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Retirement

Make Room for HSAs in Your Retirement Nest Egg

The Baldwin Group
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Updated: April 24, 2024
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6 minute read

Are you using your health savings account (HSA) to invest in your future? The ABA Banking Journal reports that only about 7 percent of all HSAs are being invested.

HSAs are valuable investment tools that can allow you to save money to meet future healthcare needs (e.g., long-term care,) along with helpful tax benefits. Given that healthcare costs typically rise with age, consider if and how you can use an HSA to meet your financial needs once you exit the workforce.

Are you eligible for an HSA?

To be able to have an HSA, you must be enrolled in an eligible high deductible health plan (HDHP), which is a health insurance plan that has low premiums, but high deductibles. To offset the costs of those higher deductibles, HDHP participants can use HSA funds to pay for medical expenses. And much like a 401(k), you can contribute to your HSA with pretax dollars.

In 2024, the maximum contribution for individual coverage is $4,150 for an individual and $8,300 for a family. Unlike with flexible spending accounts (FSAs), unspent funds in HSAs roll over each year.

You’ll need to determine if an HDHP is the right choice for you (and your dependents). If you are healthy and have predictable healthcare bills every year, an HDHP with an HSA can be a good option because you can save a lot of money from the lower premiums from the HDHP and gain tax advantages from HSA. However, this option may not be effective if you are older, have chronic health conditions, or are susceptible to illness.

If you determine that an HDHP with an HSA is right for your personal situation, you can estimate a cash target for your medical expenses, and set aside that amount to invest and grow for the future. (Just stay up to date with your HSA withdrawal rules, as these might change over time.)

How do you estimate how much money you should save?

HSA funds for immediate expenses vs. future investment

Even though you might not know exactly what your health will look like in the coming year, there are steps you can take to understand your needs and prepare for both expected and unknown costs. For instance, think about your financial situation and how comfortable you are paying for current medical bills.

Ask yourself the following questions to estimate how much money you’ll need. After you determine this amount, you can consider investing additional funds for long-term growth. 

  • How much did you spend on qualified medical expenses last year?
    Qualified medical expenses include money you spent on copays; coinsurance; dental, mental, and eye care; and prescriptions. You should be able to log into your HSA and health insurance accounts to see how much you spent on healthcare expenses in the past year. For a more complete picture, you could look at how these expenses tracked year over year.
  • How much do you anticipate spending in the coming year?
    Think about if next year’s expenses will be higher, lower, or about the same to come up with an estimate of how much money you’ll need to set aside to cover your immediate out-of-pocket costs. For example, maybe this year you had a medical procedure that you won’t have next year. Or maybe you know that next year you’ll need to have a surgery that will make you spend more money than usual. Just keep in mind that emergencies can happen at any time… and can impact your estimate.
  • Can you adjust your budget to increase HSA contributions and invest them?
    Once you determine how much money you need to cover short-term medical expenses, you can look at the rest of your budget and determine if you can put more money into your HSA (up to the annual contribution limit) for long-term growth.

How can you invest HSA funds?

If you’re able to invest any of your HSA funds, they have the potential to grow so you have more of a financial cushion over time.

Make sure that your HSA offers investment options that align with your goals. Some HSA providers only allow investments with low risk and low returns, while others offer access to investments with higher risk, and higher returns. Still others only allow you to invest after you’ve contributed a minimum amount. In any event, there can be investment fees, so look at the fee schedule for your HSA before contributing.

If you have an HSA through an employer-sponsored health plan and it doesn’t provide you the investment options you want, you can transfer the funds to a personal HSA that’s better aligned with your needs. Be sure to shop around for a plan with low-cost, high-quality investment options.

Deciding how you want to invest your HSA funds depends on your goals and unique circumstances. Understand your risk tolerance and potential medical needs when mapping out your investment strategy. Common investment options include stocks, mutual funds, exchange-traded funds, bonds, and dividend funds.

Each of these options has benefits and downsides, so if you’re an inexperienced investor or want to make an informed decision about how to invest your money, connect with a financial advisor who can help you find which options work best for you.

Weigh the pros and cons of investing HSA funds

Depending on your physical health and financial picture, investing HSA funds may or may not be the right option for you. Here are some pros and cons to factor in to your decision making:

PROS:

  • Provides a triple tax advantage because you don’t pay taxes on the money you contribute, on earnings, or money you take out for qualified medical expenses
  • Offers potential growth over time thanks to the benefits of tax-deferred, compounded interest on your invested HSA funds
  • Includes possible employer contributions which can give you free money that you can use to invest in your future
  • Provides the chance to create a financial cushion by investing to pay for future medical expenses. Plus, you can withdraw HSA funds and use them for nonmedical expenses after you turn 65 without paying the 20 percent penalty. However, you’ll likely have to pay taxes on this type of withdrawal.
  • Lets HSA funds move with you and roll over from one year to the next year so you get to keep them if you change jobs

CONS:

  • May not account for unexpected healthcare bills so you’ll need to have the money available to pay those costs
  • Could be affected by market volatility especially if you plan to tap the money in your HSA to cover medical costs in the near future
  • Must consider the impact of fees associated with investing your HSA since some come with high fees, while others have low fees
  • Only available with HDHPs which aren’t for everyone, especially people who need a lot of medical care
  • Requires careful recordkeeping if you use HSA funds for medical expenses. So you need to keep all receipts to prove that withdrawals were used to pay for qualified expenses in case the IRS audits you. This may be difficult to do over a prolonged period of time.

Don’t forget to choose a beneficiary

Like with many investments, it’s important to choose a beneficiary who will receive account funds when you pass on. From time to time, you may want to revisit your designations just in case you experience life changes that impact your choice(s).

Talk to a trusted expert

Deciding whether or not to invest in an HSA requires foresight and planning. If you need help determining if one is right for you, consult with our retirement team.

Let’s work together to examine HSAs and build a strategy that can protect your financial future.


Tags in this resource

financial planning HDHP HSA investment retirement planning
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