Can You Invest HSA Funds in Stocks and Other Assets?

A Health Savings Account (HSA) is a tax-advantaged savings vehicle designed to help individuals save for current and future medical expenses. It stands out among financial accounts because it allows for investment, offering a unique opportunity for funds to grow over time.

Understanding HSA Investment Potential

To be eligible for an HSA, an individual must be covered under a high-deductible health plan (HDHP). For 2025, an HDHP generally requires a minimum annual deductible of $1,650 for self-only coverage and $3,300 for family coverage, with maximum out-of-pocket limits not exceeding $8,300 for self-only and $16,600 for family coverage. Contributions can come from the individual, an employer, or any other person. If contributions are made through payroll deductions, they are pre-tax, reducing taxable income.

HSAs are recognized for their “triple tax advantage.” Contributions are tax-deductible, or pre-tax if made via payroll. Any investment earnings, such as interest, dividends, or capital gains, grow tax-free within the account. Finally, withdrawals are entirely tax-free when used for qualified medical expenses. This tax-free growth allows investments to compound without annual taxation.

The HSA functions as a long-term savings vehicle, extending beyond immediate healthcare needs. Unlike Flexible Spending Accounts (FSAs), HSA funds roll over year after year and remain with the account holder even if they change jobs or health plans. This portability allows funds and their earnings to grow for decades. Consequently, an HSA can serve as an additional tax-advantaged fund for healthcare costs in retirement, complementing other retirement savings accounts.

Activating Your HSA for Investment

Investing within an HSA requires selecting a provider that offers investment options, as not all HSA administrators do. When choosing an HSA provider, consider fees, the range of investment choices, and the user-friendliness of their online platform. Some providers might have specific thresholds, such as a minimum cash balance, before allowing funds to be transferred for investment.

Once a provider is chosen, the next step involves opening the investment sub-account. This process entails linking the cash portion of the HSA to a separate investment platform or brokerage account managed by the HSA custodian. Account holders may need to complete additional forms or agreements. Some providers offer streamlined processes, allowing for same-day enrollment and funding of investment options.

After the investment account is established, funds must be transferred from the HSA’s cash balance to the investment portion. Contributions initially flow into the cash account, where they are readily available for immediate medical expenses. Account holders then initiate a transfer through the provider’s online portal to move desired amounts into the investment section. Many providers offer features like auto-funding, which can automatically direct new contributions or excess cash balances into chosen investments, simplifying ongoing management.

Selecting Investment Options for Your HSA

Health Savings Accounts offer a variety of investment vehicles, similar to those found in other retirement accounts. Common options include mutual funds, which pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. Exchange-Traded Funds (ETFs) offer diversification and trading flexibility like stocks throughout the day. Some providers may also allow direct investment in individual stocks and bonds.

Diversification is important in managing any investment portfolio, including an HSA. Spreading investments across different asset classes, industries, and geographies helps mitigate risk. While investment returns are not guaranteed, a diversified approach can help balance gains with losses. Account holders should consider their personal comfort with risk when constructing their HSA investment portfolio.

Investment choices within an HSA should align with an individual’s financial goals and their anticipated healthcare spending horizon. For those with many years until retirement, a more aggressive investment strategy focusing on long-term growth through equities might be suitable. Conversely, individuals nearing retirement or those anticipating significant near-term medical expenses might opt for more conservative investments, such as bonds or cash equivalents, to preserve capital. Understanding the time frame for withdrawals helps in making appropriate allocation decisions.

It is also important to consider the fees and expense ratios associated with investment options within an HSA. Mutual funds and ETFs, for instance, charge expense ratios, which are annual fees based on assets invested. These fees can impact long-term growth, so selecting options with lower expense ratios can be beneficial. Some HSA providers may offer funds with no transaction fees or advisory fees, especially for certain managed options or pre-selected fund lists.

Withdrawing Funds from Your Invested HSA

Withdrawals from an HSA are tax-free and penalty-free when used for qualified medical expenses. The Internal Revenue Service (IRS) defines qualified medical expenses, covering costs for the diagnosis, cure, mitigation, treatment, or prevention of disease. These can include deductibles, co-pays, prescriptions, dental care, and vision care. Even certain long-term care expenses and premiums for Medicare Parts A, B, and D, as well as Medicare Advantage plans, qualify.

Maintaining detailed records of all qualified medical expenses is important. Proper documentation is necessary to reimburse past medical expenses incurred after the HSA was established. This documentation, such as receipts and invoices, is crucial for tax purposes if the IRS requests verification. While HSA distributions are self-adjudicated by the individual, substantiating receipts should be saved.

If funds are withdrawn for non-qualified expenses before age 65, they become subject to income tax and an additional 20% penalty. For example, a $500 non-qualified withdrawal would incur income tax plus a $100 penalty. This penalty is designed to discourage using HSA funds for non-medical purposes prior to retirement age. Individuals should consider the tax implications before making such withdrawals.

After reaching age 65, the rules for non-qualified withdrawals change. Funds withdrawn for non-medical expenses are still subject to ordinary income tax, but the 20% penalty no longer applies. At this point, an HSA functions similarly to a traditional IRA for non-medical distributions. However, if funds continue to be used for qualified medical expenses after age 65, they remain entirely tax-free and penalty-free. HSA funds can be accessed through online portals, forms, or debit cards provided by the HSA administrator.