Health Savings Accounts (HSAs) can be incredibly valuable when it comes to saving for future healthcare expenses. However, the way this account is set up also makes the HSA a smart place to stash money for retirement.
After all, consumers can withdraw HSA funds without penalty for any reason once they reach age 65, whereas before that HSA funds can only be deducted without penalty when used for eligible healthcare expenses. This means individuals who have saved diligently in a HSA for years or decades can use their HSA funds any way they want once they hit age 65, although they will have to pay income taxes on distributions at that point (similar to a traditional IRA).
Either way, people who utilize a Health Savings Account (HSA) get benefits all along. For starters, contributions up to HSA limits can be deducted from your taxable income each year. In 2022, individuals can contribute up to $3,650 and families can contribute up to $7,300 to a HSA account on a tax-free basis. These limits are up slightly from 2021, during which individuals can contribute up to $3,600 and families can contribute up to $7,200.
Funds in a HSA also get to grow and compound tax-free over time, and the money remains tax-free when used for eligible healthcare expenses. However, it’s important to note that you have to have a high deductible health plan (HDHP) to contribute to an HSA. HDHPs come with a minimum deductible and maximum out-of-pocket requirement that can change from year to year. In 2022, HDHPs require a minimum deductible of $1,400 for individuals and $2,800 for families as well as a maximum out-of-pocket amount of $7,050 for individuals and $14,100 for families.
Investing Your HSA Funds
One of the biggest benefits of HSAs is the fact you can invest your HSA funds to ensure maximum growth. While some HSA plan administrators offer few ways (if any) to invest your money directly, others offer many options that are easy to use and understand.
For example, a company called Health Savings Administrators claims they are the “Investor’s HSA” since they offer first-dollar investing with no minimum balance requirements, no investment transaction fees, and access to 44 low-cost Vanguard and Dimensional funds. Health Savings Administrators says that, due to their superior investment options, their average account balance is 5x higher than the industry average.
No matter where you decide to open an HSA, financial advisors agree that investing your funds is a crucial move if you plan to save with this type of account. Financial advisor and tax planner Gary L. Watts says that, generally speaking, your investment options in a HSA really come down to what the custodian of the account will permit. In most cases, that includes approved investments on their platforms, such as mutual funds or ETFs. He says these options are going to be fairly conservative as well, which means your HSA fund growth could be somewhat limited.
However, the danger of not investing is worse than choosing investments that are too conservative for your timeline.
“If funds are left in cash or a money market fund, often the default option where there is little or no growth potential, the funds won’t even keep up with inflation and will be worth less when they are withdrawn,” he says.
With that in mind, not investing your HSA funds is a lot like keeping your 401(k) in a high-yield savings account. Your money may have decades to grow until you can use it, yet your account balance is going to be worth less every year.
Alternative Investments In Your HSA
But, what if you don’t want to invest your HSA funds in index funds or ETFs? Fortunately, you don’t actually have to.
According to Gallant Token CEO Steven Walters, the time has come where people are tired of seeing their money sitting on their HSAs with little interest gained, and long-term projects like real estate and cryptocurrencies are a real possibility for your HSA funds.
Walters says investing in Bitcoin and Ethereum, which are the backbone of cryptocurrency and have less volatility in the market, would give you a substantial ROI.
“Not investing your HSA funds means you’re not seeing a return on it,” he notes. “If you were to have some type of crypto IRA where you can take your HSA funds out and disperse them in various stable coins and projects, you have a greater chance at a return on invested capital.”
Meanwhile, financial advisor Nathaniel Hoskin of Hoskin Capital says you can indirectly invest in alternatives like real estate and private equity by using your HSA to invest in REITs or alts ETFs like commodity funds.
In order to have total control over where your HSA funds are invested, you’ll need to set up a self-directed HSA. You can do so through a number of platforms, including HSA Bank and TD Ameritrade or Optum Bank and Schwab. Opening a self-directed HSA that works with a major brokerage firm will also open up the possibility to invest in a much larger range of mutual funds, stocks, bonds, ETFs and Certificates of Deposit (CDs).
How To Decide Where To Invest Your HSA Funds
According to financial advisor Jim Crider of Intentional Living FP, the decision on where and how to invest your HSA funds requires some serious thought on your part. For starters, it’s crucial to consider the purpose of that money, the time horizon until use, and your personal risk tolerance.
If you are using an HSA to save for healthcare expenses so you can pay for them as you go, for example, you should have a completely different outlook than someone who is funding an HSA so they can utilize it after the age of 65.
“Historically speaking, a well-diversified stock portfolio has been the go-to answer for achieving long-term, above inflation growth,” says Crider. However, long-term growth may not be the goal if your average healthcare costs are high and you frequently deplete your HSA funds to cover medical bills.
Meanwhile, Hoskin says some people would be wise to invest their HSA funds in high-risk options, presumably those who won’t ever need the money to cover medical bills.
“This means alternatives, leveraged ETFs, or 100% equity exposure,” he says, adding that this is because an HSA will only ever make up a small portion of your total retirement pool since you can only contribute a relatively small amount of money each year.
“At the end of the day, it’s a small, tax-deferred account that will need high growth to get big because you can’t contribute much.”
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