Should You Invest Your Health Savings Account?

The HSA is a great savings vehicle.  The HSA allows you to save money before taxes are taken from your income.  This has the effect of reducing your overall taxable income. The money in your HSA can grow tax-free and has the benefit of being distributed tax-free when used for qualifying health care expenses. But should you invest your HSA in the stock market, such as mutual funds or ETFs? Let's first consider the purpose of the HSA.

The Medical Emergency Fund

Due to the continued rising healthcare costs, our government saw a need to help consumers save for the expense of medical care while at the same time reducing the consumer's premiums. This was accomplished through the high-deductible health care insurance with the deductible being the amount of money you must pay out of pocket before insurance. While it seems that your monthly cost of insurance has gone down, the overall responsibility of paying your medical bills is now your responsibility until your deductible for the year is met. For most high deductible plans, the limit typically exceeds $6,000 for families. But this is where the HSA fits in. The purpose of the HSA is to incentivize you to save for this significant financial exposure. For this reason, you should view your HSA as a medical emergency fund. And with any emergency fund, this should take the form of cash and not be invested.

The Investing Mindset

Before you consider investing the money in your HSA, it is worth reviewing some basic principles of investing. Investing only makes sense when you can leave the investments alone for at least 5 years, and preferably 10-15 years or even longer. With the natural ups and downs of the market, you do not want to use investments for an upcoming surgery or expensive prescription medication. Instead, the money needs to be left alone to take advantage of the compounding effects of the market. Additionally, your investments need to fit within your risk profile, investing time horizon, and allocation strategy in light of all of your investments. Manage each investment portfolio with care and attention.

When Should You Invest Your Health Savings Account?

So when should you consider investing your HSA in the market?  Consider these two conditions before investing your HSA in the market: 

1. Make sure you have sufficient funds to cover your health care plan's deductible. To be even more conservative, you need to have the max out of pocket saved. There are tax incentives to have this amount saved in the HSA itself, but isn't strictly necessary. The cash could be sitting in a high yield savings account or other liquid asset. When you have sufficient funds saved to cover the annual deductible of your health care plan and can confidently leave the money invested for at least 5 years.
2. Make sure you are approaching the investment within the context of your overall portfolio strategy.  Consider your risk tolerance, and how the investment will fit in your overall asset allocation. With a proper investing mindset, you can expect your HSA to grow significantly over the the next 5, 10 or 15 years when the money is needed to pay for more expensive health care needs.

Why Should You Invest Your Health Savings Account?

The HSA is a unique financial account that offers significant tax advantages over other types of accounts, including individual retirement accounts. The money that is contributed to your HSA is an "above the line" tax deduction, which means that all contribution dollars will lower your taxable income, and thus lower the tax you owe. When invested, the HSA can grow tax free and at the time the investments are sold to pay for qualified medical expenses, there are no capital gains taxes on the investment. This makes the HSA a powerful tool for investing for your future medical expenses, which most certainly will be more expensive in the future. This means you can save and invest your HSA to help pay for long term medical stays at a hospital, or a long term care facility.

Bottom Line

The HSA is a great savings tool and can also be a great investment tool for the long term if your near-term medical emergency fund is sufficient to handle the out-of-pocket expense of a high deductible health insurance. If you have your medical emergency fund in place, and are ready to treat the HSA as part of your investment portfolio, then investing your HSA might make sense for you. Always consult your CPA and financial advisor before investing.

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