Did you know that HSA owners not only enjoy tax-free interest on their balances, but also tax-free returns from HSA investing? With interest rates at historic lows, consider investing your account funds to achieve substantial growth.
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 they were established in 2004, HSAs have become very popular, with over 20 million now in force and a projection by industry expert Devenir Research that there will be more than 27 million by the end of 2018.
The number of HSA account holders are growing for a number of reasons. Among the most influential is that account holders own their HSA for the life of the account and enjoy triple tax savings:
- Pre-tax contributions. In 2017, HSA account holders with individual coverage can contribute up to $3,400; those with family coverage, up to $6,750.
- Tax-free withdrawals for eligible medical expenses. IRS-approved medical expenses include doctor and hospital visits, physical therapy, prescriptions, dental work, eye exams, contacts and eyeglasses, COBRA premiums, and Medicare B and D premiums, among many others.
- 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.
For purposes of this blog, we’ll focus on that third one: earning tax-free interest on the balance and generating tax-free income from investing HSA funds.
Like regular savings accounts, HSAs earn interest on the account balance. Unlike regular accounts, though, the interest earned in an HSA account is not subject to taxes. Because HSA balances roll over from year to year — there is no ‘use it or lose it’ rule – account owners can grow their account over time and prepare for future medical expenses without having to worry about taxes.
Gaining tax-free interest is certainly beneficial, but interest rates remain at record low levels. For account owners seeking more substantial gain, the option for HSA investing may be the key.
Tax-Free HSA Investing
The ability to invest HSA funds is a significant factor driving account growth. Devenir reports that by the end of 2016, HSA investment assets had increased 29 percent year-over-year.
But among HSA account owners, only about 3 percent invest at least part of their account balance. 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 that threshold is met, account holders have various options. Some providers allow HSA owners to choose from a variety of investment options, like stocks, bonds, and mutual funds, and may provide research tools. Some providers offer different growth model plans that have been developed by a licensed investment advisor to meet specific investor needs and interests.
If you’re an HSA account owner and aren’t already investing your account funds, now may be 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, for those wanting to use their HSA funds for other purposes in retirement (with penalty-free withdrawals, although taxed like regular income), investing and building wealth is a strategic option.
Questions for HSA account owners to consider:
- 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?