HSA owners benefit from tax-free growth on their account through interest earned and investment income. However, account owners should also consider investing HSA funds as a means for substantial growth.
Health Savings Accounts (HSAs) are popular, tax-advantaged savings accounts designed to help people with High Deductible Health Plans (HDHPs) pay for out-of-pocket healthcare expenses. HSA accounts have taken off since their implementation in 2004. In 2020, there was over $80 billion in assets held in over 30 million HSA accounts.
There are many reasons why HSAs have become so popular. In addition to owning an HSA for the life of the account, owners also enjoy other significant benefits, such as the triple-tax savings. With an HSA, account holders:
- Make pre-tax contributions. In 2021, HSA account holders filing single can contribute a maximum of $3,600 and those filing as a family may contribute up to $7,200.
- Use the funds tax-free when withdrawn for eligible medical expenses. The IRS has an extensive list of eligible medical expenses, which includes co-pays, prescriptions, dental treatments, eye exams and treatments, COBRA premiums, and Medicare B and D premiums, and more.
- Earn tax-free interest on the account balance and income from investing HSA dollars.
Let’s talk more about earning tax-free interest on the balance and tax-free earnings from investing HSA funds.
Health Savings Accounts are a type of ‘savings account,’ so it earns interest on the account balance. As the balance grows, the account owner earns more interest. And the best part is that the interest gained is not subject to taxes.
In addition, from one plan year to the next, account owners enjoy balance rollover. There is no ‘use it or lose it’ rule like with FSAs. This can be beneficial in helping grow the account for future medical expenses. Plus, you don’t have to worry about paying taxes and reducing the account balance, particularly if the account does not meet the minimum investment threshold.
While gaining tax-free interest is beneficial, for account owners looking for more substantial gain, investing HSA dollars may be an option.
Tax-Free Investing with an HSA
The ability to invest HSA funds is a significant factor in helping drive account growth. In their year-end study for 2020, Devenir figured HSA assets increased 25% year-over-year. However, it is estimated that only 5 percent of all HSA account holders invest, which means the overwhelming majority of account owners are missing out.
One caveat to the investing option is that many HSA custodians require a minimum balance before account holders are allowed to invest. The minimum balance threshold ranges from as low as $1,000 to as high as $2,500. Once the minimum balance is met, account holders can view their HSA provider’s options. Some may allow account holders to choose the investment options, like stocks, bonds, and mutual funds, or they may provide different growth model plans selected by a licensed investment advisor. Other options may include the ability to access investor statements, and educational tools, among other features.
If you aren’t saving and investing your HSA funds now, it may be time to do so. For people who own an HSA, there are many tax advantages to the account that can help with both short- and long-term growth, while continuing to reduce the cost of personal healthcare. In addition, for those who are looking to use their HSA funds for other purposes in retirement (penalty-free, though taxed like regular income), investing and building wealth is a strategic option.
Questions to consider when you own an HSA:
- Am I maximizing my annual contributions?
- Does my HSA meet the minimum account threshold for investing?
- Is the interest earned enough to sustain my account, or should I wait and invest?
DataPath Summit is a cloud-based administration platform for FSAs, Limited Purpose FSAs, HSAs, HRAs, and Transit/Commuter accounts. Summit is an ‘everything you could need solution’ with streamlined financial processes including debit cards and electronic payments.