How to Invest HSA Funds and Get Full Benefits From Tax-Free Account

It might be smart to invest your HSA dollars to gain potential tax benefits and have an additional avenue to save for long-term healthcare needs and financial goals. According to Investopedia, people with HSAs had an average balance of just $3,221 in 2019. In comparison, the allowable annual contribution in 2021 is $3,600.

Only 9 percent of HSAs were in investment accounts other than cash, according to the Employee Benefit Research Institute. This is unfortunate considering how many benefits people are missing out on. So, how can you invest HSA funds and gain the maximum benefit?

An HSA is specifically designed for paying healthcare costs. It's a tax-advantaged account that's created for people who get their insurance coverage through high-deductible health plans. It's a triple-tax advantage plan with money going in tax free, growing tax free, and coming out tax-free.

With HSA's tax advantage, it's designed to make out-of-pocket medical expenses more manageable. However, it could be a very good investment tool to help fund your retirement years. After you turn 65 years old, you can withdraw money from the HSA account for any reason without penalty (income taxes still need to be paid). Before turning 65, withdrawing funds for anything other than qualified medical expenses attracts a penalty of 20 percent.

Many financial experts advise not spending your HSA contributions towards paying medical expenses during your working years. The HSA can be treated the same way that you treat any other retirement account. Your retirement years will be better the later you take out the money.

You can invest the money in the HSA the same as you do with your IRA. If you have maxed out your retirement savings accounts that offer a tax advantage, investing through HSA could be a great option for you because the money can grow tax-free. The investment options depend on HSA plan administrators. Some administrators require a minimum balance in your account before allowing you to invest.

For example, Optum Bank requires a minimum balance of $2,100 in your HSA account before you can start investing.

You’ll need to check with your HSA administrator for specific investment options available for you. For example, Fidelity offers stocks (including fractional shares), bonds, ETFs, mutual funds, and more.

Common HSA investment options include mutual funds, stocks, bonds, and ETFs. You could choose your investment option depending on your risk appetite and investment goals. If you're far off from retirement, you could choose to be a little aggressive in your investing style and add mutual funds, ETFs, and stocks.

However, you need to be sure before investing. Doing so would mean paying out-of-pocket for short-term health expenses so that HSA funds can remain invested and allow more runway for investment growth. You could keep some cash in an HSA to cover your annual health deductible and invest the rest.