How to Invest HSA Funds For Retirement

Investing your HSA funds can help you build wealth for both short- and long-term medical needs, retirement and other goals. It can also provide tax benefits, which can be a huge asset in your financial planning.

While investing your HSA money may be a little risky, it can provide a significant return. You can choose from a wide range of investment options.

Taxes

HSAs are tax-advantaged savings accounts that help people with high-deductible health plans pay for out-of-pocket medical expenses. Account owners make pre-tax contributions to their HSAs, and they can withdraw money without owing income taxes on qualified medical expenses or investment earnings.

There are a few important things to know about investing in your HSA. First, it is best to invest the money you plan on using for current qualified medical expenses, such as copays and prescriptions.

Once you reach a certain designated balance, typically $2,000, you can start investing your HSA funds in a variety of smart investments that can offer many potential benefits. These include self-directed mutual funds, ETFs, and dividend-paying stocks.

Some investors choose to invest in HSA-specific mutual funds that track a stock index, such as the S&P 500. These funds tend to perform well over long periods of time and are often managed by investment professionals.

Investors can also purchase mutual funds that target specific sectors of the economy. These funds might focus on energy, technology, healthcare, and other areas that have good growth potential.

These funds can provide a higher return than lower-quality options, which may be more risky. They can be a good choice for those who have a lot of HSA dollars and want to grow their wealth.

If you want to invest your HSA funds more broadly, consider mutual funds that track a broad market index. Some of these funds are actively managed by investment professionals, and others can be passively managed.

Choosing the right fund for your goals is a key component to success with investing in your HSA, and it is best to work with an experienced financial professional. This will allow you to get a clearer picture of your risk tolerance and investment goals, as well as help you create a smart portfolio of mutual funds.

Generally speaking, the biggest drawback of an HSA is that they must be tied to a high-deductible health plan, which means you’ll have to spend a significant amount from your own pocket before your insurance coverage will kick in and reimburse the rest. This isn’t a good option for those with very high health care costs or those who have chronic conditions that require frequent doctor visits.

Fees

Health savings accounts (HSAs) are one of the most popular investment vehicles in the U.S. They allow you to save for future medical expenses and grow tax-free. However, HSA funds can quickly become lost if you don’t know how to invest them properly.

When you invest in a mutual fund, you pay an expense ratio that reduces the amount of money your investment will earn. The goal of investing in mutual funds is to minimize the expense ratio as much as possible so that you can earn a higher rate of return.

A diversified portfolio of funds is crucial for achieving that goal. The best diversified portfolios will have a combination of stocks, bonds and other investment products to provide growth, diversification and tax efficiency.

Stocks: Many people have the misconception that stocks are riskier than other investments, but if you’re in good financial shape and don’t expect too much out-of-pocket medical expenses in the near future, it may be worthwhile to invest a small portion of your HSA in stocks.

Bonds: If you’re more cautious about the market, a diversified portfolio of bonds is another good option. These products tend to have lower volatility and higher yields than stocks, so they’re a good way to get a more stable return from your HSA funds.

ETFs: A diversified portfolio of exchange-traded funds can be an excellent way to grow your HSA funds. These are generally very low-cost products that can be accessed online and include options trading.

Brokerage accounts: Self-directed brokerages can offer a broad array of mutual funds, stocks and bonds for you to choose from. They can also offer investment guidance and help you find a good mutual fund for your HSA.

TD Ameritrade: Via a TD Ameritrade self-directed brokerage account, you can buy and sell a wide range of mutual funds, ETFs, and options. The company also offers a HSA Guided Portfolio that features 24 mutual funds.

Devenir: This firm offers a self-directed, no-load mutual fund portfolio and an HSAdvisor+ advisor-sold customized mutual fund portfolio with an annual asset-based fee of 0.5 percent. It also has a zero-fee HSA bank account and a debit card to help you pay for health expenses.

Investment options

While many HSA holders think of their HSA as a tool for paying current medical expenses, few realize that it also offers the opportunity to invest for retirement. Just like with your 401(k) or Roth IRA, investing your HSA funds can have a significant impact on the amount you can save for retirement over time.

To maximize the potential of your HSA, you need to figure out what kind of investments are best for you. For example, if you don’t have a lot of financial risk in the future or don’t expect a large number of medical costs, it might be a good idea to focus on fixed income investments, such as cash and money market accounts.

If you are looking for growth, stocks might be a better choice. You can choose from a variety of stock mutual funds that are designed for investors with varying levels of risk tolerance.

Dividend-paying stocks are another option. These companies typically have proven business models, so they tend to be safer than younger firms without a track record. In addition, the dividends you earn from these funds are tax-free.

A third option is to use a robo-advisor, which can automatically manage your investments on your behalf. This can be a great choice for people who are unable to devote the time required to properly manage their own portfolios.

However, you should be aware that investing your HSA funds can increase the chances of losing them if the investments don’t perform as well as expected. If you’re not sure how to invest your HSA funds, it is a good idea to seek the advice of an investment professional.

Fortunately, most health savings account providers offer a variety of investment options to their clients. Some even have automated tools that allow you to choose and rebalance your investments to stay within your desired allocation. These features can help you avoid losses, which can be particularly common in volatile markets. Keep in mind that some HSA providers may charge additional fees for their HSA investment options, so be sure to check with several to find the best option for you.

Distributions

HSAs are a popular way to save money for medical expenses. But they also have some unique benefits that can help you build up a retirement nest egg, says Carolyn McClanahan, a certified financial planner who is the founder and head of financial planning at Life Planning Partners in Jacksonville, Florida.

For instance, the funds you invest in an HSA are tax-free. And, the growth that results from your investments is tax-free as well.

That means you can invest your funds in stocks and mutual funds to grow them and, in the long run, turn them into a large nest egg for retirement. But, like any other investment, you should be aware of the risks and fees involved with investing in an HSA.

One of the most beneficial features of an HSA is that you can rollover a portion of your annual contributions to your account each year, which helps you accumulate wealth quickly. That’s particularly true if you contribute to an HSA while in the prime of your earning years and can afford to invest more aggressively for the long haul.

Another advantage of an HSA is that distributions are tax-free, which can be a huge benefit for people who have medical bills in the future. That’s especially important for older Americans who are liable for higher taxes in their retirement years.

But the tax advantages don’t stop there. The money that you earn in your HSA can also be withdrawn tax-free if you use it to pay for qualified medical expenses, which includes premiums for Medicare Part D for yourself or your spouse and dependents who are covered under your plan.

However, if you don’t use the money for your health expenses and instead withdraw it, you’ll be subject to income tax on the withdrawal and possibly a 10% early distribution penalty. That’s why it’s so important to use the money in your HSA wisely if you want to grow it for retirement purposes.

To help you get started, the government offers a special opportunity for people to transfer IRA funds to an HSA tax-free. This is called the Qualified Health Savings Account Funding Distribution, or QHSAFD. This is available only once in a lifetime, so make sure you take full advantage of this opportunity to kickstart your HSA.