How to Invest with Your HSA

Getting ahead financially is a game of inches. It’s about finding every trick, tip, and loophole you can find to maximize the growth potential of your money. There’s no topic where the phrase “work smarter, not harder” is more relevant.

It’s true that hard work is important, but grinding away at your job can only go so far. To build real wealth, you need to take advantage of every opportunity available to let your money do the hard work for you. In short, that means looking into nontraditional investing options once you’ve maxed out your regular accounts.

That’s why some people choose to invest with their Health Savings Account (HSA). Here’s what you need to know about going that route – how to do it, what to watch out for and how to decide if it’s the right option for you.

What is an HSA?

An HSA is exactly what it sounds like – a savings account for healthcare expenses. You can save money in an HSA to pay for lab work, prescriptions, imaging and doctor’s visits. Most medical bills qualify for HSA reimbursement except for elective surgery, monthly premiums and some alternative treatments. You can find a full list of eligible items through your HSA provider.

To open an HSA, you have to be under an eligible high-deductible plan. These plans must have a deductible of at least $1,350 for individuals and $2,700 for families. The out-of-pocket max for individuals must be no more than $6,650 for individuals and $13,300 for families. Typically, the high-deductible plans will have an HSA next to the name. Not every high-deductible plan qualifies for an HSA.

Like IRAs and 401ks, HSAs have a maximum annual contribution limit of $3,500 for individuals and $7,000 for families in 2019. If you contribute the family limit, both you and your partner have to be covered under a high-deductible plan. People 55 and older can contribute an extra $1,000 per year. There is no limit dictating when you have to stop contributing. As long as you’re under a high-deductible plan, you’re eligible.

HSAs famously have a triple tax benefit. You can deduct contributions on your taxes, withdraw money tax-free and let your earnings grow tax-free. There’s no other type of account that combines all three of those aspects.

Why Invest Your HSA?

Your HSA is one of the best savings vehicles available, but most people don’t realize they can use it as an investment account. While there are situations where investing your HSA is a bad idea, the upside is hard to ignore.

An HSA combines the tax benefits of both Roth and traditional IRAs, allowing you to deduct contributions on your taxes. You also don’t have to pay taxes on earnings and withdrawals if you use HSA funds for qualified medical expenses.

How to Invest Your HSA

First, open an HSA if you don’t have one already. Like bank and brokerage accounts, HSA providers are built differently and some companies are better than others. Lively and Fidelity are two of the best for investors because they have the lowest investing fees.

You might already have an HSA through your employer. If you do, look at their investment requirements, rules, and fund selection. Not every HSA provider has a good investment selection, and some have as few as 23 mutual funds while others have thousands. If you don’t like what you find, open a new HSA and transfer money from the employer’s HSA to your own.

Every HSA mandates that you keep at least some portion of your HSA in cash before you can start investing. Usually, the minimum is $2,000, but there are a few where the requirement is only $1,000. With a small handful, the requirement is a full $5,000. Find the lowest minimum possible if investing is the route you plan to take.

Next, pick which funds you want to invest in. If you’re not sure how to pick funds, contact a financial planner who can guide your decision. You can also choose funds similar to your IRA or 401k.

Once you’ve picked your investments, decide how you want to manage your account. Some people save manually every month, while others set up automatic transfers from their regular bank account to an HSA. Saving manually will keep you from overdrawing your account if money is tight, but automatic transfers are the best way to encourage consistent contributions. Choose the method that works best for your situation and personality.

When to Invest with Your HSA

Because HSAs don’t have income limits like Roth IRAs or 401ks, they’re more advantageous to high-income earners with limited access to other retirement plans. You also don’t have to contribute earned money to an HSA as you do with an IRA.

If you’ve already maxed out your IRA and 401k and still have money leftover, the HSA is a better choice than opening a brokerage account. You don’t have to pay taxes on your HSA unless you overcontribute or accidentally use HSA money for non-medical expenses.

If you’re older than 65, you can use your HSA for anything without paying a fine – though you’ll still owe income tax.

There’s no time limit on when you can get medical bills reimbursed through your HSA, as long as you have proof of purchase. If you get surgery at 45 and pay for it out-of-pocket, you’re allowed to reimburse yourself for the cost at 65 with your HSA.

The downside to investing with your HSA is that your value can drop suddenly if the market experiences a downturn. For the same reason that investing your emergency fund is risky, investing your HSA could leave your account balance dwindling when you need it most.

This is only relevant if you’re dealing with recurring medical bills and don’t have enough in the cash portion of your HSA to cover it. If you have major surgery or expensive lab work coming up, leave an appropriate amount in your HSA uninvested.