Invest Your HSA Funds to Grow a Retirement Nest Egg

Investing HSA funds would make the account more like a 401(k) than a traditional savings account, in that the money has the potential to grow more by compounding interest at a faster rate. HSA money that is not invested may earn interest like in a savings account at the bank, but if you compare the simple interest earned on savings versus compounded interest earned on money, you can appreciate the value of growing your savings faster by investing HSA funds.

Not everyone may be in a position that would make investing HSA funds the best option for them, but for those who are focused on saving for retirement, investing could be a great choice. Remember, after age 65, you can spend HSA money on anything you want without a penalty. You would just pay normal income tax on those HSA funds withdrawn for non-medical spending like with a 401(k) or IRA.

If you are interested in investing your HSA funds but aren’t sure how to do it, rest assured that it’s a simple process. Here are the steps to investing your HSA dollars:

Investing your HSA funds is 100% self-directed, meaning you’re in control of choosing how you invest your money. Just as you’d invest any other cash holdings, you can select stocks, mutual funds, exchange-traded funds, and other investments for your HSA.

We have some helpful tools within the ConnectYourCare portal that you can use for guidance to select the investment portfolio that best suits your savings goals, such as a prospectus for selecting investment options and fund research sheets you can review to see how they perform over time. We also have a growth estimator that will help you project your earning potential depending on how much you invest, how much you spend, and how long you will save, as well as an asset allocation calculator that will help you select an investment portfolio that fits HSA spending and saving requirements.

You might also decide to consult your financial advisor about what options you should choose for investing your HSA money and how much to keep in cash. It’s up to you to choose how to invest!

As you are deciding how to invest HSA dollars, you should consider when you may need to access your HSA funds to pay for medical expenses and how much you want to save for retirement. Knowing whether you will need your HSA funds in a couple years (or a couple decades) can help you decide the ideal level of risk and degree of diversification for your investments, as well as how much to keep in cash.

For example, an individual with low medical spending who is concerned about covering health care costs in retirement may benefit from investing more of their HSA money to potentially yield a greater return 10 or 20 years down the line. On the other hand, someone with a lot of out-of-pocket medical spending may prefer to take a more modest investment approach in order to keep more HSA funds in cash and easily accessible to offset the cost of their current health care expenses. Each individual is unique.

Another strategy for growing your HSA health care nest egg is to save all HSA funds now and reimburse yourself later. There is no expiration date for reimbursing yourself for eligible medical expenses, as long as you save the receipts from those purchases. ConnectYourCare members can log receipts with our HSA Save-It! feature, making it easy to keep track of reimbursable spending over years and even decades.

If you pay for health care costs out of pocket now and save your receipts, you can allow your HSA funds to accumulate over the years untouched and potentially grow faster with interest. Then, when you need the cash later, you can reimburse yourself with your HSA funds (based on your saved receipts) to pay for anything you want.

The strategy behind this method is that the more money you save in your HSA, the higher the yield will be from interest on HSA principal and earnings from investments. Think of it as a “pay now, save for later,” best practice!