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Surprising fact: Most of the folks who have access to a particularly lucrative investment tool—one that offers multiple tax benefits—let that opportunity slip through their fingers.

Recent research from the Employee Benefit Research Institute sheds some light on how people typically use their health savings account (HSA), and the insights are perplexing. Of those surveyed who have HSAs, only 6% are using them to invest; that means well more than 90% of Americans are missing out!

While having a health savings account can be beneficial even if you don’t invest the funds you’re saving within it, using your HSA as an investment vehicle maximizes your benefits. Investments made through your HSA can grow tax-free, and if you invest consistently over time, you could end up with a hefty nest egg for future health care costs—and even for retirement.

If you want to learn more about investing your HSA funds, you’ve come to the right place. I’ll run you through what you should know about HSA investing, what benefits it offers, and which health savings accounts we recommend. I’ll also answer some common questions about using HSAs for investing and amassing your retirement savings.

Looking to Invest Your Health Savings Account Balance?


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Health savings accounts can best be described as part cash account, part investment account. While the money is primarily intended to be spent on qualified medical expenses, you can invest some or all of it—and many people (myself included) do.

While many HSA providers offer several investment options, you’ll often need to meet a minimum balance in your HSA before you can start investing. For instance, some HSA administrators might require you to have at least $2,500 in your cash account before you can invest. But other accounts don’t carry this requirement.

But How Should I Invest?

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As far as how to invest is concerned, that’s largely dependent on the investments your HSA provider offers, which can vary widely.

Some HSAs are self-directed and let you choose from thousands of stocks, bonds, exchange-traded funds (ETFs) and mutual funds. In that case, how you invest is just about the same as how you’d invest in a traditional brokerage account or individual retirement account (IRA).

However, other HSAs might require you to choose from a very limited set of mutual funds or ETFs. Even then, the process is pretty simple—just select which fund or funds you want to purchase with your available funds.

If you have a high-deductible health care plan (HDHP) and are eligible for an HSA, research different account providers and their investment choices to determine which investments are available to you.

Is Investing Health Savings Account Funds a Good Idea?


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Yes, it can be a good idea to invest the funds in your health savings account—after all, investing is generally the best way to grow wealth over time. But you should also keep at least a portion of your HSA balance saved as cash so you can still easily spend it if you need it.

For instance, I typically keep my estimated annual out-of-pocket expenses in the savings portion of my HSA and invest the remaining balance for long-term needs, such as medical expenses in retirement. This gives me added peace of mind that the money is available if we can’t afford to cover unexpected health care costs with our normal checking account.

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Why You Should Consider Using Your HSA to Invest


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Some people just aren’t in a financial position where they can invest their HSA funds. But if you are, there are oh-so-many reasons to put at least some of that HSA money to work.

1. Triple Tax Advantage

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HSAs offer an impressive trifecta of potential tax benefits, including:

— Pre-tax contributions: Contributions to an HSA made via payroll deduction are pre-tax. Any contributions you make on your own (not via payroll deduction) may be 100% tax-deductible.

— Tax-free investment growth: Your HSA investment earnings and interest earned on the savings portion aren’t subject to taxes either.

— Tax-free withdrawals for qualified medical expenses: If you withdraw HSA dollars for a qualified medical expense, you won’t be taxed on the withdrawal.

You will pay income taxes and a 20% penalty on withdrawals for non-qualified costs before age 65. However, after age 65, while you’ll still have to pay ordinary income tax on non-qualified withdrawals, you’ll no longer have to pay any penalties.

2. Long-Term Growth

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Chances are your health care expenses will probably rise as you age. If you have a high-deductible health plan and start investing in an HSA early, you can build a sizable nest egg for medical costs (or other expenses) in retirement. This will provide some assurance that your future health care costs will be covered even if they grow more expensive when you’re older.

3. Investment Options

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Similar to what you’d see with a taxable brokerage account, HSAs sometimes offer numerous investment options ,including individual stocks, bonds, certificates of deposit (CDs), funds, and more.

