Marcus Marion, CMA™ Investing in your health is one of the soundest financial decisions you can ever make. As the adage goes, health is wealth. However, the key challenge usually lies in finding the right investment vehicle. Most would prefer a plan that promises maximum medical benefits at minimum cost. And that’s where HSA accounts come in.
Setting up an HSA account is an ingenious way to cover your health expenses. The account may also serve as a critical investment instrument.
But as with any investment decision, due diligence is paramount before opening an HSA account.
Read on for insights into HSA accounts, the benefits of opening one, potential drawbacks, and how to use them as an investment instrument.
What Are HSA Accounts?
A Health Savings Account (HSA) is a type of personal tax-advantaged savings account set up to help in paying certain healthcare costs.
HSA account holders enjoy numerous benefits besides simply setting money aside for unforeseen medical expenses. These accounts also allow you to withdraw money tax-free, provided that you spend it on qualified medical expenses, such as dental checkups, vision care, prescription meds, and insurance.
Contributions to health savings accounts can be made either by the individual account holder or their employer.
Can You Invest Your HSA Money?
One of the frequently asked questions by aspiring HSA account holders is whether it’s possible to invest their savings. But can you invest HSA money?
The answer to this question can be a yes or no, depending on several factors. Many HSA administrators require account holders to have a predefined minimum balance before investing their savings. It’s important to check with your administrator before using your HSA account as an investment instrument.
There are also additional aspects to consider before determining whether to actually invest your HSA savings. More on that later on.
How Do HSAs Work?
HDHPs entitle you to lower monthly premiums. However, you’ll need to cater for your healthcare bills by yourself before your medical insurer begins to share the cost.
Besides being enrolled in a high-deductible health plan, you can only set up an HSA account if you’re not under any coverage that disqualifies you.
For instance, you’re ineligible to contribute to an HSA account if you have Medicare coverage or are claimed as a dependent on another person’s tax return. You’re also ineligible for HSA contributions if you’re currently covered by a plan that pays out a share of an insured service without requiring deductibles or copayments.
Once you’ve established that you qualify for HSA contributions, the second step is to set up an account. Financial institutions like banks, as well as insurance companies, offer HSAs.
The next step is to open up your HSA for contributions. As already hinted, anyone can contribute to these accounts. That includes yourself, your employer, and even your friends and relatives.
Note that the Internal Revenue Service (IRS) sets the maximum amount that HSA account holders can contribute to their accounts. This amount depends on several factors, including your coverage type (whether you’ve enrolled in a self-only or family coverage) and your age (whether you’re 55 or older).
The maximum HSA limit for 2023 is $3,850 if you’re under self-only coverage and $7,750 if you’re under family coverage. Contributors aged 55 and older can contribute an extra $1,000 to their HSA accounts. This is known as a “catch-up” contribution, and it generally applies only to the eligible spouse who has hit 55 years.
In 2024, the HSA contribution limits are $4,150 for those under self-only coverage and $8,300 for those under family coverage. Seniors aged 55 and older will still be required to contribute an extra catch-up of $1,000.
Understanding your annual HSA limit is essential in spreading out the contributions. For instance, if your employer contributes $2,000 to your HSA account in 2023, then your share of the contributions is $1,850. That’s the amount that would come from your own pockets as well as from your friends and relatives.
What Are The Benefits Of Investing Your HSA Money?
There are multiple ways to invest your money for hefty returns. One such method is by putting your HSA savings into good use.
Now, the biggest reason to set up an HSA account is that you can capitalize on the triple tax advantage these accounts offer. Those include;
i) Exemption from paying federal income tax on your HSA contributions.
ii) Exemption from paying tax on your withdrawals provided the money is used in paying qualified healthcare costs, such as;
- Ambulance costs
- Dental checkups
- Vision care
- Hearing aids
- Acupuncture
- Psychological therapy
- Psychiatric care
- Deductibles
- Prescription drugs
- Follow-up medical visits on qualified long-term services
NB: Insurance premiums generally don’t count as qualified medical expenses unless they’re for Medicare or other medical coverage for seniors (65 years or older) who meet the following conditions;
- Are receiving healthcare continuation coverage
- Are receiving unemployment compensation
- Are under long-term care insurance
- Are subject to annually adjusted limits
iii) Exemption from paying tax on earnings from HSA investments.
