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An Overview of Self-Directed HSAs

Vicky Warren · December 19, 2019 · 5 min read


Whether you have dreams of being a day-trader or just wish you had a more active role in your 401k, a self-directed Health Savings Account (HSA) may be for you. It’s a savings account for medical expenses that functions like a trading account. You have a wide range of investment options at your disposal and unlike a traditional trading account, your contributions are tax-free.

Let’s get into the details.

First things first, an HSA is a savings account for health-related expenses. In order to contribute to one, you must also be enrolled in a High Deductible Health Plan (HDHP). Once your account is open (and as long as you’re enrolled in the HDHP) anyone can contribute to it. You, your employer, your parents, your brother, your neighbor, your brother’s neighbor- whoever it is that wants to deposit money into your HSA, they can. The only catch is that the IRS limits contributions on an annual basis to $3,600 for individuals, $7,200 for families, and a $1,000 catch-up allowance for people aged 55 or older in 2021 and $3,650 for individuals, $7,300 for families in 2022.

Additional benefits of opening an HSA include:

  • Contributions you make to your account are tax deductible.

  • You don’t pay income tax on contributions others make to your account.

  • HSAs grow tax-free. That means no income tax on your interest or dividends.

  • You never lose your contributions, even if you move companies or retire. Yes, even if your employer made some or all of those contributions.

  • Under age 65, all money used for qualifying medical expenses is also tax-free. If you use your HSA for anything else, you’ll pay income tax on the distributed amount as well as a 20% penalty.

  • After age 65, you can use your HSA savings for anything you want, making it function like a traditional retirement account. All distributions used for qualified medical expenses are still tax free, but you will pay income tax on the distributions you take for other expenses.

The above rules and benefits are true of all HSAs, including self-directed HSAs. Where self-directed HSAs differ is what happens to your contributions once they’ve been deposited.

What is a self-directed HSA?

Not all HSAs are the same. Some will only give you one or two options: keep your contributions in a savings account, earning interest, or invest in a money market account. These are considered the “safest” investment options because you’re not likely to lose your money. But they also won’t grow your savings very quickly.

A self-directed HSA, on the other hand, is an HSA that allows you to not just invest your contributions, but to choose the individual investments from a wide range of options.

You can choose to include several types of assets like ETFs, stocks, bonds, or mutual funds in your account. You can even invest in alternative investments like real estate, private companies, precious metals or lend money in the form of a promissory note. Talk about diversification!

If you have an interest in investing and don’t need your HSA contributions right away (and you’re intending to use your HSA as part of your retirement plan), you should consider this type of account.

How do self-directed HSAs Work?

Step 1: Fund your account. You can choose to deposit your entire annual contribution at one time or spread your contributions throughout the year.

Step 2: Estimate how much you’ll need in the near-term for qualified medical expenses. The more money in your account, the more you can make, so the ideal scenario is to fund it and then use other money to pay for health costs. But if you can’t do that, estimate how much you need to keep in your cash account for expenses.

Step 3: Move the remaining money to your investment account.

Step 4: Choose your investments. If you need investment advice, Lively has a library of resources to help you choose the best investments for you.

Step 5: Check in periodically. You want to make sure your investments are growing at the rate you expected. If not, it might be time to sell those investments and buy new ones.

Step 6: Distributions. If you end up needing some of the money you invested, you can sell an investment. Then move the cash from your investment account to your cash account. Then it’s ready to use!

How do I open a self-directed HSA?

Step 1: Enroll in an HDHP. That means your health plan has a minimum deductible of $1,400 for individuals and $2,800 for family coverage. You can buy a HDHP through your employer or the private market.

Step 2: Research FDIC insured Self-Directed HSAs. This can be done through your employer or the private market. If your employer offers an HSA, ask about the ability to invest your contributions. If your employer either doesn’t offer an HSA or doesn’t offer a Self-Directed HSA, you can open an account with a trustee like Lively.

Step 3: Fund it!

Self-Directed HSAs are a great tool to grow your financial stability, especially if you have an interest in investing. They offer flexibility in terms of when and how much you contribute and the investments you buy. And allow you to grow tax-free money at the rate of the market. If you have any questions about opening a Lively self-directed HSA, consult our FAQs or reach out to us.

Vicky Warren

Vicky Warren

Vicky Warren, once a nurse, now a freelance healthcare writer and social media coach.

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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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