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