3 Tips for Investing Your Health Savings Account (HSA) Funds

by Travis Pizel · 4 comments

Using a Health Savings Account (HSA) as an investment vehicle can be a great way to prepare for retirement. It requires a high-deductible health insurance plan in order to participate in the HSA, but you can invest the funds however you wish.

I decided to switch to a high-deductible plan with an HSA this year, since my family has low medical expenses, and so far it’s worked out perfectly. We’ve paid for some medical expenses, plus the family’s eyewear for the year, and still have a good sum of money left over.

Realizing that an HSA was the right choice for my family is just part of the story. To fully take advantage of an HSA as an investment vehicle, there are few other things that you and I need to be aware of.

Funds Are Not Automatically Invested

I set aside a specific amount from every paycheck into my HSA. Looking at my account’s details, I see that the balance is currently sitting in an FDIC insured account earning 0.01% interest. If you have an HSA, yours is likely earning something similarly low.

The funds are not automatically invested inside the account, so you have to personally take action if you want your money to be invested somewhere that will allow it to grow faster. Check with your HSA administrator to determine the right kind of investment strategy.

My HSA administrator recommends that people consider using the same investing strategy used for other retirement funds based upon time left until retirement, and risk tolerance.

Investment Choices Very

The choices available for investment through an HSA will vary based upon who manages the account. But for the most part you can use an HSA to invest in mutual funds, stocks, bonds, exchange-traded funds (ETFs), Treasuries and CDs.

In my case, I have access to all of these options so it’s just about choosing the best one for our situation and risk tolerance. Check with your HSA administrator for more information about your specific choices.

Fund Availability is Limited

Funds in the Health Savings Account are available for immediate use. However, money that’s tied up in investments must first be liquidated before they can be used.

Transferring investment assets into the savings account usually takes a business day or two. If you know you’ll incur qualified medical expenses, you can chose to transfer some assets ahead of time. Or you can choose to have a certain amount of funds available in the savings account for immediate use at all times.

Health Savings Accounts can be a great tool to not only pay for your health expenses with pre-tax money, but also help grow your money for the future. However, to take full advantage of a Health Savings Account, you have to know all the details, and take action.

How are you investing the money inside your HSA? What tips do you have that are important to know?

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  • Mark says:

    My employer takes money out of my paycheck and deposits it into a local bank that has my HSA account. The local bank doesn’t offer investments with it so I do a free transfer to Health Savings Administrators and invest the money with them in a Vanguard Fund.

    I have been doing this for 5-6 years and it has been great. It is the best investment vehicle there is because unlike other investments you never have to pay tax on the money if you use it for medical expenses. I save all my receipts and pay all my medical expenses out of pocket (I am healthy with little, if any yearly expenses) so the money in my mutual funds can grow as much as possible. I plan on the investment earnings to pay for all my medical expenses in retirement.

    • Travis @enemyofdebt.com says:

      That’s a great plan, Mark, if you can continue to pay for your medical expenses out of pocket, your investments will keep growing and growing. Once you reach retirement age, you can use your HSA funds for not only medical expenses, but at that point you’re allowed to use those funds for anything you’d like! Thanks for your comment!

      • fredhohnson says:

        No you can’t. If used for anything other than qualified medical expenses at any time in your life then that withdrawal is taxed and penalized.

        • Travis Pizel says:

          We’re both right, fredHohnson – If you use HSA funds before the age of 65 (currently), you have to pay income tax + a 20% penalty. After the age of 65, however, use of HSA funds for something other than qualified medical expenses is subject to income tax, but not the 20% penalty.

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