Should You Invest Your HSA?
So, you have a Health Savings Account (HSA), now what? While these accounts are similar to Flexible Spending Accounts (FSAs), one of the main differences between an HSA and an FSA is that you may be able to invest your HSA contributions.
Learn more about the pros and cons of investing your HSA, and why this may be a beneficial strategy to consider for your overall financial wellness.
The Basics of Investing Your HSA
Maintain a Minimum Balance
Before investing your HSA, your administrator may require you to maintain a minimum balance in your account. You will need to maintain this minimum amount to continue to invest. So, if you withdraw money and dip below the minimum balance, you will need to contribute more funds before you can continue to invest.
Consider Your Planned Health Expenses
If you are considering investing your HSA, it's important to note you will have to maintain both the required minimum investment balance and the amount of money you anticipate using on your health expenses for the year.
Consider the following hypothetical example:
The above example illustrates how you should maintain a balance that meets both the minimum required balance for investing, as well as a safe amount of money to cover any anticipated health expenses.
Now let's say you want to invest a portion of your contributions in your HSA. This example uses the 2020 maximum contribution limit for family coverage, $7,100.
Pros and Cons of Investing Your HSA
As with any investment strategy, there are both pros and cons if you choose to invest your HSA.
Pros of Investing Your HSA
Tax-free Growth: HSAs are one of the only accounts that provide tax-free distribution of account growth on your investments, if certain conditions are met. Even while you're investing in your HSA, if you need to access your funds to help pay for qualified medical expenses, you still have the option to access your funds.
Retirement Savings: Many people only use their HSAs as a short-term account to cover their immediate eligible medical expenses. However, HSAs are an excellent tool to take advantage of in your retirement planning. You can contribute to an HSA in addition to your other retirement accounts, and once you reach the age of 65, you can use your HSA funds to pay for qualified medical expenses and some health insurance premiums.
Asset Growth: You can choose to invest a portion of your HSA into optional market-based investments, which under normal circumstances, should experience growth in the value of your assets over time. This growth can be achieved through the accrual of additional interest or through the increase in value of investments purchased, both of which can outperform normal interest rates. This can help you grow the value of your HSA over the long term.
Cons of Investing Your HSA
Risk: All investments involve risk. It is important to consider the risks associated with any investment you choose to make, including your HSA. When considering whether or not to invest, you should consider your time horizon, when you will need access to your funds. You should also consider the impact and frequency of market fluctuations, as it could affect the availability of your HSA funds.
Lastly, you should carefully consider both how much of your HSA assets you invest and where you invest those assets. It is important that you invest in a way that limits your risk to an acceptable level. Those HSA assets you can avoid using for longer periods of time are excellent candidates for investing.
Choose What's Best for You
After reviewing the pros and cons of investing your HSA balance, it's important to review your financial plans and make the best decision for you and your family.
Consider these questions as you plan:
- Do I need to use my HSA funds in the near future?
- How much time do I have to grow my HSA if I choose to invest it?
- Can I weather any storms the market may face if I choose to invest my contributions?
- What growth could I expect to see if I choose to invest?
The answers to these questions may help you make the best decision for your family.