Health Savings Accounts (HSAs) are a great way to save money for healthcare expenses in retirement. There are three major tax savings to an HSA:
- Tax-deductible contributions
- Tax-free interest
- Tax-free distributions on qualified medical expenses
There’s one more way to grow your money — by investing your HSA. In this post we’ll dive into reasons you may want to invest and things to keep in mind when investing your HSA. As with all money matters, it’s always a good idea to consult a professional for legal and tax advice. They are the most qualified to help you with your personal situation.
Should you invest your HSA?
It’s important to define your goals for your HSA. This will help you figure out if investing is right for you. Remember, HSAs do have annual contribution limits, determined by the IRS. The IRS increases contribution limits to account for inflation. Be sure to take this into account when you're thinking about future savings.
Goal: Saving for ongoing expenses
An important goal for many HSA users is to pay for ongoing medical expenses. These are the expenses that come up on a regular basis, like prescriptions and copays. Most of the time, these are smaller purchases that your health insurance doesn't cover. Since you need a high-deductible health plan to contribute to an HSA, it’s important to make sure you’re covered.
You should be able to estimate your typical expenses by looking at past expenses. You can estimate how much much you anticipate to spend annually based on previous years. The next step is to make sure to contribute enough to your HSA to cover those expenses. If your goal is to save for ongoing expenses, it's a good idea to keep this money in your HSA in cash. This makes it much easier for you to access it in the short term.
Goal: Saving for planned expenses
Another goal many people have for their HSA is to save for a large planned expense. Here are some examples:
- Elective Surgery
- Lasik Eye Surgery
- Any other qualified expense your health plan doesn't cover
Once you find out you may have a large planned expense coming up, start saving now. Make sure to plan out your HSA contributions so you will have enough funds to pay for the expense when it arises. Again, it’s a good idea to keep this money in your HSA in cash, as you know you will be spending it soon.
Goal: Saving for an emergency
Another goal for many Americans is to save for an unexpected medical emergency. While nobody likes to think this may happen to them, it’s a good idea to be prepared. You should keep some cash in your HSA for unexpected expenses that come up.
Goal: Saving for retirement
Another important goal for many people is to save money for retirement. The great thing about an HSA is that it has triple tax benefits. One of those ways is a good strategy to save for retirement.
Once you are over age 65 and enrolled in Medicare, you can no longer contribute to an HSA. But you can still withdraw funds tax-free for qualified medical expenses. As many people experience increasing health care costs as they age, this can end up being a helpful way to pay the bills.
Another important aging-related use of HSAs is for long term care insurance premiums. The amount you can spend on premiums depends on your age, and it increases as you get older.
There is another big benefit to using an HSA to save for retirement. Once you are over age 65 you can withdraw HSA funds for ANY expenses, not just qualified expenses, without experiencing a penalty. If you were to do this under age 65 you would have to pay taxes and penalties. If you do decide to use your HSA for non-healthcare expenses in retirement, remember that those withdrawals are subject to regular income taxes, similar to an IRA or 401k, or other retirement accounts.
Saving for retirement is a big reason that people choose to invest their HSA funds. Investing is a good way to potentially grow your money over a longer period of time. That’s why it is an appealing option for those looking to save money up for their future retirement. For those who may have ongoing expenses and wish to save for the future, a mix of cash and investments in their HSA could be the right option.
Evaluate your options and invest appropriately
Once you decide that you would like to invest your HSA, it’s a good idea to do some research. Here are a few things to consider to help you make a good decision.
Many HSA providers require minimum account balances to invest HSA funds (thought that isn’t the case here at Lively). If your HSA provider does have an account minimum, it is important to be aware of this fact and the dollar minimum.
If you are sure you will always have an account balance above the minimum, then you can proceed with investing without issues. If you currently don't have enough to meet the minimum, or you're concerned about dipping below that - find a provider with a lower investment threshold.
Many HSAs have pre-selected mutual funds or investing limitations, so do your due diligence before you get started.
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.
At Lively, it’s simple to invest your HSA funds by leveraging industry leading investment options. Simply put, you can invest in what you want with us. If it is important to you to choose exactly what you invest in, make sure this is an option with your provider.
All types of investments are typically subject to some fees, whether those are commissions, trading fees, or other varieties of fees.
Before you start investing, make sure to find out what fees you will be subject to with your HSA provider. If you’d like more tailored investment advice, see if that is available from your provider and if it is subject to additional fees.
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 investing options. 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.
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.
How much can you make investing your HSA?
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, 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.
Use your HSA to plan for the future
Investing provides a clear path to further leverage the power of your HSA and grow your HSA funds for years to come. Before you invest, make sure to outline your financial and healthcare goals. Then align your HSA investment strategy with your lifestyle to achieve those goals. With the right balance of investments and cash savings you should be able to pay for qualified out-of-pocket medical costs today, tax-free, and save for healthcare costs well into retirement.
To start saving for healthcare expenses and retirement and investing your HSA dollars with no minimum amount, 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.