We’ve heard this on repeat: Health Savings Accounts can be a great investment in one’s personal healthcare and financial future.
Their versatility, and the fact that these accounts can be kept for life, mean that HSA owners need to adopt strategies for building and using the accounts to their full potential. Should you save and earn interest, or invest your HSA balance and watch it grow? The answer largely depends on how you use your account. But developing a long-term approach to capitalizing on your HSAnowcan pay big dividends down the road.
What to consider
Personal goals, immediate healthcare needs and stage of life can all factor into the decision whether or not to invest.
People with recurring healthcare expenses use their HSA for medications, doctor visits, medical procedures and other healthcare needs. For those who use their HSA regularly and spend down the balance, investing may not be the best option. But you can still enjoy tax-free contributions and tax-free distributions for eligible expenses.
For younger generations (Gen Z, Millennials and Gen X) or for those who do not have significant healthcare expenses, developing an investing strategy now can be a big boon toward covering future healthcare costs or supplementing their retirement accounts.
Building up an HSA vs other retirement plans
While an IRA or 401(k) is a solid option for a retirement account, an HSA offers a greater amount of flexibility over a lifetime.
As long as they’re enrolled in a qualified high deductible health plan, people can make tax-free contributions. They own the account for life and can take tax-free, penalty-free distributions for qualified out-of-pocket healthcare expenses at any time. HSA owners can also grow the account tax-free by accruing interest or investing.
Then after age 65, the person can use the money for any expense without penalty – healthcare or otherwise. Healthcare expenses remain tax-free, while distributions for other types of expenses are taxable. Non-qualified distributions before age 65 are subject to both penalty and tax.
Why invest your HSA balance?
The third leg of the “triple tax advantage,” tax-free investment growth, is a key component for setting up future spending. However, many HSA owners are not taking advantage of this lucrative perk. There are over 29 million HSAs now open, but just over 5% of all HSA owners are investing (approximately 1.5 million), according to the latest report by Devenir, the HSA investment research firm.
With average out-of-pocket healthcare expenses estimated at $285,000 for a 65-year-old couple that retired in 2019, HSA owners need a plan that addresses these future financial burdens.
Why invest now?
TheFederal Reserve announced in June 2020 that it would keep interest rates lowthrough 2023 – though that could change. Nevertheless, HSA owners should strongly consider investing because accumulating interest alone will not yield substantial growth.
Interest rates currently range from a low of 0.07% to a high of about 2.00%. At even the highest yield, a $25,000 balance would earn only $500 a year. If the interest rate remains stable, by 2030 the account will have earned less than $5,500 even with compounding.
While there are no guarantees in the stock market, investing has much more growth potential than accruing interest. Assuming anaverage annual return of 10% on investing,that HSA account holder could turn that $25,000 into nearly $65,000 over the next decade.
Strategies for investing your HSA balance
Maximize contributions
First and foremost, every HSA owner should maximize their annual contributions to the extent they can afford. While enrollment in a qualified HDHP is required to open and fund the HSA, the savings achieved through lower premiums can be used to bolster annual contributions.
In 2021, the maximum annual contributionfor people with single coverage is $3,600, while those with family coverage can contribute up to $7,200. Account owners age 55 or higher can make an additional “catch up” contribution of $1,000 each year over the annual limit, whether individual or family.
Talk to your HSA adviser
Depending on the HSA administrator, there may be a minimum balance requirement before the account owner can start investing. Some banks offer a zero balance requirement, while others may ask for a certain amount on-hand, such as $500 or $1,000, before investing can begin.
Many HSA administrators offer investing options through their custodial bank. Some may also provide materials for researching investment options and portfolios. Depending on the software, HSA owners may also be able to invest through a single sign-on portal.
The time is right to invest your HSA funds. Interest rates are low and investing can help you really take advantage of tax-free growth. Your future self will thank you for building a more robust healthcare and retirement account, and setting yourself up for financial success.
Chris Gunderman is chief financial officer for DataPath, Inc.
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