HSA Investment Strategy: Guide

SmartAsset: HSA Investment Strategy Guide

A Health Savings Account (HSA) offers the ability to build an investment portfolio to cover future medical expenses. This specialized account could be a game-changer in retirement with the right investment strategy. Let’s see how you could use your HSA as an investment tool for retirement.

A Financial Advisor can help you create a financial plan for your investment needs and goals.

What is an HSA?

A HSA is a specialized savings account designed to help you save for future medical expenses. In recent years, HSAs have become a more popular option available to employees.

Essentially, when you have an HSA combined with a high-deductible health plan, you can significantly lower your monthly premiums compared to a traditional health care plan. Hopefully your budget allows you to put those savings directly into your HSA.

Like you build up savings in this account, you can invest the funds for long-term growth. Plus, take advantage of many special tax benefits. And combined with other investments, an HSA can help increase your retirement savings.

HSA Investment Strategy

The details of an appropriate HSA investment strategy will vary for everyone. Here are four key things to consider:

Consider the value. Before embarking on an HSA investment strategy, it is essential to consider the value that this type of account brings to the table. Otherwise, it can be difficult to find the motivation you need to accumulate savings in this unique account.

The tax rules surrounding HSAs are a big part of the value that an HSA offers. Specifically, your contributions reduce your taxable income and your money will grow tax-free. Plus, you can even make tax-free withdrawals if the money is used for eligible medical expenses. It’s a triple tax advantage worth pursuing.

Contribute as much as possible. With the potential for tax savings in mind, it makes sense to prioritize your contributions to an HSA. But how much can you contribute?

In 2022 you can contribute up to $3,650 as a single person with a high deductible health plan (HDHP). Or up to $7,300 in family with HDHP coverage.

Of course, you may not have the means to maximize your HSA dues. And that’s it! But it’s a good idea to contribute what you can regularly. For example, let’s say you save $50 per month by switching from a traditional health plan to an HDHP. If possible, channel these savings directly into your HSA.

Choose an asset allocation that reflects your risk tolerance. A suitable asset allocation will vary depending on your risk tolerance. This fact does not change when you invest through an HSA.

Here are three common allowances:

  • 60/40 Portfolio: You will split your assets with 60% stocks and 40% bonds.

  • 80/20 Portfolio: You will split your assets with 80% stocks and 20% bonds.

  • Based on age: As you age, your risk tolerance declines. And with that, your asset allocation may need some tweaking along the way.

In many cases, you may decide to put your HSA dollars into a less risky strategy. Indeed, at least part of these funds must be available when you incur health expenses.

Pay back later. An HSA is designed to cover your health care costs. But there is no timeline for your repayment requirements. You can keep your health care receipts and reimburse yourself when you really need it.

For example, let’s say you have a $500 medical bill this month. Instead of withdrawing the funds from your HSA, you can cover the cost with your monthly income. So you keep the receipt. In 10 years, you have an expense that requires tapping into your HSA. At this point, you can surrender the receipt for $500 and withdraw the funds without paying tax on the withdrawal.

So why wait to reimburse you? Paying you back later means the funds invested in your HSA can continue to grow. Since time is on your side as an investor, the hope is that your portfolio can reach its full potential if you can avoid withdrawing funds.


SmartAsset: HSA Investment Strategy Guide

SmartAsset: HSA Investment Strategy Guide

An HSA can help you save for medical expenses in retirement. If you choose to invest in an HSA, make sure your investment strategy matches your financial goals. And don’t forget to make regular contributions to watch your HSA grow.

Tips for Building HSAs and Retirement Investments

  • An HSA is a great way to build a portfolio to cover future medical expenses. Consider working with a qualified professional Financial Advisor to define the best retirement savings strategy. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • If you want to know if you are saving enough for retirement, SmartAsset’s Free Retirement Calculator can help you determine how much you will need.

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