Can You Invest Your HSA Funds?

A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals manage healthcare costs and grow funds for the future. Beyond covering immediate medical expenses, a key feature of an HSA is the ability to invest its funds. This article clarifies HSA eligibility, explains how these accounts facilitate investment, guides provider selection, details the investment process, and outlines the tax treatment of invested HSA funds.

HSA Eligibility Requirements

To establish and contribute to a Health Savings Account, an individual must be covered under a High Deductible Health Plan (HDHP) and meet specific criteria. For 2025, an HDHP must have an annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. The plan’s out-of-pocket maximum, which includes deductibles, co-payments, and co-insurance, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage in 2025.

An individual must not be covered by any other health plan that is not an HDHP, with specific exceptions for vision, dental, or certain preventive care. Enrollment in Medicare disqualifies an individual from contributing to an HSA, as does being claimed as a dependent on someone else’s tax return.

Understanding HSA Investment Accounts

An HSA operates with two distinct components: a cash account and an investment account. The cash portion holds funds readily available for immediate healthcare expenses. This cash balance often needs to reach a specified minimum threshold before funds can be transferred into the investment portion. This minimum threshold varies by HSA provider, often ranging from a few hundred to a few thousand dollars.

Once the minimum cash balance is met, accountholders can move excess funds into the investment account. This allows the money to potentially grow over time, similar to a retirement account. Common investment options offered by HSA providers include mutual funds and Exchange-Traded Funds (ETFs). Some providers may also offer individual stocks or bonds.

Selecting an HSA Provider for Investment

Choosing an HSA custodian that supports investment requires careful consideration of several factors. Fee structures are a primary concern, as various charges can impact long-term growth. These may include monthly maintenance fees, investment fees, or trading fees for specific transactions. Some providers may waive certain fees if a minimum cash balance is maintained or if the invested balance exceeds a certain amount.

The breadth and quality of investment options are also important, indicating the variety of funds and securities available for selection. Providers often offer a range of mutual funds, including low-cost index funds or target-date funds, which can be suitable for different investment strategies. Minimum balance requirements for investing can vary significantly. The ease of transferring funds between the cash and investment portions of the account, and the overall user interface, contribute to a seamless investment experience.

Investing Your HSA Funds

Once an eligible HSA is established with a provider offering investment options, the process of investing funds typically begins with transferring money from the cash portion of the account. Most providers require a certain cash balance to remain accessible for immediate medical needs before funds can be allocated to investments. Accountholders can initiate a transfer of funds from their available cash balance to the investment platform.

After the transfer, the next step involves selecting specific investment vehicles from the provider’s available offerings. This often means choosing from a curated list of mutual funds or Exchange-Traded Funds (ETFs) that align with personal risk tolerance and investment goals. Some platforms also allow for the purchase of individual stocks or bonds. Accountholders define the allocation percentages for each chosen investment. Many HSA providers also offer the option to set up recurring investments, automatically moving new contributions or a portion of the existing cash balance into selected investments at regular intervals.

Tax Treatment of Invested HSA Funds

Health Savings Accounts offer a unique “triple tax advantage” that applies to both contributed and invested funds. First, contributions made to an HSA are tax-deductible, reducing an individual’s taxable income for the year they are made. This applies whether contributions are made directly or through payroll deductions. Second, the funds within an HSA grow tax-free, meaning any interest, dividends, or capital gains generated from investments are not subject to taxation while held within the account. This allows the investment earnings to compound more efficiently over time.

Finally, qualified withdrawals from an HSA for eligible medical expenses are also tax-free. This includes a wide range of expenses, from deductibles and co-payments to prescription medications and certain long-term care services. Should funds be withdrawn for non-qualified expenses before age 65, they become subject to ordinary income tax and may also incur an additional 20% penalty. After age 65, withdrawals for non-qualified expenses are taxed as ordinary income but are exempt from the 20% penalty, allowing the HSA to function similarly to a traditional retirement account.