Can HSA Funds Be Invested? What You Need to Know

A Health Savings Account (HSA) serves as a savings tool for healthcare expenses, offering a distinctive advantage: the funds within an HSA can be invested. This allows the money to grow over time, potentially increasing the resources available for medical costs. The primary objective of an HSA is to help individuals save for current and future qualified healthcare needs.

HSA Eligibility and Contribution Rules

Establishing an HSA requires meeting specific eligibility criteria, primarily being covered under a High-Deductible Health Plan (HDHP). For 2025, an HDHP must have a minimum annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. The annual out-of-pocket maximum, including the deductible, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage.

Several factors can disqualify an individual from contributing to an HSA. These include being covered by other non-HDHP health insurance (e.g., a spouse’s non-HDHP plan), or enrolling in Medicare. Individuals claimed as a dependent on someone else’s tax return are also ineligible to open or contribute to their own HSA.

Contribution limits for HSAs are set annually by the IRS. 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. Those aged 55 and over can make an additional $1,000 catch-up contribution. If an employer contributes to an employee’s HSA, these amounts count towards the annual maximum contribution limit.

How to Invest HSA Funds

Many HSA providers offer integrated investment platforms, allowing a portion of the cash balance to be moved into various investment vehicles. The process typically involves transferring funds internally from the cash portion of the HSA to a linked investment account. This internal transfer allows the money to be managed for potential growth, similar to other investment accounts.

Some HSA providers require a minimum cash balance to remain in the account before funds can be transferred for investment. This threshold commonly ranges from $1,000 to $2,000, meaning only amounts exceeding this base can be invested. Other providers offer no minimum balance requirements for investing. After meeting any initial minimums, some platforms allow for recurring transfers, automatically sweeping funds above a set threshold into investments.

HSA providers offer diverse investment options. Common choices include mutual funds, which pool money to buy a diversified portfolio of stocks, bonds, or other assets. Exchange-Traded Funds (ETFs), individual stocks, and bonds may also be offered, providing flexibility for different investment strategies and risk tolerances. Some providers even offer managed investment options through robo-advisors, which select and manage investments based on a user’s goals and risk profile.

Tax Benefits and Distributions of Invested HSA Funds

Invested HSA funds offer a “triple tax advantage.” Contributions are tax-deductible, reducing taxable income. If contributions are made through payroll deductions, they are also exempt from FICA taxes (Social Security and Medicare). Any investment growth within the HSA, such as interest, dividends, or capital gains, accumulates tax-free.

The third advantage applies to withdrawals. HSA distributions are tax-free and penalty-free if used for qualified medical expenses. Qualified medical expenses are broadly defined by the IRS to include most items and services for the diagnosis, cure, mitigation, treatment, or prevention of disease. This encompasses a wide range of costs, such as doctor visits, prescription medications, dental care, vision care, and even certain long-term care expenses.

Before age 65, non-qualified withdrawals are subject to ordinary income tax and an additional 20% penalty. For example, a $1,000 non-qualified withdrawal incurs a $200 penalty in addition to income taxes. However, after reaching age 65, the 20% penalty for non-qualified withdrawals no longer applies. At this point, HSA funds can be used for any purpose, though distributions for non-medical expenses will be taxed as ordinary income, similar to withdrawals from a traditional IRA. Even after age 65, withdrawals for qualified medical expenses remain tax-free.