Opening a Health Savings Account (HSA) can be a great investment in one’s personal healthcare and financial future. Owned by the participant (rather than the employer), an HSA is a versatile healthcare spending and savings account that can be used for many expenses. Since they can keep the account for life, HSA owners need to adopt strategies for building and using their account to its maximum potential. Should you save and earn interest, or invest your HSA balance and watch it grow? The answer largely depends on how you use your account.
People with regularly occurring healthcare expenses use their HSA to buy medications, pay for doctor and dental visits, cover procedures, and other healthcare needs. If you use your HSA regularly and spend down the balance, investing may not be the best option. Regardless, you will still enjoy tax-free contributions and tax-free distributions for eligible expenses.
If you do not have recurring healthcare expenses, or the expenses you have are significantly less than your available HSA balance, then the time is right to invest. Developing an investing strategy now could be a big boon toward covering future healthcare costs or supplementing your retirement account.
The time is right to invest your HSA balance
HSA savers (or builders) can use the third leg of the “triple tax advantage” – tax-free investment growth – to set themselves up for future spending. However, many HSA owners are not taking advantage of this perk. According to the latest Devenir report, there are over 29 million open Health Savings Accounts, but just over 5 percent of all HSA owners are investing (approximately 1.5 million).
With average out-of-pocket healthcare and medical expenses estimated at $285,000 for a 65-year-old couple that retired in 2019, you need a strategy to help combat these financial burdens.
Why invest now?
The Federal Reserve announced in June 2020 that it would keep interest rates low through 2023. For HSA owners, that puts a much heavier emphasis on investing.
No matter where you bank your HSA, the account is not going to grow significantly by accumulating interest. Some banks offer rates as high as 2.00% while others offer as little as 0.07% on balances over $25,000. At best, you could earn $500 annually at 2.00%; at worst, you would earn $17.50 at 0.07%. If the interest rate did not change, by 2030 you would have earned only $5,000.
Compared to the potential stock market returns, that is not a sound long-term strategy for building up your HSA.
Annual stock market returns
Historically, the stock market averages a return of 10% annually. Some years it will be higher and other years it will be lower.
Now think about that $25,000. By investing, over the next decade it could turn into $65,000 (assuming a 10% annual return each year). That’s over 2.5 times the current value and a much larger return than letting the money sit in a savings account.
How do you invest your HSA balance?
Maximize your contributions
First and foremost, every HSA owner should maximize their annual contributions to the extent they can afford. While it is required that you enroll in a qualified high deductible health plan (HDHP) to open the HSA, the savings from lower premiums can be used to bolster your annual contributions.
Currently, the average employer contribution is $673 and the average employee contribution is $1,168; combined that equals $1,841. That’s just over half of the individual limit for 2020 and about 25 percent of the maximum family contribution.
Consider too, that after age 55, account owners can contribute an additional “catch up” contribution of $1,000 over the annual HSA limit, whether individual or family.
Minimum threshold for investing
Depending on your HSA administrator, you may have to meet a minimum balance before being allowed to start investing. Some banks offer a zero balance requirement while others may ask you to have $500 or $1,000 on hand first.
Talk to your HSA administrator
Many HSA administrators offer investing options through their custodial bank; some may also provide materials to help you research investment options and portfolios. Depending on the HSA software, you may even be able to invest through a single sign-on portal.
HSA investment strategies
Your strategy should largely depend on your age and the amount of risk you want to take. Generally, the higher the risk, the higher the reward; this could be a good strategy for younger adults who have a long time before retirement. For those getting close to retirement, a more conservative approach is advisable.
If steeped in stock market knowledge, you may find choosing your own stocks, bonds or mutual funds to be a good strategy. If you don’t have the time or knowledge, many investment advisors offer pre-configured portfolios to help you meet your long-term goals.
The time is right to invest your HSA funds. Interest rates are low and investing can help you really take advantage of tax-free growth. Your future self will thank you for building a more robust healthcare and retirement account, and setting yourself up for financial success.
This article reflects an opinion and is for informational purposes only; it does not constitute professional tax or investing advice. Seek a licensed professional for investment advice. Due to fluctuations in the stock market, investment value could increase or decrease at any time and growth is not guaranteed.
DataPath Summit is an all-in-one HSA administration solution for TPAs, employers, and participants.