HSA or Health Savings Accounts are a great way to pay for your everyday health expenses. HSA are also used to help save for a future medical expenses. By saving into your HSA, you can make those contributions tax free. I am lucky enough to have an HSA that my employer contributes to and my own tax-free contributions. As most Americans, that is where the HSA contributions end as no more than a simple savings account. This means that your balance is a straight forward cash balance. What if you could convert that cash balance into an investment?
HSA can be invested but with any investment, it stands the chance of losses. Second, if you have your HSA invested and you require the cash you will need to sell those investments to use those funds which could also be sold at the wrong time. Below I will cover some questions to ask if, when and should I invest with my HSA?
Do you have any upcoming medical expenses you are planning on using your HSA dollars towards? If you do, having those dollars locked up in investments is most likely not a good move. Upcoming expenses is not just planned medical spending but should also account for emergency situations. Just like an emergency fund, your HSA should have sufficient cash available to cover those expenses and even your medical insurance deductible.
HSAs are not only a great way to save as an emergency fund for medical expenses but can be factored into your retirement plans. As you invest your HSA the rules for most investments remain the same. That rule is as you age your equities holding should continue to drop as you increase bonds. When you reach the age of 65 the restriction of just medical expenses goes away and can be used on any other needs. Just remember that those deductions from the HSA will be taxed just like a 401K and IRA.
HSAs can be invested and composed of mutual funds, stock, bonds, and exchange-trading funds (ETF-s). The best way to leverage ETF-s is to find low expense ratios that impact your annual fund operating costs. ETF-s also have a good chance on being diversified, which makes them safer than having all of your money locked into one company stock for example.
ETF-s are typically easy to sell, so when that medical need arises you should be able to get the cash fairly quickly. Be sure to do your homework though to double check what index and equity funds will be used in the ETF-s.
HSAs should in certain circumstances be viewed as more than just a basic savings account. Take into account how much money you need for medical emergencies and upcoming medical costs. With that number you can look at long-term planning and investing with your HSA. You just gained another tool in your arsenal for retirement and medical expenses.