Can HSA Accounts Be Used for Investments?

Health Savings Accounts (HSAs) are financial instruments primarily designed to assist individuals with healthcare costs. Beyond mere savings for medical expenses, HSAs also offer significant potential for long-term investment. This dual utility makes them a powerful tool for managing immediate health expenditures and fostering future financial growth.

Investing HSA Funds

Health Savings Account funds can be invested, providing a unique avenue for wealth accumulation. This capability is underpinned by a “triple tax advantage.” First, contributions made to an HSA are tax-deductible, reducing your taxable income. Second, any earnings or growth from investments within the HSA accumulate tax-free. Lastly, withdrawals are also tax-free, provided they are used for qualified medical expenses. This tax-free growth allows invested funds to compound over time without annual taxation on gains. Account holders typically maintain a cash portion within their HSA to cover immediate healthcare expenditures. Concurrently, a separate portion of funds can be allocated to investments for long-term appreciation. This separation allows for liquidity for short-term needs while dedicating other assets to growth strategies.

Setting Up an Investment HSA

Investing HSA funds involves a few steps, as not all HSA providers offer integrated investment platforms. First, identify an HSA administrator that supports investment options; many traditional banks or credit unions may only offer basic savings accounts. Investment-focused HSA providers often partner with brokerage firms or offer their own built-in brokerage capabilities. After selecting a suitable provider, you typically link your HSA to their investment platform.

The process usually involves transferring funds from your HSA’s cash balance into a designated investment sub-account. Common investment vehicles available within an HSA often include mutual funds, exchange-traded funds (ETFs), and individual stocks. These options allow account holders to diversify their investments according to their risk tolerance and financial objectives. The specific types of investments available will vary by HSA provider, so reviewing their offerings is an important part of the selection process.

Understanding HSA Distributions

Accessing funds from an HSA follows specific rules to maintain their tax-advantaged status. Distributions for qualified medical expenses are entirely tax-free and penalty-free. Account holders must retain records, such as receipts, for all qualified medical expenses, as the Internal Revenue Service (IRS) requires proof of use. Qualified medical expenses include a wide range of services and products, from doctor visits and prescription medications to dental and vision care, as detailed in IRS Publication 502.

Should funds be withdrawn for non-qualified expenses, the tax implications vary depending on the account holder’s age. If the withdrawal occurs before age 65, the distributed amount is subject to ordinary income tax and an additional 20% penalty. However, once the account holder reaches age 65, non-qualified distributions are still subject to ordinary income tax but are exempt from the 20% penalty. At this point, the HSA can function similarly to a traditional Individual Retirement Account (IRA), offering taxable withdrawals for any purpose without penalty.

Important HSA Rules and Tax Reporting

Eligibility to contribute to an HSA requires enrollment in a High-Deductible Health Plan (HDHP) and not being covered by other health insurance, Medicare, or claimed as a dependent. For 2025, an HDHP must have a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage. The annual out-of-pocket maximums for HDHPs are $8,300 for self-only coverage and $16,600 for family coverage.

The IRS sets annual contribution limits for HSAs. For 2025, individuals with self-only HDHP coverage can contribute up to $4,300, while those with family HDHP coverage can contribute up to $8,550. An additional “catch-up” contribution of $1,000 is permitted for individuals aged 55 and over. Funds can be rolled over or transferred between HSA providers without tax consequence. Tax reporting for HSAs involves several forms: Form 1099-SA reports distributions from the account, Form 5498-SA reports contributions made to the account, and Form 8889 is used to report HSA contributions and distributions on your individual income tax return.