The third tax advantage is the biggest case for pursuing an HSA investing plan. Simply knowing that you won’t owe the IRS a dime for earnings or interests generated from investing your HSA funds is enough incentive to put this money into good use.
However, there’s one noteworthy exception to HSA tax benefits. Any withdrawal made by account holders under the age of 65 for reasons unrelated to qualifying medical expenses attracts tax at the account holder’s ordinary income tax rate. That’s not to mention an additional 20% tax penalty on withdrawals for nonqualified expenses.
Besides the tax benefits, it’s also great to know that HSA contributions have no expiration date. Your savings stay in the account until you expend it.
What Are the Drawbacks of Investing Your HSA Money?
The biggest downside to setting up an HSA account is that these accounts must be tied to high-deductible health plans. And a typical HDHP plan will need you to finance a significant amount of money on deductibles before qualifying for reimbursement from your health insurance.
Not only is it unsound to invest in an HAS account if you have high medical expenses. It’s imprudent to set up the account in the first place.
Another potential drawback to investing your HSA savings is that some of these accounts could charge significantly higher fees. Besides, the investment options offered may not be so attractive.
What Are The Available HSA Investment Options?
There are numerous HSA investment options that you can explore. It’s important to analyze each option carefully to determine its suitability for your investment needs.
Common ones include;
1. Mutual Funds
A mutual fund is a single investment that encompasses several investment assets. These funds allow you to pool your resources to invest in diverse portfolios.
Mutual funds require minimal investment knowledge to navigate. They also support automatic dividend investment.
However, there are annual fees and sales commission charges to contend with.
Exchange-traded Funds (ETFs)
Exchange-traded funds operate more like mutual funds. The primary difference is that ETFs are typically traded on stock exchanges.
Much like mutual funds, ETFs allow you to diversify your investment. They also support automatic dividend reinvestment and generally attract low annual fees.
2. Stocks
Stocks, also known as equities, are a type of security that grants stockholders an ownership stake in a company.
The most significant benefit of investing your HSA funds in stocks is that you can rake in thousands of dollars depending on market movements. Besides, some HSAs allow you to invest in stocks with no commissions. Not to mention the absence of annual fees.
The only noteworthy drawbacks to stock trading are that it deals with a highly volatile market and requires in-depth market research.
3. Bonds
Bonds are investment instruments issued by governments or corporations, allowing them to raise capital for ambitious projects.
By investing your HSA in buying a bond, you’re essentially lending money to the issuer.
Bonds are less risky and less volatile. They also attract lower interest rates than bank accounts while guaranteeing heftier returns in the long run.
Other FAQs on HSA Accounts
1. Do I have to pay taxes on my savings account?
As already mentioned, HSA accounts are generally exempt from federal income tax.
You won’t need to pay tax when making contributions to your HSA account or withdrawing funds from the account. There are no taxes applicable on interest or earnings from HSA investments either.
However, the only way to enjoy these benefits is to ensure every withdrawal is spent on qualifying medical expenses.
2. How can I make the most of my HSA savings?
To reap maximum benefits from your HSA savings;
- Fully exploit your employer-matching contributions
- Contribute the maximum annual amount required for your HSA account
- Think of your HSA as a long-term investment strategy or retirement package
- Avoid withdrawing from the account as much as possible
- Always have enough funds to take care of your qualified medical expenses even as you invest your HSA funds
3. Can you withdraw money from HSA?
You can withdraw money from HSA, provided you’re using it to pay for qualifying medical expenses.
You could also withdraw money from your HSA account to fund an identified project.
Wrap Up
There are pros and cons of opening an HSA account. However, the benefits far outweigh the drawbacks.
We hope this article provided you with the information you need to set up an HSA account or better manage your existing HSA fund.
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