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How I Invest My Health Savings Account

Making choices to harness HSAs’ prodigious tax benefits.

An illustration featuring the symbol of the healthcare sector and other decorations.

When Morningstar introduced a high-deductible healthcare plan with a health savings account alongside the traditional healthcare plan about a decade ago, some of my colleagues were skeptical. Even though the company provided generous incentives for selecting the high-deductible healthcare plan, they worried about shouldering the higher out-of-pocket costs that are part and parcel of high-deductible healthcare coverage. Heck, “high deductible” is right in the name!

But I was all over the high-deductible healthcare plan from day one, not so much because I prefer that type of coverage but because I was excited about the opportunity to invest in an HSA. I was ready to have an additional receptacle—along with our IRAs and 401(k)s—for long-term tax-sheltered retirement savings. My only reservation, if you can call it that, was whether my HSA assets would ever add up to much. While the contribution limits have edged up a bit over the past several years, they’re still less than $8,000 a year for people with family coverage, like me, and half that much for singles.

Nearly a decade later, I’m happy to report that my enthusiasm for the HSA as an investing vehicle was warranted: My assets in it have quietly and painlessly compounded thanks to the genius of automatic payroll deductions and investment compounding. While you may choose a different path for your HSA assets based on your own household financial situation, here’s how my HSA fits into our financial plan and how I’ve invested the money.

Different People, Different Use Cases

No other tax-sheltered vehicle offers the prodigious tax benefits that health savings accounts do: Pretax dollars go into the account (or you can deduct the contributions on your tax return if you’re not contributing through your employer), the funds earn interest and compound with no taxes due as long as they stay inside the HSA, and withdrawals for qualified healthcare expenses are also tax-free.

There are two main use cases for an HSA: There’s the original, to fund out-of-pocket healthcare expenses as you incur them, and the turbocharged version, which maximizes the tax benefits by investing the HSA in long-term securities and using non-HSA assets to fund healthcare outlays.

There’s nothing wrong with using an HSA as it was originally intended, to pay as you go. Savings yields are certainly better today than they were a few years ago, and you benefit from the same tax treatment as long-term HSA investors do. (You just don’t benefit as much or for as long.) Moreover, there’s an attractive “mental accounting” benefit to using an HSA in this way, earmarking savings for a very specific use, in this case, healthcare outlays.

The reason financial-planning types get excited about not using an HSA for current healthcare expenses is that doing so better capitalizes on the tax benefits of the HSA. If the HSA assets are invested in something that appreciates a lot over the holding period, like stocks have the potential to do, all of that growth will escape taxation because qualified HSA withdrawals are tax-free. That tax treatment makes the HSA much more attractive than a Roth, to which you contribute aftertax dollars, and traditional tax-deferred retirement accounts, which tax funds on the way out.

How I Invest My HSA

The “turbocharged” route is the one I’ve taken with my own HSA. I contribute the maximum to it annually via automatic paycheck withdrawals and invest in long-term assets via the brokerage account option that’s bolted onto our HSA. I’ll confess that I let a sizable balance build up in the savings account while we got our sea legs with paying most of our healthcare outlays out of pocket. (More on this in a minute.) But eventually, I transferred the assets to the investment provider associated with our HSA, and I also set up automatic transfers from the HSA into the investment portfolio every month.

In terms of investments, we’re going for growth because we’re unlikely to touch our HSA assets for another 20 years or more. At a minimum, we need our HSA assets to keep up with healthcare inflation. I considered a fund or exchange-traded fund that focuses on the healthcare sector, but decided that was overly narrow and didn’t fit with my overarching goal to not clutter things up. Instead, I selected a low-cost international index fund as the sole HSA holding because our total portfolio was light on non-U.S. stocks. The U.S. market has continued to trounce overseas ones, but even non-U.S. stocks have beaten cash by a solid margin over the past few years.

My HSA comes with a debit card, so it takes a bit of discipline to not use that account and pay healthcare bills with other assets instead. We’ve been lucky that our healthcare outlays have been pretty limited; we cover most of them with our credit card, where we earn airline miles. I also contribute to a limited-purpose flexible spending account. That type of FSA is available to people who also contribute to an HSA. The limited-purpose FSA funds can only be used for specific out-of-pocket healthcare-related expenses, especially vision or dental costs. Because those outlays are at least somewhat predictable, I can make an educated guess each year about how much to put into the account. In contrast with HSA assets, which roll over from year to year, FSA funds are “use it or lose it.” If I’ve overfunded my limited-purpose FSA in a given year, we can use the money for new glasses. (I scooped up some prescription sunglasses last December. Thanks, FSA!)

My End Game

We expect to use our HSA assets in retirement to cover healthcare expenses, and those withdrawals for qualified healthcare expenses will be tax-free. We’ll even be able to use some HSA assets on non-healthcare expenses in retirement, thanks to the healthcare bills we’ve been paying out of pocket over the past several years. That’s because as long as you have receipts to substantiate the previously incurred healthcare outlays, you can pull HSA funds for non-healthcare expenses tax-free later on. (See “Trick 3″ in this article.) The ability to use tax-free HSA withdrawals to hold down our tax bill will be particularly valuable in retirement. That’s because a big share of our other cash flows will be coming from our traditional tax-deferred accounts, and those withdrawals will be taxed at our ordinary income tax rate.

I’ve also pondered whether we might use our HSA assets to cover long-term-care expenses. We haven’t purchased long-term-care insurance, so having an account earmarked for such outlays is appealing. My main reservation about using HSA assets for long-term-care expenses is that those expenses typically result in high deductions for medical costs. In other words, we might be taking our tax-free HSA withdrawals in years when we’d have low taxes anyway, thanks to the deductibility of the long-term-care expenses.

The other potential negative with earmarking HSA assets for long-term-care expenses is that it would likely entail hanging on to our HSA assets until later in life. (In 2018, more than half of people receiving care in long-term-care facilities were over age 85, according to data from the Centers for Disease Control.) If my spouse and I ended up not using our HSA assets during our lifetimes, the lush tax benefits would effectively cease; HSA withdrawals by nonspouse beneficiaries are fully taxable. That scenario, along with the potentially foregone tax deductions, points to the value of not earmarking HSA assets for long-term-care expenses but spending them earlier in retirement instead.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. She is also the author of a new book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement (Sept. 2024, Harriman House). She co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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