The Potential Long-Term Benefits of Investing Your HSA

Health savings accounts (HSAs) are particularly prized for their triple tax advantages: Contributions are tax-deductible,1 earnings are tax-free, and withdrawals are tax-free when used for qualified medical expenses. However, roughly 95% of HSA holders keep their accounts entirely in cash, according to the Employee Benefit Research Institute. Account holders who don't invest their HSA contributions could be missing an opportunity to earn tax-free returns.

“We generally recommend keeping two to three years’ worth of routine medical expenses in cash,” says Rob Williams, vice president of financial planning at the Schwab Center for Financial Research. But any funds in excess of that could be invested for potential growth—for two reasons:

  1. Given the likelihood that health care costs will be even higher in the future, it may be wise to do all that you can to get ahead of them. Indeed, a 65-year-old couple retiring today can expect to need as much as $363,000 in savings to cover Medicare premiums and out-of-pocket costs.2
  2. If you use HSA funds for things other than health care expenses after age 65, you’ll pay only ordinary income tax with no other penalty—putting the funds on par with withdrawals from 401(k)s and IRAs, with the added advantage that HSAs aren’t subject to required minimum distributions. (Nonqualified withdrawals made prior to age 65 are subject to ordinary income tax plus a 20% early withdrawal penalty.)


To contribute to an HSA, you must participate in an eligible high-deductible health care plan. You can contribute up to $3,550 in 2020 ($7,100 for families), plus an additional $1,000 in catch-up contributions if you’re 55 or older. Once you have sufficient funds in the account—most require you to maintain a minimum cash balance—you can start to invest additional funds based on your risk tolerance, your time horizon, and the choices offered by your HSA administrator.

1While HSA contributions are exempt from federal income tax, they are not exempt from state taxes in California or New Jersey.

2Paul Fronstin and Jack VanDerhei, “Savings Medicare Beneficiaries Need for Health Expenses in 2019: Some Couples Could Need as Much as $363,000,” ebri.org, 05/16/2019.

Next Steps

  • Read more about the benefits of HSAs for retirement.

  • Work one-on-one with a Certified Financial Planner™ professional to map out your retirement plan, including how much of your savings to earmark for health care costs, when you enroll in Schwab Intelligent Portfolios Premium™. Learn more.

Important Disclosures

Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs.  Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co., Inc. (“Schwab”), a dually registered investment advisor and broker dealer.

Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.