Can I Invest My HSA Money? Here’s How

A Health Savings Account (HSA) offers a unique way for individuals to manage healthcare costs while also providing an opportunity for long-term financial growth. An HSA is a specialized savings account available to those enrolled in a high-deductible health plan (HDHP). This account allows you to set aside funds for current and future medical expenses. It is possible to invest the money held within an HSA. This article will explain the process and important considerations for investing your HSA funds.

Understanding the Benefits of HSA Investing

Investing funds within a Health Savings Account presents financial advantages, distinguishing it from many other savings vehicles. Contributions made to an HSA are tax-deductible, reducing your taxable income for the year they are made. This means you pay less in taxes upfront, allowing more of your money to work for you.

Beyond the initial tax deduction, earnings generated from investments within the HSA grow on a tax-free basis. This includes interest, dividends, and capital gains, which accumulate without being subject to federal income tax. When funds are withdrawn for qualified medical expenses, these distributions are also entirely tax-free. This combination of tax-deductible contributions, tax-free growth, and tax-free withdrawals for eligible expenses creates a “triple tax advantage” that can boost long-term savings for healthcare. An HSA is a tool for accumulating wealth for healthcare costs, particularly as you approach retirement.

Getting Started with HSA Investments

Your first action should be to determine if your current HSA administrator offers investment options. Many HSA providers are primarily banks or credit unions that might only offer a basic savings account without investment capabilities. If your current administrator does not support investments, you have the option to transfer your HSA funds to a different provider that does.

Once you select an administrator offering investment features, you will need to set up a linked investment account. This involves moving a portion of your cash balance from your core HSA savings account into a separate investment sub-account. Many administrators require a minimum cash balance to remain in the savings portion before funds can be transferred for investment. You should also inquire about any administrative fees associated with the investment platform, as these can vary between providers. The process involves online enrollment.

Navigating Investment Choices and Rules

After establishing your HSA investment account, you can explore the types of investments commonly offered and must adhere to Internal Revenue Service (IRS) rules. Most HSA administrators provide a range of investment options, including mutual funds, exchange-traded funds (ETFs), and sometimes individual stocks or bonds. These options allow you to diversify your holdings across various asset classes, which is a fundamental principle of sound investment management. Choosing investments that align with your risk tolerance and long-term financial goals is important.

While the growth within your HSA is tax-free, the IRS imposes “prohibited transaction” rules to prevent misuse of these tax-advantaged accounts. These rules, in Section 4975, prohibit self-dealing, which involves using HSA assets for your personal benefit beyond qualified medical expenses. Examples of prohibited transactions include investing in collectibles, engaging in direct loans to yourself, or using the HSA as collateral for a loan. If a prohibited transaction occurs, the HSA can lose its tax-advantaged status, and the entire account balance may be considered a taxable distribution subject to penalties.

Accessing Your Invested Funds

Funds can be withdrawn tax-free at any time to pay for qualified medical expenses. Qualified medical expenses are broad and include costs for medical care, dental care, vision care, prescription drugs, and many over-the-counter items. Maintain detailed records, such as receipts, to substantiate that withdrawals were for eligible expenses.

If you need to use invested funds for qualified medical expenses, you sell a portion of your investments, and the proceeds are transferred back to the cash portion of your HSA. From there, you can use a debit card provided by your administrator or reimburse yourself for out-of-pocket payments.

For withdrawals not used for qualified medical expenses, the tax consequences depend on your age. If you are under age 65, non-qualified withdrawals are subject to ordinary income tax plus an additional 20% penalty. Once you reach age 65, the 20% penalty is waived, and non-qualified withdrawals are only subject to ordinary income tax, similar to distributions from a traditional Individual Retirement Account (IRA). This flexibility after age 65 means an HSA can function as a supplemental retirement account, even for non-medical expenses.