Potential Long-Term Benefits of Investing Your HSA
Health savings accounts (HSAs) are not only a tax-smart way to pay for your current health care needs, but you could also rely on your savings—and any potential growth from investing HSA dollars—in your retirement. HSAs are particularly prized for their triple tax advantages: Contributions are tax-deductible, earnings are tax-free, and withdrawals are tax-free when used for qualified medical expenses. (While 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.)
That said, according to the Employee Benefit Research Institute, roughly 88% of HSA holders kept their accounts entirely in cash in 2021. 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. Account holders who don't invest their excess HSA contributions could be missing an opportunity to earn tax-free returns. Here's how you can contribute to your HSA and get started with investing your account.
1Jake Spiegel and Paul Fronstin, "Projected Savings Medicare Beneficiaries Need for Health Expenses Increased Again in 2023—Some Couples Could Need as Much as $413,000 in Savings," ebri.org, 02/09/2023.