Did you know that HSA owners enjoy tax-free interest on balances and tax-free returns from HSA investing? Health Savings Accounts (HSAs) are tax-advantaged savings accounts that help people with a high-deductible health plan pay for out-of-pocket medical expenses. Since their inception in 2004, HSAs have become very popular. Devenir’s 2022 midyear report finds almost $99 billion in assets in nearly 34 million HSA accounts.
The number of HSA account holders is growing for several reasons. One is that HSA account holders own their accounts for life. And a major attraction is that they also enjoy tax savings in three different ways:
- Pre-tax contributions: In 2024, HSA account holders with single coverage can contribute up to $4,150, and those with family coverage can contribute up to $8,300.
- Tax-free withdrawals for eligible medical expenses: IRS-approved medical expenses include doctor and hospital visits, physical therapy, prescriptions, dental work, eye exams, contacts, eyeglasses, and more.
- Tax-free interest and earnings: Account holders do not pay income tax on interest earned on the account balance or earnings from investing HSA dollars.
This blog will focus on earning tax-free interest on the balance and generating tax-free income from investing HSA funds.
Is HSA Interest Tax-Free?
Like regular savings accounts, HSAs earn interest on the account balance. However, unlike those accounts, the interest earned in an HSA account is not subject to taxes. And because HSA balances roll over from year to year, like traditional savings accounts, HSA owners can grow their balances over time and prepare for future medical expenses without worrying about taxes.
And while gaining tax-free interest is beneficial, investing may be the key for those seeking more substantial gain.
Is HSA Investing Tax-Free?
The ability to invest HSA funds is a significant factor driving account growth. Devenir reports that in mid-2022, over 2.4 million HSAs had at least a portion of their funds invested, accounting for over 7% of accounts.
Why do so few HSA account holders invest a portion of their funds? One obstacle to investing is that many HSA custodians require a minimum balance threshold before account holders are allowed to invest. The threshold usually ranges between $1,000 and $2,500. Once account holders meet that threshold, they have various options. Some providers enable HSA owners to choose from multiple investment options, like stocks, bonds, and mutual funds. And they may also provide research tools. Some providers offer different growth model plans developed by a licensed investment advisor to meet specific investor needs and interests.
If you’re an HSA account owner considering investing your account funds, now may be the time to do so. HSA accounts offer tax advantages to help with both short- and long-term growth while continuing to reduce your healthcare costs. In addition, investing and building wealth may be a strategic option for those wanting to use their HSA funds for other purposes in retirement. That’s because you can make penalty-free withdrawals, although they act like regular income for tax calculations.
Questions HSA account owners should ask:
- Am I maximizing my annual contributions?
- Does my HSA balance meet my provider’s minimum threshold for investing?
- Is the interest I’m earning enough to sustain my account, or should I invest?
Once you’ve given these points some consideration, ask how we can help bring this benefit to your employees.
DataPath Administrative Services offers complete HSA administration services, including account management, banking, and investments.