If you have high deductible health insurance (HDHP) and have extra cash to save on future health expenses in a given year, it almost always makes sense to put money into health insurance Health Savings Account (HSA). Finally, there are tax benefits on the front end when you put money into an HSA, but you can also see some valuable tax savings later.
How Health Savings Accounts (HSAs) work:
In 2021, eligible plans that qualify as HDHP must have a minimum deduction of $ 1,400 for individuals and $ 2,800 for families. Meanwhile, the maximum expense limits for HDHPs are capped at $ 7,000 for individuals and $ 14,000 for families. With an eligible HDHP, individuals can contribute up to $ 3,600 to an HSA through 2021, and families can save up to $ 7,200 in an HSA.
At the front end of the equation, the contributions made to an HSA account are tax-privileged, which means that they decrease your taxable income. This means you will pay less income tax over the years that you contribute to an HSA.
From there, the money grows tax-free until you withdraw it to meet eligible healthcare expenses. And if you don’t use the money in your HSA, you can take it out and use it for whatever you want (including to supplement your retirement) with no penalty from age 65. All you have to do is pay normal income tax rates for the money you take out.
While many people save money in an HSA knowing they will have healthcare expenses, many people also invest in an HSA with the goal of leaving their money alone. Because of the way HSAs work, they can be incredibly valuable as an investment vehicle. You save money on taxes when you contribute, and your money grows tax-free. If you can keep your HSA money in your account until you are 65, your money can be used however you want.
HSA health savings account wooden blocks near stethoscope on wooden table
Make sure you invest your HSA
With all of this, far too many people forget they can invest the money in their HSA. Actually, current research from Devenir shows that only 4% of HSA accounts across the country have at least some of their HSA assets invested.
Given the potential for long-term growth that HSAs have – and the fact that many people plan on using their HSA funds to supplement their retirement – this is downright insane. If you have an HSA and you are putting money aside to fund healthcare expenses or your future retirement, you can easily leave thousands of dollars on the table by not investing the money in your account.
Imagine for a moment if you could set aside $ 6,000 annually in a family HSA account for 20 years starting today, and leave that money alone without having to use it for health care expenses. In that case, after 20 years, you’d have $ 120,000 in your HSA, assuming every return you’ve received is enough to cover the cost of managing your account.
Now imagine that you had your HSA money invested from the start (adding $ 500 per month to your account) and had a net return of 5% after factoring in HSA fees. In that case, you’d end the 20-year stretch for $ 198,395.72. If you could get a net return of 6% you would have $ 220,713.55.
If these math aren’t enough to get you into thinking about HSA investing, I don’t know what’s happening.
How to invest your HSA
It’s important to know that, on the whole, some HSA providers offer significantly more investment opportunities than others. Whether you are currently opening an HSA or The choice is yours on where to keep your HSA moneyStart the process by finding an account with the best investment opportunities.
For example, HealthSavings administrators are a very good option when it comes to raising HSA funds. Finally, with this provider you can start investing from your first dollar with no minimum balance and choose from 42 affordable Vanguard and Dimensional funds.
HealthSavings Administrators is also free of investment transaction fees, so you won’t incur unexpected fees as you save. However, they do charge underlying fund fees for their investment options as well as an annual account fee of 0.25%. Over the course of a year, HealthSavings administrators said their fees cost customers an average of $ 53.
That being said, there are plenty of other excellent administrators that offer HSAs with attractive investment opportunities. Some of my favorites are Lively, Fidelity, HSA Bank, and Optum Bank.
Remember, some HSAs with investment opportunities allow you to start investing from the first dollar in your account, while others don’t allow you to start investing until you hit a certain threshold. At HSA Bank, for example, you cannot invest your HSA money until you have at least USD 1,000 in your HSA account. With Optum Bank mutual funds, however, you can start investing as soon as you have $ 2,100 in your HSA and you can only transfer funds to your investment account in increments of at least $ 100.
Some HSA accounts with investment options also come with higher fees than others. Therefore, check and compare the fees of multiple providers. Health Savings Administrator has one Handy fee comparison table This can give you an idea of the fees charged by large HSA companies.
The bottom line
If you are taking the initiative to save on future healthcare expenses in an HSA, don’t stop there. You should also figure out how best to invest the money in your HSA account so that it can keep up with inflation and generate a decent return over time.
In other words, don’t just cram your HSA money into a proverbial mattress. Invest your money in funds that provide long-term growth and you’ll thank them later.