Opening a Health Savings Account (HSA) can be a great investment in your personal healthcare and financial future. Owned by the participant-employee (rather than the employer), the HSA is a versatile spending and savings account that can be used for many healthcare expenses. Since they can keep the account for life, HSA owners should adopt strategies for building their account balance and using the account to its maximum potential.
Should you just save and earn interest, or invest your HSA balance and watch it grow? Answer: it depends, largely, on how you intend to use the account.
People with regularly occurring healthcare expenses use their HSA to buy medications, pay for doctor and dental visits, cover lab tests and diagnostic procedures, and similar needs. If you are one of those who uses your HSA regularly and spends down the balance, then investing may not be your best option. Regardless, you will still get tax-free contributions and tax-free distributions for eligible expenses.
If you do not have recurring healthcare expenses, or the ones 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.
Invest your HSA balance
HSA savers (balance-builders) can use the third leg of the HSA “triple tax advantage” – tax-free investment growth – to set themselves up for future spending. However, many HSA owners aren’t taking advantage. According to the latest Devenir report, there are over 30 million Health Savings Accounts now open, but less than 6 percent of all HSA owners are investing (about 1.7 million accounts).
With a healthy 65-year-old couple retiring in 2019 needing an estimated $390,000 to cover healthcare expenses, including Medicare Parts B and D, you need a strategy to prepare for 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, with $25,000 you could earn $500 annually at 2.00%; at worst, you would earn only $17.50 at 0.07%. If the interest rate did not change, by 2030 you would have earned only $5,000.
Compared to potential stock market returns, that is not a sound long-term strategy for building up your HSA.
Annual stock market returns
For nearly the last century, the stock market has averaged a return of 10% annually. Some years it will be higher and other years it will be lower.
Now think about that $25,000. Through investing, it could turn into $65,000 over the next decade (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?
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 and continue contributing to an HSA, the savings from the lower premiums of an HDHP can be used to increase annual contributions.
In 2020, the average employer contribution was $870 and the average employee contribution was $2,033; combined that equaled $2,903. That’s only about 80% of the individual limit for 2021 and about 40 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 used by your administrator, you may even be able to invest through a single sign-on portal.
HSA investment strategies
Your strategy should depend largely on your age and the amount of risk you are comfortable taking. Generally, the higher the risk, the higher the reward, which 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 that choosing your own stocks, bonds or mutual funds is a successful strategy. If you don’t have the time or knowledge, many investment advisors offer pre-configured model 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 take the greatest advantage of tax-free growth. Your future self will thank you for setting yourself up for financial success through building a more robust HSA healthcare and retirement account.
This article reflects 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.