Health Savings Accounts (HSAs) can be extremely valuable when it comes to saving for future healthcare expenses. However, the way this account is set up also makes the HSA a smart place to put money away for retirement.
After all, consumers can withdraw HSA funds without penalty for any reason once they reach age 65, whereas previously HSA funds could only be deducted without penalty when they were. used for eligible health expenditure. This means that people who have diligently saved in an HSA for years or decades can use their HSA funds however they want once they turn 65, although they will have to pay taxes on them. distributions at this point (similar to a traditional IRA).
Either way, people who use a Health Savings Account (HSA) get benefits all round. For starters, contributions up to HSA limits can be deducted from your taxable income each year. In 2022, individuals can contribute up to $ 3,650 and families can contribute up to $ 7,300 to a tax-free HSA account. These limits are up slightly from 2021, when individuals can contribute up to $ 3,600 and families can contribute up to $ 7,200.
Funds in an HSA can also grow and build up tax-free over time, and the money remains tax-free when used for qualifying healthcare expenses. However, it’s important to note that you must have a High Deductible Health Plan (HDHP) to contribute to an HSA. HDHPs have a minimum deductible and maximum disbursement requirement which may change from year to year. In 2022, the HDHP require a minimum deductible of $ 1,400 for individuals and $ 2,800 for families as well as a maximum amount of $ 7,050 for individuals and $ 14,100 for families.
Invest your HSA funds
One of the biggest advantages of HSAs is the fact that you can invest your HSA funds to ensure maximum growth. While some HSA plan administrators offer few ways (if any) to invest your money directly, others offer many options that are easy to use and understand.
For example, a company called Health Savings Administrators claims to be the “Investor’s HSA” because it offers a first dollar investment with no minimum balance requirement, no investment transaction fees and access to 44 Vanguard and Dimensional funds. Low cost. claims that due to their superior investment options, their average account balance is 5 times the industry average.
No matter where you decide to open an HSA, financial advisers agree that investing your funds is a critical decision if you plan to save with this type of account. Financial advisor and tax planner Gary L. Watts says that, generally speaking, your options for investing in an HSA really boil down to what the account custodian will allow. In most cases, this includes investments approved on their platforms, such as mutual funds or ETFs. He says these options will also be quite conservative, meaning that the growth of your HSA fund might be somewhat limited.
However, the danger of do not invest is worse than choosing investments that are too cautious for your time frame.
“If funds are left in cash or a money market fund, often the default option where there is little or no growth potential, the funds will not even keep up with inflation and will be worth less when they are. withdrawn, ”he said.
With that in mind, not investing your HSA funds is like keeping your 401 (k) in a high yield savings account. Your money may have decades to grow until you can use it, but your account balance will be worth less each year.
Alternative investments in your HSA
But what if you don’t want to invest your HSA funds in index funds or ETFs? Fortunately, you don’t have to.
According to Gallant Token CEO Steven Walters, the time has come when people are tired of seeing their money resting on their HSAs with little interest earned, and long-term projects like real estate and cryptocurrencies are a real possibility for your HSA funds.
Walters says that investing in Bitcoin and Ethereum, which are the backbone of cryptocurrency and have less volatility in the market, would give you a substantial return on your investment.
“Not investing your HSA funds means you don’t see any return,” he notes. “If you were to have some type of crypto IRA where you can withdraw your HSA funds and spread them across various coins and stable projects, you are more likely to get a return on your invested capital.”
Meanwhile, financial adviser Nathaniel Hoskin of Hoskin Capital says you can invest indirectly in alternatives like real estate and private equity by using your HSA to invest in REITs or alternative ETFs like commodity funds.
In order to have full control over where your HSA funds are invested, you will need to set up a self-directed HSA. You can do this through a number of platforms including HSA Bank and TD Ameritrade or Optum Bank and Schwab. Opening a self-directed HSA that works with a large brokerage firm will also open up the possibility of investing in a much wider range of mutual funds, stocks, bonds, ETFs and certificates of. deposit (CD).
How to decide where to invest your HSA funds
According to Intentional Living FP financial advisor Jim Crider, the decision on where and how investing your HSA funds requires serious thought on your part. For starters, it’s crucial to consider the purpose of the money, the time horizon to its use, and your personal risk tolerance.
If you are using an HSA to save for healthcare expenses so that you can pay them off as you go, for example, you should have a completely different perspective than someone funding an HSA so they can pay it off. use after the age of 65.
“Historically speaking, a well-diversified equity portfolio has been the ideal solution for achieving long-term growth above inflation,” said Crider. However, long-term growth may not be the goal if your average healthcare costs are high and you frequently deplete your HSA funds to cover your medical bills.
Meanwhile, Hoskin says some people would be wise to invest their HSA funds in high risk options, presumably those who will never need money to cover medical bills.
“It means alternatives, leveraged ETFs or 100% exposure to stocks,” he says, adding that this is because an HSA will only ever be a small part of your total retirement pool. , because you can only contribute a relatively small amount each. year.
“At the end of the day, it’s a small, tax-deferred account that will need high growth to get big because you can’t contribute much.”