How Should You Invest in an HSA?

May 18, 2017

I’ve written about how to invest in a Roth IRA, your employer’s retirement plan, and a taxable account, but a new type of tax-sheltered account that’s growing in popularity is a health savings account or HSA. (If the new health care bill passes, HSAs could become even more important as the contribution limits would be doubled.) Like a health care FSA, HSA contributions are tax-free and can be used tax-free for qualified health care expenses, but unlike FSAs, you can leave the money in the account to be used for future health care expenses (and for any purpose without penalty after age 65). For this reason, many plans allow you to invest money in the account. Before investing your HSA, here are some things to consider:

When might you use the money?

Anything you might spend in the next few years shouldn’t be invested at all. That’s because a downturn in the market could force you to sell investments at a loss and even leave you without enough money in the account to cover your health care costs. If you use the account for current expenses, you might want to leave at least enough in cash to cover your deductible for the next year or two. On the other hand, if you plan to cover any current health care costs with other savings and not touch the HSA, you can invest as much as the plan will allow you (many require you to keep a minimum amount in cash) to grow as much as possible tax-free for future medical expenses.

How should you invest it?

You can either look at your HSA as a standalone account or as part of your overall retirement portfolio. In the former case, you can invest it in a fully diversified asset allocation fund or a balanced portfolio based on your risk tolerance and time frame. In the latter case, you can use it for investments that may not be available in your employer’s retirement plan.

Where should you have your HSA?

Unlike with your employer’s retirement plan, you don’t have to wait until you leave or turn age 59 ½ to transfer your HSA to a different provider. If you want to invest in something not available from your current provider, you may want to consider other options. Just be aware that your contributions from your payroll and your employer will likely continue being deposited in your current HSA so you’ll have to keep transferring the balance periodically.

Not sure what to do? Consider consulting with an unbiased financial planner to discuss your options in more detail. In the meantime, don’t let analysis paralysis stop you from contributing to an HSA at all. You can always leave it in cash until you make your decision.