For instance, with a self-directed Fidelity HSA, investors can allocate a portion of their investments to equities, fixed-income assets, exchange-traded funds (ETFs), and mutual funds. Unlike many other HSA administrators, Fidelity also supports fractional share investing, which makes higher-priced shares more accessible for investors working with smaller dollar amounts.

4. Can Be Used for Medical Expenses, Retirement or Both

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Health savings accounts offer some flexibility, especially when you use your HSA to save for retirement. Not only can you make tax-free withdrawals to cover qualified medical expenses at any point in life, but you can also withdraw money for any purpose after age 65 without paying any tax penalties. You’ll simply pay ordinary income taxes on the amount withdrawn, as you would with a traditional 401(k) or IRA.

But unlike 401(k)s or IRAs, HSAs aren’t subject to minimum required distributions (RMDs) when you turn 73 (or 75 starting in 2033), meaning you can use your HSA funds whenever and however you need them later in life. For instance, if you decide you don’t need to draw on your HSA until you’re 85, that’s your prerogative. You can leave that money invested as long as you’d like.

How Much Should You Save for Retirement?

HSAs Can Assist With Gaps in Medical Coverage or Expenses in Retirement


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Medicare coverage doesn’t kick in until you’re 65, which can present a problem if you’re planning to retire earlier than that. For those who want to retire early, it’s possible to use your HSA balance to cover any gaps in health care coverage. And those gaps can be costly. On average, individuals pay up to $700 per month for COBRA continuation coverage. The cost of insurance through the Affordable Care Act (ACA) or private insurance could be even higher, depending on the plans available to you.

Even if you don’t plan to retire early, health care expenses can be higher than you think in retirement. A recent report by RBC Wealth Management estimates that a 65-year-old couple who retired in 2021 and was covered by Medicare would pay more than $11,300 for out-of-pocket health care costs each year. For couples over 85, that figure jumps to over $39,000 paid out of pocket annually. Investing in an HSA in the decades before retirement could help offset these costs considerably.

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Use Your HSA as a Self-Funded Long-Term Care Insurance Plan


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While the estimated costs in the RBC Wealth Management report are remarkable, the cost of long-term care in retirement can make them look like peanuts by comparison. And per the RBC report, approximately 70% of 65-year-olds will need long-term care at some point in older adulthood. A recent Genworth survey estimates that the median cost of full-time (~40-hours per week) in-home care is around ​​$5,148 per month, or nearly $62,000 annually. Expenses increase even further for nursing home care, with a private room costing around $9,034 each month, or over $108,000 annually.

If you start contributing to an HSA early, your contributions could potentially cover several years of long-term care costs later in life. For instance, let’s say a 30-year-old initially invests $1,000 into an HSA and continues to make $200 monthly contributions until they retire at age 65. Assuming a 7% annual return on investments, their HSA balance will have grown to $342,445.09. If they kept up with contributions and left their money invested until age 70, their balance could grow to $494,098.73. (Of course, that would mean you’d have to be able to delay taking Medicare or Social Security until 70 to do so, because you couldn’t continue contributing to your HSA otherwise.)

While you could opt to purchase long-term care insurance, the coverage only kicks in if you meet certain criteria. And even then, it might not cover everything, making it less flexible than an HSA. HSA dollars can be used to cover long-term care costs, as well as other health care expenses and general expenses later in life.

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Can I Invest My HSA in Stocks?


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You might be able to invest HSA funds in stocks, but it depends on whether your HSA administrator offers this option through your account. Certain HSA administrators might allow you a full suite of brokerage services—which means you’ll be able to invest in stocks, bonds, CDs, ETFs, and mutual funds—while others might offer fewer options.

Investment options may also vary by account as well as provider. For instance, with a self-directed Fidelity HSA, you have more investment options than you would with a Fidelity Go HSA. The self-directed option lets you choose from stocks, bonds, ETFs, and mutual funds, while the Fidelity Go account only lets you invest in select mutual funds.

