Health Savings Accounts (HSAs) are popular, tax-advantaged savings accounts designed to help people with High Deductible Health Plans (HDHPs) pay for out-of-pocket healthcare expenses. HSA accounts have seen substantial growth since their introduction in 2004. Devenir’s mid-year 2022 update reports that nearly $99 billion in assets were held in almost 34 million HSA accounts.
There are many reasons why HSAs have become so popular. One great attraction is that holders own HSAs for the life of the account. Owners also enjoy other significant benefits, such as triple-tax savings. With an HSA, account holders:
- Make pre-tax contributions: Learn more about current contribution limits here.
- Use the funds tax-free when withdrawn for eligible medical expenses: The IRS offers an extensive list of eligible medical expenses, which includes co-pays, coinsurance, deductibles, prescriptions, dental and vision care, and more.
- Earn tax-free interest and investment income on unused balances.
HSA Interest is Tax-Free
Health Savings Accounts are a type of savings account. The account owner earns interest on the unused balance, and the earned interest is not subject to taxes. In addition, the account balances roll over from one year to the next without any limitation. This helps build up the account balance for future medical expenses.
Account owners whose unused balances meet a minimum threshold and seek more considerable account growth can choose to invest some or all of their balance.
HSA Investing is Tax-Free
The ability to invest HSA funds is a significant factor in helping drive account growth. In their mid-year 2022 report, Devenir estimated that only about 7 percent of all HSA account holders invest, which means the overwhelming majority are missing out.
HSA custodians often require a minimum unused balance before HSA account holders are allowed to invest, typically ranging from as low as $1,000 to as high as $2,500. Once the minimum is met, account holders can view their HSA provider’s investment options. For example, some allow account holders to choose investment options, like stocks, bonds, and mutual funds. Others provide different growth model plans selected by a licensed investment advisor. Additional advantages may include accessing investor statements and educational tools, among other features.
For people who own an HSA, the many tax advantages can help with both short- and long-term growth while continuing to reduce the cost of personal healthcare. Investing and building wealth is a strategic option for those looking to use their HSA funds for future healthcare expenses and other purposes in retirement. These withdrawals are penalty-free but count as regular income for tax purposes.
Questions to consider when you own an HSA:
- Am I maximizing my annual contributions?
- Does my HSA meet the minimum account threshold for investing?
- Is the interest earned enough to sustain my account, or should I wait and invest?
DataPath Summit is a cloud-based administration platform for FSAs, Limited Purpose FSAs, HSAs, HRAs, and Transit/Commuter accounts. Summit is an ‘everything you could need solution’ with streamlined financial processes, including debit cards and electronic payments.
