How an HSA Can Help You Save for Health-Related Expenses and Grow Your Wealth
You probably think of your HSA as a great vehicle for saving for your current and future healthcare expenses. Did you know, though, that you can also invest your contributed funds and maintain a health savings account investment portfolio? If you’re wondering how to invest your health savings account, read on to learn the ins and outs of this beneficial opportunity.
If you don’t have an HSA, or you aren’t using yours to your full advantage, let’s review a few of the basics. Health savings accounts were designed to let you set aside funds pre-tax to pay for certain medical expenses. You can open your own HSA or take advantage of your employer’s plan if they offer one. Every year, you oversee how much money you contribute to your account, though there are upper limits to how much you can put in. Unlike a Flexible Spending Account (FSA), your HSA balance carries over from year to year, meaning you never have to worry about losing your savings.
Looking beyond these foundational elements, a big benefit of HSAs is that the money can be invested in stocks, mutual funds, and other asset classes. Here’s what you need to know about how to invest your health savings account.
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Creating Health Savings Account Investments
Though HSAs weren’t explicitly created for investment purposes, they can serve as excellent retirement savings accounts with big benefits. HSAs serve as a central repository for your medical funds, and just like an IRA or taxable brokerage account, you’ll have to have money saved up before you think about investments. Make sure to check with your HSA administrator to find out if there’s a minimum balance requirement before you can invest. Oftentimes, it’s as little as $1,000.
Another benefit? Some HSAs offer tools that can make investing even easier for you, like tools to help select investments and automatic rebalancing, so your portfolio shifts to stay within your preferred asset allocation. If your HSA is set up through your employer, keep in mind you may have less room to customize where your money is invested since they frequently offer fewer investment options.
If you’re thinking of investing your money through your HSA, you will likely see your money grow faster than just leaving it in a savings account. Investing HSAs can be a great way to boost your overall retirement savings, particularly if you’ve maxed out any other tax-advantaged accounts.
About the Famous ‘Triple Tax Benefit’
Perhaps the biggest benefit of an HSA is the so-called triple tax advantage. There is no other savings vehicle that offers this mix of advantages. Here’s the breakdown of this significant upside:
- You don’t pay federal income tax on your HSA contributions.
- You won’t be taxed on any withdrawals made for qualified medical expenses.
- Any earnings you see from your investments won’t be taxed.
The first two bullets aren’t limited to HSA investments—they’re true with any HSA account. However, if you do choose to invest your money, knowing your earnings won’t be taxed can pay big dividends – literally.
Anticipating Long-term Care
Thinking about getting older can be a difficult personal exercise, but it’s worth getting over that discomfort, particularly because aging can often bring with it unanticipated expenses. As of 2021, the annual cost of a private room in a nursing facility is $108,405, and the price of a home health aid is $61,776. According to projections, those costs are anticipated to skyrocket in the next two decades. In 2041, it’s estimated that a private nursing facility room will cost $195,791 and the cost of a home health aide will rise beyond the six-figure mark to $111,574 annually.
Though it’s impossible to predict your later-life needs, taking steps now to lessen the future burden is a smart financial strategy. If you started early, say at 30 years old, and invested $200 in an HSA each month, you could have almost $1.3 million by the time you turned 70, assuming a 10% annual stock market return.
That nest egg can help you prepare yourself and protect your family should you need long-term care in your later years. To make sure it’s there when you need it, it’s a good idea to leave that money where it is and let it grow like you would an IRA.
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Rolling IRA Funds Into an HSA
HSAs have an additional trick in their arsenal that can help you amass money faster if you don’t have a lot saved up. Just once, you can roll over money from your IRA into your HSA, as much as you want up to the contribution limit.
This is a good strategy if you experience an unanticipated medical expense and don’t have quite enough in your account to cover the expected cost.
When to Cash in on Your HSA
Unlike a Flexible Spending Account, which requires you to spend your money within a specific timeframe or forfeit it, an HSA can be held onto for as long as you like. If you can be patient and leave your investment where it is and let it grow, you could see much bigger benefits down the road.
Whenever you’re set to cash in on your HSA, you can take a lump-sum distribution that could put tax-free money in your pocket when you need it most.
Is HSA Investing Right for You?
Now that you know how to invest your health savings account, it’s up to you to decide if it’s the right path forward for your goals. There are a lot of benefits to investing in your HSA that can make a big difference in your financial and personal health but investing also comes with inherent risks.
At Davidson Capital Management, our philosophy is “the better you do, the better we do.” As fiduciaries, we put your interests first and provide guidance along with active asset management designed to help you meet your personal investing goals.