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How to Invest Your HSA Funds

By on February 24, 2014 in Money

How to Invest Your HSA FundsMany employers are switching their health insurance plans to high deductible health plans (or HDHP) that have a health savings account (or HSA) tied to them. The health savings account allows both the employer and the employee to deposit money into the employee’s account to help cover some of their medical costs before the high deductible is hit and the insurance kicks in.

The beautiful thing about HSAs compared to other types of healthcare money accounts like Flexible Spending Accounts (or FSAs) is that your HSA funds never expire. FSA funds have to be used by the end of the tax year or you forfeit whatever is left. With an HSA you can let the money sit in your account and enjoy tax-deferred growth all the way until retirement if you want. When you leave your employer you get to take your health savings account with you as well.

Since you have control over the account and could potentially have thousands of dollars sitting there, you don’t want it to just sit and not earn any kind of return. You should be investing it.

How to Invest Your Health Savings Account Money

Here are three different strategies you can use to invest the money sitting in your HSA.

To Keep Pace With Inflation

Your main concern, especially if you have a relatively small balance, is to simply not lose out to inflation every year. I would consider a small balance having anything less than your annual deductible saved in the HSA.

If that’s you, don’t just let your money sit and not earn any return at all. If you have a high deductible health plan with a $2,500 family deductible annually and inflation runs 3% per year you will need $2,575 the next year just to maintain the same “true” level of money in the account. In five years you would need $2,898 just to have the same spending power of $2,500 today.

If your account doesn’t pay interest or only minimal interest, you’ll need to see if you can step up the earnings somehow in order to offset the loss of the spending power of the money in the account due to inflation.

For Long Term Growth

On the other hand you might need to access all of those funds right away. If you have other options to pay for your healthcare spending or just a very large account balance, many health savings accounts can be invested in things other than just a plain savings account that pays out minimal interest.

You might have to move HSA providers in order to get the investments you want, but some HSAs even let you invest in mutual funds from Vanguard and other quality firms. It is like having another separate retirement account that will grow tax-deferred until you need the funds. What’s even better is as long as that many is used for qualified healthcare spending, you won’t pay income tax on any of the withdrawals.

A Mix of Both

Our third option is if you are somewhere in the middle. You want to keep the amount equal to your deductible in the account, but you also want to try to get growth the remaining money. You’ll need to do some calculations to figure out based on your account value what the current ratio is of funds that should be kept in cash versus funds that can be invested. After you get that number, just set up your investments appropriately and check your asset allocation every 6 to 12 months.

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