Remember that investing in stocks typically involves more risk than investing in fixed-income assets like bonds, as well as diversified investments like mutual funds and ETFs.

Can I Invest My HSA in CDs?

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You may be able to invest in brokered CDs through your HSA, depending on how your account is structured and what investments are available to you. Again, some providers permit investing in CDs, while others don’t.

Is It Better to Invest in an HSA or 401(k) for Retirement?

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As HSAs and 401(k)s are both powerful retirement savings vehicles, it’s not necessarily better to invest in one over the other. In fact, you can opt to invest in both, assuming they’re available to you.

With a 401(k), you’ll benefit from higher contribution limits than you’d get with an HSA. For 2023, those 401(k) limits are $22,500 if you’re under 50, while HSA limits are $3,850 for individuals and $7,750 for family coverage if you’re under 55. For 2024, 401(k) limits are $23,000 if you’re under 50, while HSA limits are $4,150 for individuals and $8,300 for family coverage.

But you’ll also pay taxes on 401(k) withdrawals in retirement. By contrast, with an HSA, qualified withdrawals to cover medical expenses are income tax free at any age. Having both types of accounts can be a smart retirement strategy, as each offers different tax benefits.

Another bonus point for HSAs: Unlike with 401(k)s, RMDs aren’t required with HSAs. This means you can keep your money invested for as long as you’d like without worrying about potential tax consequences. The flexibility these accounts provide can be a major perk.

How Do HSAs Differ From FSAs?

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At first blush, flexible spending accounts (FSAs) appear similar to HSAs—they’re tax-advantaged accounts that you can use to spend on health care costs. But there are some important differences:

— You can’t invest FSA money.

— FSA funds are “use it or lose it”—don’t carry over from year to year.

— The account belongs to the employer, not the employee, so if you quit your job, you can’t take your FSA or FSA funds with you.

— FSAs have lower maximum contributions ($3,050 in 2023, vs. $3,850 for individuals and $7,750 for families with an HSA, and $3,200 in 2024, vs. $4,150 for individuals and $8,300 for families with an HSA)

— All contributions are pre-tax (only employer contributions are pre-tax in an FSA).

— You don’t need an HDHP to have an FSA, but you do need an employer health care plan.

Can Your HSA Investment Account Lose Money?

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While you’re unlikely to lose any funds in the savings portion of your HSA, it’s possible to lose invested funds. All investing involves risk, but some investments are riskier than others. In general, investing in stocks comes with a higher risk of loss than investing in bonds. But on the flip side, you might have less opportunity for growth with a low-risk investment portfolio.

The performance of your HSA investments will depend on a variety of factors, including market conditions, when you invest, the types of assets you invest in, and your overall risk tolerance.

Unsure about making financial decisions like these on your own? An independent investment adviser can provide investment advice; if you’re seeking out legal or tax advice, consult an accountant or other financial professional.

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How Much Retirement Savings Is Enough?


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When it comes to how much you need to set aside for retirement, the first thing you need to know is there’s no magic number for everyone. Retirement savings goals vary by person.

My goal is helping you figure out how to determine your own number.

The amount of retirement income you will need depends on your planned retirement age, where you plan to live, and other factors. Fortunately, after asking yourself a few questions, you’ll be able to estimate realistic retirement goals.

Sir Arthur Conan Doyle’s famed sleuth, Sherlock Holmes, famously says, “To begin at the beginning.” In other words, if you want to know where you need to go to get where you want, you should begin at the beginning.

For this retirement savings exercise, though, I say we need the reverse—we’ll begin at the end and work our way backward. That way, we can set our desired outcome and understand what needs to happen now to get where we want later in retirement.

Use the following factors to more accurately determine how much you need to save for retirement.

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Factor #1: Retirement Age


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When will you retire? If you’re hoping for an early retirement, you’ll need more money saved than someone who retires at the customary retirement mark (age 65). Likewise, retiring later generally means needing less money.

