Financial Experts Love HSAs, and So Do We. Here’s Why Your Portfolio Needs This Tax-Efficient Investment Tool

What is an HSA account and why is it a good investment?
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If you’re not investing in an HSA, you may want to reconsider. Not only do experts love HSAs because of the tax benefits, there are a number of other benefits for the everyday investor. An HSA is a tax-efficient savings tool that can help you pay for medical expenses now or in the future, but can also be used for non-medical items.

HSAs offer triple tax savings and give you another way to invest your money.

“In my opinion, an HSA is better than a Roth because you’re never paying taxes on it,” says Ashley Coake, an enrolled agent, certified financial planner, and founder of Cultivate Financial Planning.  “With a Roth [IRA], you’re going to go ahead and pay federal, state, Social Security and Medicare taxes. But with an HSA, you’re not paying any of that ever, so long as you use it for medical expenses.” 

Here’s why you should consider investing in an HSA: 

What Is an HSA?

An HSA is an investment account that lets you put pre-tax money aside for medical expenses. An HSA can be used to pay for any deductibles, copays and help lower your overall health care costs.

The money in your HSA is yours until you pull it out, unlike an FSA where you lose it if you don’t use it. When you pay qualified medical costs out of an HSA, it’s tax-free. If you use that money for something other than medical expenses, like a boat or a car, you’ll incur a fee and owe ordinary income taxes. 

Here are some more details on the advantages of an HSA:

Triple tax benefits. This is one of the most loudly touted perks of an HSA, and rightly so. The money you put in is tax-free, money grows in your account tax-free, and you won’t be taxed on money you take out, as long as it’s used for qualified medical expenses. “There’s a fourth bonus,” says Jackie Cummings Koski, a certified health savings account expert. “If you get your contributions made through payroll, you don’t have to pay the FICA tax on the employee end.” That’s an additional 7.65% of tax savings.

Money you put in an HSA is yours to keep indefinitely. Unlike a Flexible Spending Account (FSA), where you have to use the funds in your account at year’s end (unless there’s a grace period), money in an HSA rolls over from year to year, says Koski. “You can spend, save, and or invest the funds tax-free,” she says.

You can get reimbursed for qualified medical expenses anytime. There’s no time limit to reimburse yourself for qualified medical expenses, explains Koski. You can hold on to receipts—or digitize them—and pay yourself months, years, or decades later.

You might be eligible to contribute to the family limit. Per the IRS, if you have a high-deductible  health plan (HDHP) and are the only person on it (aka a self plan), then you can contribute the individual amount, which is up to $3,600 in 2021 and $3,650 in 2022. If you’re on a family HDHP, you can sock away up to $7,200 in 2021 and up to $7,300 in 2022. When you hit age 55, you can contribute an additional $1,000.

Here’s the kicker: You don’t necessarily need to be married to someone and be on their health plan to contribute $7,200 a year. Your child over 18, as long as they’re on your health plan (up to age 26) can qualify. And depending on the particulars of your plan, if domestic partners are allowed to hop on a family plan, they might be able to qualify. “They just can’t be a tax dependent,” says Koski.

You can use it to invest in the stock market. If you don’t need the funds in your HSA to cover medical costs, it’s a good idea to invest them, explains Coake. “Even though you have medical expenses during the year, if your cash flow allows it, fund those with your cash flow,” says Coake. “To get the biggest bang for your buck, let it grow.” 

Pro Tip

You can do a one-time, tax-free rollover funds from an IRA to an HSA, but that amount would count toward your contribution limit for that year. 

How Do You Invest Your Funds In an HSA? 

You’ll be able to invest in a selection of ETFs, stocks, mutual funds, and bonds. Sometimes, an employer-sponsored HSA plan might have fewer investment options.

Another thing to keep in mind when you invest your funds in an HSA is that some providers will have partnerships with a brokerage. You then open a self-directed brokerage account through the provider. Other providers allow you to invest directly on the platform, and might have tools or features to help guide your decisions or rebalance your portfolio.

No matter what the provider, you’ll need to keep in mind the investment fees that might get folded in—maintenance fees, expense ratios, closing costs. And depending on your HSA provider, you might be required to keep a certain amount in your HSA for medical expenses. Everything beyond that can be put toward investing.

Withdrawing Funds for Medical Use

When taking out money for medical and dental expenses, the expenses need to be qualified and can include anything from co-pays, birth control, labwork, eye surgery, to medications and X-rays and wigs (if you’ve experienced hair loss from a disease).

For expenses to be used for someone else’s medical expenses other than your own, they would have to be a spouse or a dependent on your taxes. 

Due to the CARES Act in 2020, over-the-counter drugs without a prescription and feminine products were added to the eligibility list.  If you want to see for yourself, you can check out the IRS Pub 502, which provides a list of qualified medical expenses.

“Because you can reimburse yourself anytime in the future, be sure to hold on to those receipts,” says Koski. As physical receipts can easily get lost or fade over time, see if you can get receipts emailed to you, or create a digital version by snapping a photo of it on your phone and storing it in the cloud.  

Withdrawing After 65 for Non-Qualified Expenses

Once you turn 65, should you use the money in an HSA for non-qualified expenses, you’ll only owe ordinary income tax. Before you do so, remember that you can use that money toward your Medicare premiums, plus your deductibles, says Koski.

You’ll be able to use HSA money toward medical procedures done abroad, notes Koski. You just won’t be able to use it to buy prescription drugs that are from out of the U.S. 

Other Considerations

Mind early withdrawal penalties and taxes. If you take out money from your HSA to use for anything other than non-qualified expenses, you’ll get hit with a 20% tax penalty, and owe ordinary income tax, explains Koski. Should you contribute in a given year more than the maximum, you’re on the hook for a 6% excise tax.

Pay attention to fees. While many HSA providers don’t have monthly fees, there might be other fees tacked on, such as investment fees, and fees to receive paper statements.

“HSAs are a unicorn investment strategy,” says Coake. “You’re avoiding taxes now, in the middle, and at the end. There’s no other investment vehicle that does that, and it’s a really great way to minimize taxes.”

“HSAs are a unicorn investment strategy,” says Coake. “You’re avoiding taxes now, in the middle, and at the end. There’s no other investment vehicle that does that, and it’s a really great way to minimize taxes.”