If you have a high deductible health insurance plan (HDHP) and you have extra cash to save for future healthcare expenses in any given year, it almost always makes sense to put money into a Health Savings Account (HSA). After all, there are tax benefits on the front end when you put money into an HSA, but you can also score some valuable tax savings later on.
Here’s how Health Savings Accounts (HSAs) work:
In 2021, eligible plans that count as an HDHP must have a minimum deductible of $1,400 for individuals and $2,800 for families. Meanwhile, maximum out-of-pocket limits for HDHPs are capped at $7,000 for individuals and $14,000 for families. With an eligible HDHP, individuals can contribute up to $3,600 to an HSA in 2021, and families can save up to $7,200 in one.
On the front end of the equation, the contributions made to an HSA account are tax-advantaged, meaning they reduce your taxable income. This means you’ll pay less in income taxes in the years you contribute to an HSA.
From there, the money grows tax-free until you deduct it to cover eligible healthcare expenses. And if you don’t use the money in your HSA, you can take it out and use it for anything you want (including to supplement your retirement) without a penalty starting at age 65. You’ll just have to pay ordinary income tax rates on the money you take out.
While many people save money in an HSA because they know they’ll have healthcare expenses coming up, plenty of people also invest in an HSA with the goal of leaving their money alone. Because of the way HSAs work, they can be incredibly valuable as an investing tool. You’ll save money on taxes when you contribute, and your money grows tax-free. If you’re able to leave your HSA money in your account until age 65, then you can use your funds however you want.
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Make Sure You Invest Your HSA
With all this being said, far too many people forget they can invest the money in their HSA. In fact, recent research from Devenir shows that only 4% of HSA accounts nationwide have at least part of their HSA assets invested.
Considering the potential for long-term growth HSAs have — and the fact many people plan to use their HSA funds to supplement their retirement — this is downright crazy. If you have an HSA and you set aside money to fund healthcare expenses or your future retirement, then you’re easily leaving thousands of dollars on the table by not investing the money in your account.
Imagine for a moment you’re able to set aside $6,000 annually in a family HSA account for 20 years from today, and you can leave that money alone and not have to use it for healthcare expenses. In that case, you would have $120,000 in your HSA after 20 years provided any return you received was enough to cover the administration costs of your account.
Now imagine you invested your HSA money from the start (by adding $500 per month to your account) and that you earned a 5% net return after accounting for HSA fees. In that case, you would end the 20-year stretch with $198,395.72. If you were able to fetch a 6% net return, you would have $220,713.55.
If that math isn’t enough to get you to look into HSA investing, I don’t know what will.
How To Invest Your HSA
It’s important to know that, by and large, some HSA providers offer considerably more options for investing than others. Whether you’re just now opening an HSA or you have a choice of where you keep your HSA money, you’ll want to start the process by finding an account with the best investment options.
For example, HealthSavings Administrators is a very good option when it comes to investing HSA funds. After all, this provider lets you invest from your first dollar with no minimum balance requirement, and you can choose from 42 low-cost Vanguard and Dimensional funds.
HealthSavings Administrators is also free from investment transaction fees, so you won’t get dinged with unexpected fees as you save. However, they do charge underlying fund fees for their investment options, as well as a 0.25% annual account fees. Over the course of one year, HealthSavings Administrators said their fees cost clients an average of $53.
With that being said, there are plenty of other excellent administrators who offer HSAs with attractive investment options. Some of my favorites include Lively, Fidelity, HSA Bank, and Optum Bank.
Just keep in mind that some HSAs with investment options let you invest starting with the first dollar in your account, yet others don’t let you begin investing until you reach a specific threshold. With HSA Bank, for example, you cannot invest your HSA money until you have at least $1,000 in your HSA account. With Optum Bank mutual fund investments, on the other hand, you can begin investing once you have $2,100 in your HSA, and you can only transfer money to your investment account in increments of at least $100.
Some HSA accounts with investment options also come with higher fees than others, so make sure you check and compare fees across multiple providers. Health Savings Administrator has a handy fee comparison chart that can give you an idea of the fees charged by major HSA companies.
The Bottom Line
If you’re going to take the initiative to save for future healthcare expenses in an HSA, don’t stop there. You should also figure out the best way to invest the money in your HSA account so it can keep up with inflation and secure a decent return over time.
In other words, don’t just stuff your HSA money in a proverbial mattress. Invest your money into funds that can provide long-term growth, and you’ll thank yourself later on.