Investing in your Health Savings Account (HSA) can vastly improve your tax standing while simultaneously adding to your net worth.
And it’s never been more important to take investment seriously. High inflation in the United States is going to stick around for a while, with inflation rising annually at a faster pace than predicted. In September, the Federal Reserve raised its estimate of average inflation this year from 3.4% to 4.2%.
This is why you need to invest to outpace inflation, which an HSA investment account can certainly help you to achieve.
Why HSAs present attractive investment opportunities
First of all, remember that contributions made to your HSA are tax-advantaged, meaning they reduce your taxable income. The result is that you’ll pay less in income taxes in the years you contribute to your HSA. The money in your HSA then grows tax-free until you deduct it to cover any eligible healthcare expenses.
If you are 65 or over, you can also use the money in your HSA for non-medical purposes, like supplementing your retirement, without a penalty. You’ll just pay ordinary income tax rates on the money you take out.
Because of the way HSAs work, they can act as an extremely valuable investing tool. The problem is that very few people capitalize on this potential. According to a 2019 report from Devenir, only 4% of HSA users nationwide have at least some of their HSA assets invested.
HSAs have a lot of potential for long-term growth. And given that many people plan to use HSA funds for retirement, it would make sense to invest some of those assets, as this could generate even more money for retirement.
How to choose an HSA for investing
First, it’s worth emphasizing here that some HSA providers offer more options for investing than others. If you’re deciding which HSA provider to use, make sure you pay attention to the ones that have the best investment options.
For example, one popular option for many is HealthSavings Administrators. This HSA provider lets you invest from your first dollar with no minimum balance requirement. You can also choose from 42 low-cost Vanguard and Dimensional funds. Another benefit is that HealthSavings Administrators is free from investment transaction fees, although there are underlying fund feeds for their investment options, plus a 0.25% yearly account fee.
It’s worth comparing several providers to ensure that you get the most bang for your buck and that you end up with an HSA that aligns with your preferences. Other HSA providers who offer attractive investment opportunities include Lively, HSA Bank, Optum Bank, Fidelity, and Saturna.
Keep in mind that some HSAs, unlike HealthSavings Administrators, won’t let you begin investing until you have a certain amount of money in your account. HSA Bank, for instance, requires that you have at least $1,000 in your account, while for Optum Bank, the figure is $2,100, and with this provider, you can only transfer funds to your investment increments of at least $100. Some providers, moreover, have higher fees than others.
How to invest in your HSA
Once you’ve signed up with an HSA provider, the next step is to decide how to invest your money. Once your HSA reaches a certain investment threshold (which will vary depending on your provider), you can choose to invest a portion of your HSA dollars in mutual funds. Examples of mutual funds include:
- Vanguard funds
- Target date funds
- Lifestyle funds
When you set up your HSA, you can decide how you want the funds to be allocated among the available mutual funds. Depending on the provider, you may be able to transfer between funds and reallocate balances, set up automatic portfolio rebalancing, and – should a qualified medical expense come up – move money back to your HSA cash account to pay for it.
It is also possible to invest your HSA money into stocks, bonds, and exchange-traded funds (EFTs).
Your HSA investment options
Before you decide to invest the money in your HSA, and what to invest in, there are some things you need to consider:
- Cost: this depends mainly on an investment’s expense ratio and commission
- Expense ratio: the percentage of a fund’s total assets that goes toward the cost of running the fund every year. While these percentages are typically small (e.g. 0.10%, which would amount to $1 a year in fees if you invest $1,000 in an EFT), the higher the expense ratio, the more significant the cost over the long term.
- Commission: a fee you pay to a broker each time you buy or sell one or more shares of an individual stock, bond, or EFT. Buying shares of 20 individual stocks, for example, will land you with 20 commission charges, which can really add up.
You want to pay less to invest, as well as less in commissions, so you have more money available to compound.
In addition, whether you choose aggressive, moderate, or conservative investment vehicles will depend on your age and risk tolerance. Younger people can be more aggressive in their investments, such as an 80/20 ratio of stocks to bonds, whereas an older person who will want to be more conservative – so they don’t risk their retirement money – should stick closer to a 60/40 ratio of stocks to bonds.
When it comes to choosing an HSA provider for investing and when making investment decisions, it’s important to be thoughtful and deliberate in both your short-term and long-term plans. This will ensure that you maximize the money-making potential of your HSA.