In spite of being the fabled “triple-tax advantage” and therefore an ideal account for investing for your retirement, only a fraction of those with HSA’s actually invest the money.
Having worked on the business side of HSAs for a good number of years, I can tell you that there are three main reasons for these low investment rates:
- People are actively spending their HSA funds. They have medical expenses, or think they might, and are using their HSA debit card as the name would imply — to pay those expenses if and when they arise.
- People think they’ll need to actively spend their HSA funds. They don’t have medical expenses but think there might be a need to have the funds close at hand, just in case.
- People have no idea how to invest their HSA funds, or if they even can.
No. 1 is understandable. If you’re sick and/or you’re living paycheck to paycheck, that tax-preferred account will stretch your health care dollar.
No. 2 also makes sense to a point. It’s good to have an “emergency HSA fund” available on demand, in case you need it quickly. But in most cases, you can access invested HSA funds before you have to pay your medical bill(s), so maybe keep a smaller emergency fund than you need in order to maximize your investing potential.
No. 3 is sad but true. In some cases, your HSA trustee or custodian (just fancy words for the company that manages your HSA) hasn’t made it easy for you to invest your funds, or they haven’t given you options at all.
In this case, here’s all you need to know: Your HSA funds follow almost identical investing rules to traditional IRAs. You can invest funds from your HSA into an investment account that handles “normal” investments, like stocks, bonds, annuities, etc. You can’t invest in real property, like real estate or cars and boats. If you have returns on your investments and simply reinvest them, like an IRA, then you don’t pay taxes. Plus, if you do need to withdraw the funds from your HSA to pay for qualifying medical expenses, you don’t pay taxes then, either.
That’s about it. We’ll give you more investing tips but just wanted to put that one, simple piece of knowledge in your brain: yes, you can invest your HSA funds even if your current HSA provider has made it less than easy…just think about how you do it with your IRA. In fact, if you want to invest it the same place you currently have your IRA, go for it!