similar to an IRA, the IRS doesn’t consider it to be the same thing, so it doesn’t count against your eligible IRA contribution limits.
Contributing the maximum 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 You Should Invest With Your Health Savings Account
How you invest in your HSA depends on the factors you should consider when investing 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 certificate of deposit. This will preserve your spending power and expose your funds to the least risk.
If you don’t have a lot of anticipated medical expenses or you believe you can pay for your medical expenses from 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 need access to the funds shortly, then you may wish to change your asset allocation in your HSA.
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 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 to let your money grow for a long time, 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. To make managing your investment portfolio easier, you can use a free online tool called Personal Capital. 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 your investments work together. This is important when you have multiple financial and investment accounts working together.
Personal Capital analyzes your investments and shows your asset allocation across all your accounts. From there, you can easily decide how to 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.
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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.
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.