If you have a health savings account (HSA), investing that money can help you maximize the tax benefits the account offers. But depending on your situation, investing your HSA funds could leave you with more risk than you're willing to take on.
Now, we're not investment professionals, so always be sure to speak with one before making financial decisions. But from our experience, before you choose to invest your HSA funds, consider these benefits and drawbacks.
First, the pros of investing HSA funds...
One of the main benefits of using an HSA is that your contributions are tax-deductible and you can withdraw money tax-free as long as it's for eligible medical expenses. If you choose to invest that money instead, here are a few other benefits you'll get:
Tax-free growth: The only other investment account that offers tax-free growth on your investments is a Roth IRA, which earmarks your money for retirement. With an HSA, you can invest your funds now and use them whenever you need to.
You can save for retirement: If your primary goal is to save for retirement, you can use both a Roth IRA and an HSA to achieve your goal. That's because once you reach age 65, you can use HSA funds to pay for some health insurance premiums, including for Medicare Part B and long-term care insurance.
It's better than earning nothing: If you generally don't get sick often and don't need your HSA funds now, it's usually better to invest that money instead of letting it sit there and earning nothing at all.
But there are always some cons...
While there are some killer benefits of putting your HSA funds in the market, there are a few things to consider before you pull the trigger:
Fees: HSA administrators typically charge a fee to allow you to invest your funds. What's more, you may also have to pay fees based on the mutual funds and other investments you choose. Depending on what rate of return you want, fees could reduce what you end up with.
Volatility: If you plan on using your HSA funds within the next few years, it's generally best to keep the money as safe as possible. That way, if the stock market crashes, you don't watch your HSA balance decrease right before you need it.
You may not have the option: Many HSA administrators require that you have a minimum balance in your account before you can invest your money. If you reach that amount and start investing, you'll have to be careful not to go below the threshold again. Otherwise, you won't be able to continue investing until you've brought the balance back up.
The bottom line? That's up to you...
Investing your HSA funds can be a great way to save for the future. But it's generally only a good option if you're not consistently dipping into the account to cover current medical expenses.
If you're using your HSA mostly for short-term needs, it may be better to keep the balance safe rather than risking it in the market. So, if you're considering it, take a look at your past account activity. Then look ahead to planned expenses where you may be taking a withdrawal from the account.
Depending on how you've used the account in the past and what your plans are for it in the future, you'll have a better idea of whether it's worth it to invest the money.
Note: The information provided on or through this website does not constitute legal or tax advice and no attorney-client relationship is created. If you are seeking or need legal or tax advice, please contact an attorney or tax professional directly.
Compound It! is your weekly update of achievable, effective, no-nonsense HSA saving, buying and investment advice, delivered by people who make it work in their own lives. For the latest info about your health and financial wellness, be sure to check out the HSA Learning Center, and follow us on Facebook and Twitter.