Warren Buffett said, “If you don’t find a way to make money while you sleep, you will work until you die.” What he means is, you need to invest your money in a place where it can earn more money. When your money earns money, it multiples faster than it would if you simply saved your paychecks. And the faster your money multiplies, the less work you have to do.
Most people think of investing as a way to save for retirement, but the principle applies to saving for healthcare as well. Luckily, investing your Health Savings Account (HSA) contributions can help you save for both retirement and healthcare expenses.
Qualifying for HSA investment
First, to qualify to contribute to an HSA, you must also be enrolled in a High Deductible Health Plan (HDHP) and that must be your only health insurance. Once you buy the appropriate health insurance, you choose your HSA. HSAs come in three forms: traditional savings accounts, self-directed investment accounts, and guided portfolio investment accounts.
If you have an HSA that functions as a savings account: you will not be able to invest your contributions. Instead you’ll likely earn interest on your money. Unfortunately, interest rates for this type of account are typically below the rate of inflation, which means you could effectively lose money by “saving” it.
The good news is, you can transfer your balance to a new HSA that does allow investment at any time during the year without paying a penalty.
If you have a self-directed HSA: you can invest your HSA funds. Self-directed HSAs allow you to invest in a wide range of investment options including: individual stocks, ETFs, mutual funds, CDs, and bonds.
If you have a guided portfolio HSA: you can invest your HSA funds. Guided portfolio HSAs will give you personalized investment suggestions based on your preferred risk profile and how long you have until you retire.
If your employer offers an HSA, ask your HR Department what kind of HSA it is. If it’s an HSA that doesn’t allow investing, you can open an HSA through the private market.
How to invest your HSA dollars
If your HSA administrator allows you to invest your contributions, you will have two actual accounts underneath your HSA umbrella. You will have your cash account and your investment account. Your cash account is where your contributions will be deposited and from where you will pay for qualified medical expenses. Your investment account is what you will use to buy and sell investments.
In order to buy investments you will need to move money from your cash account into your investment account. Then you can buy investments. If your HSA administrator requires you to maintain a minimum cash balance in your cash account, you can only transfer funds once that minimum is achieved. And if your cash balance falls below that minimum, your administrator may sell investments on your behalf and transfer the money to your cash account.
Ideally, you will have an HSA that allows you to invest your savings and has zero cash minimum like Lively’s Self-Directed HSA through TD Ameritrade or our Guided Portfolio through Devenir. Cash minimums can restrict the amount you’re able to save and can cost you thousands of dollars over time.
If you have a self-directed HSA, you will invest your contributions by following these steps:
- Fund your cash account.
- Transfer money to your investment account.
- Choose the investments you buy.
If you have a guided portfolio HSA, you will follow these steps: Fund your cash account.
- Transfer money to your investment account.
- Answer a few questions that will help your administrator give you appropriate investment options.
- Choose your investments.
Should I invest my HSA money?
Yes. We could just leave it at that, but let us tell you why.
If you put your money into a savings-type of HSA, you will save a lot less money over the long term. Let’s take a look at a hypothetical five year example:
- Your annual contribution: $3,600 (the 2021 annual contribution limit for an individual), paid at the beginning of the year
- Your annual spend on qualified medical expenses: $1,800 in the first year, and the equivalent in subsequent years
- Current average interest rate on a savings account: 0.5%
- Long term Inflation on healthcare expenses: 5.26%
- You invest your contributions in the S&P 500: 10% annual return
Note: The average annual return of the S&P 500 over the last 10 years was 10%. The actual annual return of the S&P 500 fluctuates yearly.
- Year one: Starting Balance $3,600; Expenses $1,800; Annual Gain .5%; YE balance: $1,809
- Year two: Starting Balance: $5,409; Expenses: $1,895; Annual Gain .5%; YE balance: $3,532
- Year three: Starting Balance: $7,132; Expenses: $1,994; Annual Gain .5%; YE balance: $5,163
- Year four: Starting Balance: $8,763; Expenses: $2,099; Annual Gain .5%; YE balance: $6,697
- Year five: Starting Balance: $10,297; Expenses: $2,210; Annual Gain .5%; YE balance: $8,128
- Year one: Starting Balance $3,600; Expenses $1,800; Annual Gain 10%; YE balance: $1,980
- Year two: Starting Balance: $5,580; Expenses: $1,895; Annual Gain 10%; YE balance: $4,054
- Year three: Starting Balance: $7,654; Expenses: $1,994; Annual Gain 10%; YE balance: $6,226
- Year four: Starting Balance: $9,825; Expenses: $2,099; Annual Gain 10%; YE balance: $8,499
- Year five: Starting Balance: $12,099; Expenses: $2,210; Annual Gain 10%; YE balance: $10,878
As you can see, by investing your contributions in the S&P 500, you could save an extra $2,750 over five years.
HSAs are superior retirement vehicles
Your contributions rollover from year to year and also enjoy a triple tax advantage. That means your contributions are free of federal income tax, the gains your contributions make are free of federal income tax and distributions used for qualified medical expenses are also free of federal income tax.
Once you reach the age of 65, you can start using your savings to pay for other expenses as well. You will pay income taxes on the disbursements you take for general expenses, but qualified medical expenses remain tax-free. That’s a key difference between HSAs and traditional retirement accounts like 401ks and IRAs. Distributions from 401ks and IRAs are subject to federal income tax no matter what you use the money for.
Another great retirement feature of HSAs is: no minimum distribution requirements. That means you can keep your money invested in the market until you need it.
How to transfer your HSA balance from one account to another
If your current HSA doesn’t allow you to invest your contributions and you want to transfer your balance to an administrator that does, you follow these easy steps:
Find an HSA administrator that offers the type of investment account you’re interested in. Look for $0 cash minimums, low or no fees, and make sure the types of investments they offer are what you’re looking for.
Set up your new account.
Instruct your old HSA administrator to set up a trustee-to-trustee transfer of your funds into your new account. Most allow you to do this online.
As you can see, there are a many benefits to investing your HSA contributions. It allows you to save more money faster and helps you plan for retirement. And if your current HSA doesn’t allow investing, you can transfer your balance to an account that does without paying a penalty. If you have questions about the specific types of investments your HSA offers, reach out to your administrator.
To start saving for healthcare expenses and retirement and investing your HSA dollars, sign up for an Lively HSA today.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.