Investors in their 20s, 30s and 40s in search of an big boost for their financial future need look no further than a health savings account, or HSA — an investment product mistakenly viewed as just a savings tool to pay for medical expenses.
Indeed, HSAs are increasingly seen by wealth managers as investment and retirement savings accounts in disguise. That's thanks to their incomparable triple-tax benefits, investment options, and investor-friendly reimbursement rules.
HSAs, The Secret Retirement Account
Jeremy Finger, founder of Riverbend Wealth Management, dubs HSAs the "secret retirement account."
Rob Williams, managing director of financial planning at Schwab Center for Financial Research, says HSAs are a powerful item in the retirement planning tool kit.
HSAs can be used to create a long-term nest egg specifically designed to cover future health care costs. And they also can fund other retirement expenses down the road. And younger investors have a longer runway for their dollars to grow. They can reap the biggest benefits.
"The number of options investors have to save for retirement and other goals is expanding," said Williams.
The long-term benefits of investing in HSA funds include major tax breaks and growth opportunities. That's a key reason Investor's Business Daily continues its annual special report on the Best HSAs. In this report, 12 HSA providers made our 2024 list by combining investment options and low fees.
Read our full report on the best HSAs for 2024 and how to get the most from HSA investing
HSAs Help Drive Investment Growth
The good news is fresh research from HSA consultant Devenir shows more HSA account holders are utilizing their health savings accounts as an investment vehicle.
"We continue to see more accounts investing a portion of their HSA," said Jon Robb, senior VP of research and technology for Devenir.
Only a small percentage of HSA account holders are using their accounts as an investment tool, however. And 18% of HSA accounts are unfunded or have zero dollars in them.
But younger investors can turn that around for big benefits.
Don't Miss Out On the Benefits Of Time For HSAs
The downside of not investing HSA money, especially for investors in their 20s, 30s and 40s, is simple. They miss the opportunity to grow their savings over time.
To make HSAs work for Millennial and Gen Z account holders as a long-term investment and maximize tax-efficiency, three things must happen, says Finger. "You have to sign up, fund it (to the maximum), and invest the money properly," Finger said.
And if an account holder's goal is to get the maximum flexibility and growth out of the HSA, Finger says, they should pay current out-of-pocket health expenses from other personal savings if they're able to.
Don't spend the money in your HSA, leave it in the fund to grow, he says. Younger people, of course, typically have lower health care costs than older folks, making it easier for them to save and invest their HSA contributions.
In 2023, you can contribute up to $3,850 in an HSA if you have individual coverage and $7,750 for family coverage. Those older than 55 can contribute an additional $1,000. In 2024, HSA contribution limits rise to $4,150 for single coverage and $8,300 for families, although there's no increase in catch-up contributions. Only those covered by a high deductible health plan (HDHP) are eligible to invest in a health savings account.
Six Key Reasons HSAs Pack A Punch
There are six key reasons why HSAs can pack a powerful long-term savings punch for Millennials and GenZers who have long investment time horizons that allow their HSA dollars to grow like they would in a 401(k) or IRA.
HSA Tax Benefits
HSAs offer even better tax benefits than traditional 401(k)s and IRAs, and Roth accounts. With an HSA there are no taxes on contributions and no taxes while money grows in the account Any withdrawals for qualified medical expenses are tax-free as well. "That's really powerful," said Schwab's Williams. In contrast, withdrawals for traditional 401(k)s and IRAs are taxed. And dollars contributed to a Roth IRA or Roth 401(k) are taxed up front by the IRS.
It's the after-tax return of a health savings account that makes it shine. For example, a hypothetical $1,000 investment in an HSA that grows at 7% a year will be worth $7,612 over 30 years. And while the same investment in a traditional IRA would also grow to $7,612, only $5,938 would be left over after the account holder paid income taxes on that balance at a tax rate of 22%, according to Fidelity.
HSAs Offer Spending Flexibility
After age 65, any dollars remaining in an HSA account can be used for any type of expense, although you'll have to pay income tax on any withdrawals for non-qualified medical expenses. "The HSA becomes kind of a second IRA account," said Williams.
HSA Contributions Have Great Growth Potential
Dollars deposited into HSAs can be invested in assets with greater growth potential than cash savings, such as stock mutual funds and ETFs. There's just one problem. Nearly half (49%) of respondents don't realize HSA funds can be invested, according to a new Fidelity survey.
HSA Funds Can Be Carried Over
You don't lose it, if you don't use it. Unlike a flexible spending account (FSA), any contributions to an HSA that are not used to pay for covered medical expenses can be carried over to the next year and beyond without penalty. That means you can roll over your savings balance in a health savings account each year to grow your nest egg.
Use HSA Funds For Other Expenses
Rules allow deposits to be used for nonmedical expenses. Millennials and Gen Z could use a form of savings other than their HSA to pay for qualified medical expenses. Then, they later can reimburse themselves from their HSA for that payment. But they must save the original receipt.
For example, you spend $3,000 on your kid's braces this year and pay out of pocket. You let that $3,000 remain in your HSA and grow. Then, 10 or 20 years later, withdraw the money ($3,000) from your HSA tax-free to pay for something else, such as retirement costs or college tuition.
But you need to keep good paperwork and save the initial receipt to prove to the IRS that the tax-free withdrawal was for a qualified expense. "You need the receipt to offset HSA withdrawals," said Finger.
Experts recommend saving those receipts in digital form. Many HSA providers now provide so-called receipt vaults as an added feature. This gives account holders a secure place to save receipts. You don't want to risk trying to save a paper receipt for decades. "A lot of that ink disappears" or fades over the years, Finger said.
Employers May Help Fund Your HSA
Just like company matching contributions in 401(k)s, many employers also contribute to HSAs. In the first half of 2023, 31% of all dollars contributed to an HSA came from employers. The average company HSA match was $726, according to Devenir.
Finger says if you're eligible for an HSA, contribute first to a 401(k) plan at work to get the company match. Then consider funding an HSA next to take advantage of the triple-tax-free benefits. Regular 401(k)s and IRAs and Roth savings accounts should be funded next, says Finger.
Young investors who use HSAs in tandem with other retirement accounts also benefit from diversifying their savings from a tax standpoint, adds Williams. "All these different types of accounts can be used together in a coordinated way," said Williams. "And the younger you are and the sooner you start saving and investing, the more benefit the HSA will provide."
