A Health Savings Account (HSA) is a component of high deductible health plans that allows you to put aside pre-taxed dollars to use for future healthcare needs, like co-pays, coinsurance, deductibles, and other medical services, equipment, and supplies.

Many HSA participants see this type of account as a medical savings account, but it can also double as an investment account that can provide a source of income after retirement. For example, combining an HSA with the freedom of a self-directed IRA allows individuals to significantly expand their investment decisions.

Not only can you use HSA funds to supplement the costs of Medicare expenses, like Part B and Part D plans, but after you reach age 65, you can also use the funds for non-qualifying expenses.

Here are a few tips on how to invest HSA funds to meet your medical and post-retirement needs.

What Investments Can You Hold in an HSA

When you open an HSA, you can typically manage funds in one of two ways: keeping them in a traditional savings or money market account or actively investing funds to achieve stronger growth.

Like funds in other standard investment accounts, such as an IRA, HSA funds can be directed towards and invested in several common assets, including stocks, bonds, ETFs, and mutual funds. But what if you want to expand beyond that or leverage funds to exploit promising investment opportunities?

The answer is often a self-directed HSA.

A self-directed HSA gives you ultimate control over your HSA funds, providing the opportunity to invest in alternative assets generally prohibited by a standard HSA.

Some self-directed IRA investment ideas you can make with an HSA account include:

• Real estate
• Promissory notes
• Precious metals
• Cryptocurrency
• Private Equity

Should I Use My HSA as an Investment

Using your HSA as an investment vehicle can be beneficial if you want the opportunity to grow your savings at a faster rate. Here are some other reasons you may want to consider investing your HSA funds:

• HSA contributions are made with pre-tax dollars
• Earnings are not taxed when you invest a portion of your HSA fund
• If you need to use your HSA for qualified medical expenses, withdrawals are not taxed, regardless of when they are made
• Contributions are tax deductible up to the IRS-specified limits
• Contributions do not need to be used each year (unlike a flexible spending account) and, therefore, can continue to grow and produce earnings yearly.
• Funds can be used for traditional investments, like stocks and bonds, or self-directed towards alternative assets.

Remember that your HSA account is there for your current and future needs, and investing funds can carry some risks. If you can make the full contribution and don’t anticipate any significant medical expenses, then investing your HSA funds can set you up for a secure retirement, whether that means covered medical bills or extra income. If you’re not sure if investing your HSA funds makes sense for your current circumstances, speak to a financial advisor.

Does an HSA Grow Interest?

All HSA accounts grow interested, but how much an account grows depends on how funds are held.

When you enroll in an HSA, your employer typically deposits pre-taxed dollars into a special account, often a savings or money market account. When deposited and left in this type of account, the funds will grow as a market-based interest, often 1% or less.

HSA funds invested in other types of assets, like stocks and mutual funds, will earn interest based on the asset’s performance. For instance, if your HSA funds are invested in a specific stock, then growth will depend on how that stock performs on the public exchange.

Likewise, if your funds are invested in a mutual fund, growth will depend on how that portfolio performs. The same is true for HSA funds that are self-directed into alternative assets.

How Much Money Should I Keep in My HSA

The amount of money you should keep in your HSA account depends on three different factors:

• Your estimated annual medical expenses, including family members, if they rely on your HSA funds
• Your family medical history which can help you account for your long-term medical expenses
• Your estimated lifespan

Those factors aside, if you plan on using your HSA as an investment tool or even simply to cover your medical expenses down the road, it can be wise to contribute the maximum amount allowed by the IRS. That’s especially true since the dollars in your HSA carry over yearly and have a triple tax advantage: pre-tax contributions, tax-free earnings, and tax-free qualifying withdrawals.

IRS HSA contributions can change from year to year, so it’s important to review your contributions and IRS limits annually

The annual HSA contribution for 2022 is $3,650 for individuals and $7,300 for families. The 2023 HSA contribution limits have been increased to account for inflation and are now set at $3,850 for individuals and $7,750 for families.

During both tax years, individuals 55 years of age or older can make an additional $1,000 “catch-up” contribution.

Can I Invest My HSA into Crypto?

Yes, because HSA investment can be self-directed, you can choose to invest your funds in cryptocurrency. To do so, you must work with a trustee or custodian, like Horizon Trust, who is qualified to carry out this type of investment. You will also need to open a crypto trading account.

Can You Withdraw Money from an HSA for Non-Medical Expenses?

Yes, you can technically withdraw money for non-medical expenses from your HSA account anytime, but taxes and penalties may apply.

If you are under 65 and want to withdraw HSA funds for non-medical expenses, expect to pay income tax on the amount withdrawn. The funds will also be subject to a 20% early withdrawal penalty.

Once you reach 65 years of age, HSA funds withdrawn for non-medical reasons are only subject to income tax.

Keep in mind that regardless of your age, withdrawals made for medical expenses are always tax and penalty-free.

Is an HSA Better than a Roth IRA or 401(k)?

If your primary goal is to amass savings that can be used for medical expenses both now and in the future, an HSA can be a better option than a Roth IRA or a 401(k). That’s because contributions are made with pre-tax dollars, grow tax-free, and can be withdrawn tax-free when they are used to cover medical expenses.

HSAs can also prove to be valuable tools for retirement, even if your primary goal is not medical expenses. That’s particularly true when you consider that Roth IRA contributions are taxed, and both Roth IRAs and 401(k)s carry tighter rules (and penalties) that make it harder or less lucrative to access your funds before retirement.

For instance, if you need a costly medical procedure, you can rely on your HSA to cover the expenses without worrying about taxes or expenses. You can also let your funds stay and grow in the HSA and enjoy penalty-free withdrawals for non-medical expenses down the road, though you will have to pay taxes.

However, there are benefits to Roth IRAs and 401(k)s that simply don’t exist for HSA. One of the most significant is contribution levels. The contribution limit for a Roth IRA for 2022 is $6,000 ($7,000 if you’re over 55). That’s $2,340 more than an HSA. HSA and 401(k) limits are even more significant. In 2022, it is $20,500–or $16,850 more than an HSA.

Even considering contribution limits, an HSA can still be a solid investment choice. But, because each investor has different financial goals, investment capabilities, and immediate and future needs, there is no single answer as to which account is best. If you’re not sure which option is the right one for your needs, it’s a good idea to speak with a financial professional who can discuss the pros and cons of each account type as it relates to your circumstances.

Horizon Trust and our team of financial experts can help you understand how an HSA fits into your financial needs–whether it’s in addition to a retirement account, like a Roth IRA or 401(k), or as a stand-alone financial tool to help you manage medical expenses now and retirement needs in the future.