Potential Long-Term Benefits of Investing Your HSA

June 12, 2023
Health savings accounts are for more than just routine medical expenses. By investing a portion of your account, you can potentially grow your funds tax-free.

Health savings accounts (HSAs) are particularly prized for their triple tax advantages:1 Contributions are tax-deductible, earnings are tax-free, and withdrawals are tax-free when used for qualified medical expenses. However, roughly 88% of HSA holders keep their accounts entirely in cash, according to the Employee Benefit Research Institute. Account holders who don't invest their HSA contributions could be missing an opportunity to earn tax-free returns.

"We generally suggest keeping two to three years' worth of routine medical expenses in cash, cash investments, or similar low-volatility investments within your HSA," says Rob Williams, managing director of financial planning, retirement income, and wealth management at the Schwab Center for Financial Research. Then, any excess funds could be invested for potential growth—for two reasons:

  1. Given the likelihood that health care costs will be even higher in the future, doing all that you can to get ahead of them is wise. Indeed, a 65-year-old couple retiring today can expect to need as much as $318,000 in savings to cover Medicare premiums and out-of-pocket costs throughout retirement.2
  2. After age 65, you can use your HSA to pay for things other than health care.3 You'll owe ordinary income tax on the funds with no other penalty—similar to withdrawals from 401(k)s and IRAs. However, HSAs aren't subject to required minimum distributions, making them a compelling option for retirement savings overall. 

To contribute to an HSA, you must participate in an eligible high-deductible health care plan—often, but not always, offered through an employer. For an individual account, you can contribute up to $3,850 in 2023 ($7,750 for families), plus an additional $1,000 in catch-up contributions if you're 55 or older. Contribution limits increase to $4,150 (individual) and $8,300 (families) for 2024.
Most HSAs require you to maintain a minimum cash balance before you can open an investment account. Once you have sufficient funds to meet your minimum and cover health care costs, you can start investing some of your contributions based on your risk tolerance, your time horizon, and, ideally, a diversified portfolio or other investment choices offered by your HSA administrator.

1While HSA contributions, earnings, and qualified distributions are exempt from federal income tax, they may not, in whole or in part, be exempt from state taxes.

2Jake Spiegel and Paul Fronstin, "Projected Savings Medicare Beneficiaries Need for Health Expenses Remained High in 2022," ebri.org, 02/09/2023, www.ebri.org/content/projected-savings-medicare-beneficiaries-need-for-health-expenses-remained-high-in-2022.

3Nonqualified withdrawals made prior to age 65 are subject to ordinary income tax plus a 20% early withdrawal penalty.

Learn more about health care planning.

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How Higher Income Can Affect Medicare Premiums

Medicare premiums can jump sharply if your retirement income rises above certain levels, but there are steps you can take to prepare and minimize the impact.

4 Steps to Smart Medicare Decisions

There's more to enrolling in Medicare than just turning 65. Make these Medicare decisions ahead of time—then celebrate.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.