If you have a high deductible insurance plan, you may also have a health savings account to go along with it. Health savings accounts allow you to put aside pre-tax funds to cover qualifying health costs.
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Opening a health savings account is a great way to cut the costs of healthcare and to save for costly services. Unfortunately, around 96% of people with a health savings account are making a mistake: they're not investing their HSA money.
Health savings accounts are an important investment vehicle
Just 4% of all health savings accounts in 2016 were invested in anything other than cash, according to a 2017 survey conducted by the Employee Benefits Research Institute (EBRI).
One big reason so many HSA owners have their money invested in cash: the accounts are often treated as short-term vehicles to pay for near-term health expenditures. In fact, one report found that more than half of workers with an HSA use the account to cover near-term health expenditures, and 55% typically spend the full balance of their HSA account each year.
Unfortunately, those who view HSAs as nothing more than short-term savings accounts to provide a tax break on healthcare costs are missing out on an important opportunity to save for the future.
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HSAs can grow tax-free and provide for care during retirement
While health savings accounts can be used to pay for immediate care needs, these accounts typically provide far more value if you treat them as long-term investment vehicles to pay healthcare expenditures as a senior.
Seniors incur healthcare expenses at disproportionately higher rates than their younger counterparts, with the Bureau of Labor Statistics reporting mean healthcare spending of $5,994 for Americans 65 and older. Employee Benefits Research Institute also indicates a senior couple should save up to $370,000 for healthcare costs -- assuming the couple is covered by Medicare and a Medigap -- if they want a 90% chance of being able to afford care should they have high prescription drug needs.
Seniors on fixed incomes are often less able than younger working adults to shoulder the costs of healthcare expenditures -- and attempting to pay could result in retirement account balances being reduced too quickly and seniors running out of funds.
If money in an HSA is invested, allowed to grow over time, and both initial investments and gains can be withdrawn tax free, seniors benefit from substantially increased financial security.
Investing an HSA provides an opportunity for growth
Investing the assets in your health savings account provides a substantial benefit because you will not pay taxes on gains, as long as the money is withdrawn to cover qualifying healthcare costs.
With most other types of tax-advantaged investment accounts, including a 401(k) and traditional IRA, you invest with pre-tax funds but must make required minimum distributions as a senior and pay taxes on withdrawals. With Roth IRAs, you have the opportunity for tax-free withdrawals but have to invest with post-tax funds.
An HSA is one of the only investment vehicles where you save on taxes at both ends. As long as you make withdrawals specifically for healthcare expenditures, the withdrawals are not taxable. Those 65-and-over can also make withdrawals for any purpose without penalty, but the income will be taxable at that time.
Since it costs less to make initial investments due to the tax break and the tax-free gains make it easier for your money to grow, an HSA is a very powerful investment tool -- and one you're not making wise use of if you don't actually invest.
By keeping HSA assets in cash, your funds lose value over time due to inflation -- especially if you roll over assets for many years -- and you miss the opportunity to benefit from market gains you won't be taxed on.
Even among HSA owners who use their accounts to cover the costs of healthcare in the short-term, there are still opportunities to invest a portion of their account balance. EBRI research revealed the average HSA accountholder rolled over an estimated $1,151. Remaining balances left in accounts at the end of each year could grow and eventually be invested.
How to invest assets in an HSA
To invest an HSA, account owners are typically required to have a minimum balance. Investing the maximum annual investment -- $3,450 for individual coverage and $6,900 for family coverage with an additional $1,000 contribution for those 55 or older in 2018 -- could allow you to meet minimum balance requirements more quickly so you can begin making the money work for you.
It's also important to make sure your HSA is held in a financial institution with low account fees and ample investment opportunities. Employer-provided accounts may come with higher fees; if so, unless your employer is contributing to your HSA, you may want to keep your HSA at a brokerage firm offering a better deal. Look for a firm that provides a good mix of investment opportunities, such as exchange-traded funds or broad-index mutual funds.
Next, determine how to allocate investments. If you're treating your HSA as a long-term investment vehicle, consider an investment mix similar to the mix used for your 401(k). When you're younger, invest more aggressively and put more of your HSA money into stocks. As you grow older and the likelihood you'll need to withdraw money to pay care rises, assets will be invested more conservatively since you may not have as much time to weather market downturns.
Get started investing your HSA
If you're eligible and you want to save to cover healthcare costs as a senior -- and benefit from big tax breaks for investing -- open an HSA today. If you already have an HSA, look into opportunities to invest your assets so you can make the money in your account work for you.
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