Can I Invest My HSA Funds? Here’s How and Why

A Health Savings Account (HSA) is a specialized savings vehicle designed to help individuals manage healthcare costs. This account provides a tax-advantaged way to set aside funds specifically for eligible medical expenses. Unlike some other health savings options, money within an HSA rolls over year after year, allowing it to accumulate. A significant feature is the ability to invest these accumulated funds, which allows the money to potentially grow, offering a strategic approach to covering both present and future healthcare needs.

Understanding HSA Eligibility Requirements

To be eligible for a Health Savings Account, an individual must be covered under a High Deductible Health Plan (HDHP). This specific type of health insurance plan features a higher annual deductible compared to traditional health plans. The Internal Revenue Service (IRS) sets annual minimum deductible and maximum out-of-pocket limits that an HDHP must meet. For 2024, an HDHP must have a minimum deductible of $1,600 for self-only coverage and $3,200 for family coverage. The maximum out-of-pocket expenses, including deductibles, co-payments, and co-insurance, cannot exceed $8,050 for self-only coverage or $16,100 for family coverage.

For 2025, these limits are adjusted to account for inflation. The minimum deductible for an HDHP will increase to $1,650 for self-only coverage and $3,300 for family coverage. The maximum out-of-pocket expenses for 2025 will be $8,300 for self-only coverage and $16,600 for family coverage.

Beyond HDHP enrollment, several other criteria determine HSA eligibility. An individual cannot be enrolled in Medicare. A person cannot be claimed as a dependent on another individual’s tax return. Lastly, an eligible individual cannot have other health coverage that is not an HDHP, though exceptions exist for specific types of coverage like vision, dental, or certain preventative care benefits.

How to Invest HSA Funds

The process of investing HSA funds begins with selecting an appropriate custodian, as not all HSA providers offer integrated investment capabilities. While many banks and credit unions provide basic HSA savings accounts, individuals interested in investing their funds should seek out custodians that specifically facilitate investments, which often include specialized investment firms. The choice of custodian plays a significant role, as offerings can differ in terms of available investment options, associated fees, and the overall user experience.

Once a suitable custodian is chosen and the HSA is established, the next step involves setting up the investment account. This usually entails linking the cash portion of the HSA to a separate investment platform offered by the same custodian. Most providers offer intuitive online portals or mobile applications where account holders can manage both their cash balance and their investment portfolio.

A common requirement across many HSA custodians is maintaining a minimum cash balance in the core HSA account before funds become eligible for investment. This minimum typically ranges from $1,000 to $3,000. For instance, some custodians might require a $2,000 balance to remain in the cash account, allowing any amount above that to be invested. However, some providers do offer “first-dollar investing,” where no minimum cash balance is required, sometimes in exchange for an annual fee.

After meeting any minimum balance requirements, funds can then be transferred from the HSA’s cash component to its investment counterpart. This transfer can be initiated manually by the account holder through the online platform. Many custodians also offer an automated “sweep” feature, which automatically moves any cash balance exceeding a predetermined threshold into the investment account at regular intervals.

Managing the investments typically occurs through the custodian’s online platform. These platforms provide tools and resources to select investment products, monitor performance, and make adjustments to the portfolio. Users can often set up features like automatic rebalancing to maintain their desired asset allocation.

Tax Advantages of Investing HSA Funds

Investing funds within a Health Savings Account unlocks a unique “triple tax advantage.” First, contributions made to an HSA are tax-deductible. If contributions are made through payroll deductions, they are pre-tax, reducing an individual’s taxable income and potentially lowering FICA taxes. If contributions are made directly, they can be deducted on federal income tax returns, even if the taxpayer does not itemize deductions.

Second, the funds within an HSA grow tax-free. Any interest earned, dividends received, or capital gains realized from investments held within the HSA are not subject to federal income tax as long as they remain in the account. This tax-free growth allows the invested funds to compound more rapidly over time compared to taxable investment accounts.

Third, withdrawals from an HSA are entirely tax-free when used for qualified medical expenses. This tax-free distribution applies at any age, whether before or after retirement. Qualified medical expenses are broadly defined by the IRS and include items such as deductibles, co-payments, co-insurance, prescription medications, dental care, vision care, and many over-the-counter medical products. The IRS provides detailed guidance on what constitutes a qualified medical expense in Publication 502.

If funds are withdrawn for non-qualified expenses before the account holder reaches age 65, these distributions are subject to ordinary income tax. In addition to the regular income tax, a 20% penalty tax is assessed on the withdrawn amount.

Upon reaching age 65, the rules for non-qualified withdrawals become more flexible. After this age, withdrawals used for non-medical expenses are still subject to ordinary income tax, but the 20% penalty tax is waived. This provision allows the HSA to function similarly to a traditional Individual Retirement Account (IRA) in retirement, offering a tax-advantaged source of income for any purpose, while maintaining its tax-free status for qualified medical expenses.

Investment Options within HSAs

Once funds are transferred to the investment portion of an HSA, account holders typically encounter a range of investment vehicles. Common options provided by HSA custodians include mutual funds, exchange-traded funds (ETFs), individual stocks, and bonds. Mutual funds often offer diversified portfolios managed by professionals, and some custodians provide target-date funds that automatically adjust their asset allocation as a specific retirement year approaches.

Exchange-Traded Funds, or ETFs, trade like stocks but represent a basket of securities. For investors seeking direct control, many HSA platforms allow the purchase of individual stocks and bonds. The specific selection of these investment types, including the availability of fractional shares or certain bond classes, will vary significantly depending on the chosen HSA custodian.

The long-term nature of HSA investments often encourages a focus on growth-oriented assets. Since these funds are intended to cover future healthcare expenses, potentially decades away, investors may opt for a more aggressive allocation that prioritizes capital appreciation. This long-term horizon allows for weathering market fluctuations.

Diversification is an important principle for building a resilient investment portfolio within an HSA. By spreading investments across different asset classes, industries, and geographies, individuals can mitigate risk. For example, combining stocks for growth potential with bonds for stability can create a balanced portfolio tailored to an individual’s risk tolerance and time horizon.

Some custodians, particularly those with a banking background, might offer a more limited selection primarily focused on mutual funds. Investment-focused custodians or those partnering with brokerage firms often provide a broader array, including self-directed brokerage windows that allow access to a wider universe of stocks, bonds, and ETFs. Some providers offer managed portfolios or robo-advisor services that automatically select and manage investments based on a user’s risk profile.