Your career path might make a significant difference in your retirement age. Does your job involve hard labor that will become more challenging as you age? Or do people in your profession often continue working past the standard retirement age?

Also consider your health, life priorities, and what’s realistic for your financial situation.

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Factor #2: What Lifestyle You Want in Retirement


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Many people plan to maintain roughly the same lifestyle as they have during their working years. Others work hard for decades so they can live more lavishly during retirement. Do your retirement goals include frequent travel? Do you want to treat yourself to a new car or home renovations? Retirees often spend a lot of time (and money!) spoiling grandchildren.

Make sure the retirement income you’re planning for is high enough that it won’t just cover the basics, but will let you have a little fun, too.

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Factor #3: Where You Want to Live


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Both the city you plan to live in and the type of home you plan to stay in will affect how much money you need for retirement.

Those who currently live in a high-cost-of-living area and plan to stay there will need more money than those who plan to move to an area with a lower cost of living. If you own a large house and plan to downsize, that will help curb expenses.

However, if you rent, you should assume costs will rise over time and you might need a higher annual income for retirement than you expected. The same goes for anyone who plans to move to an expensive assisted-living facility.

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Factor #4: 4% Rule (Or Your Personalized Safe Withdrawal Rate)


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The 4% Rule is the guideline that you should withdraw only up to 4% of retirement savings during your first year of retirement. After that, you should adjust the amount for inflation each year and withdraw that amount.

Pretend your total retirement investments are worth $2 million and you expect to earn an investment return of 5.5% annually. During your first year of retirement, you would withdraw up to $80,000.

Now imagine inflation rises to 4% that year. According to the 4% rule, the following year you should plan to withdraw up to $83,200.

Sticking to this rule should mean you will likely have enough money to handle 30 years of retirement.

However, this is one-size-fits-most advice. It isn’t tailored to your specific situation, and you shouldn’t rely on it blindly. It includes a lot of assumptions about your retirement plans that aren’t necessarily true for you.

Even the creator of the rule, Bill Bengen, believes the 4% rule is outdated. (FYI, he now thinks it’s safe to pull more money in retirement—up to 5%. However, others think it should be less than 4%, so take all of this with a grain of salt.)

Based on your unique circumstances, you might need to withdraw more or less from your retirement savings to live the retirement you want.

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Factor #5: Budget for 80% of What You Currently Make


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During retirement, you’ll need roughly 80% of your pre-retirement annual income, provided you aren’t planning on upping your lifestyle.

For instance, if your current annual salary is $80,000, you should aim to save enough to generate at least $64,000 in retirement income per year for the number of years you expect to be retired.

Why only 80%, not 100%? For one, currently you’re stashing a good chunk of every paycheck into a retirement savings account, right? You won’t be setting that money aside once you’re retired.

Hopefully, you’ll also pay off your house, student loans, and other consumer debt before retiring. You might also have lower transportation expenses (from no longer commuting to work), you may be in a lower tax bracket (meaning you’ll owe less in taxes), you’ll be receiving Social Security, and more.

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About the Author

Riley Adams is the Founder and CEO of WealthUp (previously Young and the Invested). He is a licensed CPA who worked at Google as a Senior Financial Analyst overseeing advertising incentive programs for the company’s largest advertising partners and agencies. Previously, he worked as a utility regulatory strategy analyst at Entergy Corporation for six years in New Orleans.

His work has appeared in major publications like Kiplinger, MarketWatch, MSN, TurboTax, Nasdaq, Yahoo! Finance, The Globe and Mail, and CNBC’s Acorns. Riley currently holds areas of expertise in investing, taxes, real estate, cryptocurrencies and personal finance where he has been cited as an authoritative source in outlets like CNBC, Time, NBC News, APM’s Marketplace, HuffPost, Business Insider, Slate, NerdWallet, Investopedia, The Balance and Fast Company.

Riley holds a Masters of Science in Applied Economics and Demography from Pennsylvania State University and a Bachelor of Arts in Economics and Bachelor of Science in Business Administration and Finance from Centenary College of Louisiana.