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HSA Funds: Spend, Save or Invest?

Aaron Benway · March 1, 2018 · 5 min read


Perhaps the only decisions more personal than health decisions are the financial ones – How much should I save?  Where should I save? Where can I find help if I need it?  These are big questions and deserve attention.  Your choices create options after only a few years and become life-altering over a career.

HSA Savings and Spending Strategy

Health Savings Accounts (HSAs) have recently arrived on the scene as part of this broad financial puzzle.  Connecting both health and wealth, HSAs serve double-duty in your financial planning, as HSAs allow you to save money on today’s qualified medical expenses while also providing the option to save for long-term healthcare costs.  HSAs also provide additional flexibility by allowing withdrawals for non-qualified health expenses (penalty-free after age 65).  Account holders need not worry about their funds becoming “trapped” in a health-only savings account.

Even still, it is natural to wonder whether and how much of one’s HSA should go towards retirement.  Below we will outline a few concepts to help with your decision.

Keep in mind, however, these are still only general principles.  Consider seeking the guidance of a competent financial advisor, such as a CFP certificant, who can evaluate your current situation and provide specific recommendations to help you achieve your goals.

Some financial planning questions to consider, with a “cheat sheet” at the very end:

  1. Do you have an emergency savings fund? Before maximizing your HSA, a more important and versatile account for many will be your “rainy day” fund for emergencies.  A common rule of thumb is 3-6 months of salary savings in a readily accessible account to cover job dislocations, medical emergencies and other of those blessedly infrequent life crises that require a large cash outlay.

  2. Have you saved the annual plan deductible in your HSA? Many plans require a certain cash balance minimum before accessing the brokerage feature (although not with Lively). Knowing your plan’s out of pocket deductible in cash can provide a peace of mind that is probably worth more than any foregone market gains.

  3. Are there identified health expenses in the near to medium term? Often, particularly as we get older, we begin to plan for bigger medical procedures.  If this is you, or could be you, consider saving funds in your HSA and make appropriate allocations to adjust for the timing of your anticipated expenses.  As an example, you may want to keep a larger amount in cash or short-term securities offered through the brokerage feature for known upcoming expenses.

  4. Do I intend to log medical expenses? Chances are we will all pick up medical expenses for “bumps and scrapes” over the years.   As these dollars are eligible “withdrawal IOUs,” account holders should keep track of these receipts to make the most of their account growth.  If not you could potentially risk overlooking the tax-deferred and perhaps tax-free advantages these expenses create by “shoe-boxing” your receipts for withdrawal at a later date.  If you log your medical expenses and intend to keep those amounts invested in the market, consider a heavier equity orientation.

  5. Does my employer offer contribution matching with the retirement savings plan and I am taking full advantage of it? Generally speaking, employees should take full advantage of their employer’s retirement savings match – free money still beats “tax-free.”  If you aren’t already taking full advantage of your employer’s retirement savings plan match dollars then you should probably use an appropriate budget allowance to grab this free money before maxing out your HSA contribuion.

  6. Do I need the money as part of my daily living expenses? Can I afford to not spend from my HSA?  While this is not a general-purpose financial planning post, the fact is all your accounts ultimately roll into one large account – you.  As a result, and as you can read elsewhere, generally your best financial move is to pay off outstanding credit card and other high interest consumer debt.  If you need to spend your HSA funds to make room in your budget to pay your revolving line of credit from your credit card, then you should consider doing so.  Few will recommend you pay 25% short-term interest for the opportunity to earn a market return over time.

  7. Am I healthy and expect to be healthy through retirement? As mentioned above, an HSA can be used not only for tax-free withdrawals for qualified medical expenses at any point after the HSA has been established, HSA funds can also be used for non-medical expenses (note – a penalty applies if used in this way before age 65).  Because of this account feature, an HSA is also a very good way to supplement your retirement savings plan through another tax-deferred, and quite possibly tax-free, savings account.  Even if you expect to remain healthy your entire life and rarely use the medical system, HSA investing could still be a very good financial planning strategy.

Saving versus investing in an HSA is often part of a broader set of financial planning decisions.  While the HSA provides account holders a great way to save tax-free for both near-term and far-off health expenses, and even allows for tax-deferred savings for non-medical expenses (again, withdrawal penalty goes away at age 65), do not overlook other legs to your “financial wellness” stool.

For those looking for the “quick” answer, we generally recommend as follows:

  1. Keep the annual deductible in the cash/checking account of the HSA. Consider increasing your savings balance to the maximum annual out of pocket of your annual insurance plan if you more risk-averse.

  2. Invest the rest in the brokerage feature and consider “mirroring” the portfolio of your 401(k), assuming this is allocated based on your age, goals and risk profile.

  3. If you can pay out of pocket for health expenses, keep the HSA funds invested in the market and maintain a record of your health costs for future, tax-free withdrawal.

Aaron Benway

Aaron Benway


Aaron is a Certified Financial Planner (CFP) and IRS Enrolled Agent (EA).  He co-founded HSA Coach, a digital tool to educate consumers on HSAs, track health expenses and other documents, and provide individual financial calculators, to help consumers get the most from their HSA and other savings.  To help individuals directly with their financial planning and wealth management requirements he founded AB Financial Planning.  Prior to co-founding HSA Coach, Aaron was the CFO of ventured backed fintech startup HelloWallet, acquired by Morningstar.  Aaron has an MBA from Harvard Business School and is a graduate of the US Naval Academy.

piggy bank on pink background


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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.



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