Why you should consider investing your HSA

Investing your Health Savings Account (HSA) allows your funds to grow tax-free, helping you bridge the gap between your savings and rising healthcare costs in retirement. Unlike a 401(k), an HSA offers triple tax advantages: tax-free contributions, tax-free earnings, and tax-free withdrawals for qualified medical expenses. By treating your HSA as a long-term investment vehicle, you can help maximize your spending power and grow your nest egg for the future.

How much will healthcare cost in retirement?

Healthcare costs are rising, and experts estimate the average couple will need $350,000+ to cover out-of-pocket medical expenses in retirement.

That figure is what is needed if you retire today. With inflation, these costs could be even higher in the future. It is important to remember that Medicare isn’t free; it has premiums just like your health insurance today. Prescriptions tend to cost more in retirement, too. The irony is that healthy couples will need to absorb even more costs, as longer life expectancy translates into more healthcare spending.

Bottom line: You can’t plan for retirement without also planning for your healthcare. That’s why more members than ever are investing in their HSA to build long-term retirement and healthcare savings.

HSA vs. 401(k): Which is better for retirement savings?

When it comes to retirement, everyone talks about the 401(k). But your HSA can be one of the best accounts for saving for retirement. Not only can you invest your HSA and potentially capitalize on tax-free growth, but your HSA also delivers powerful tax advantages you can’t find anywhere else.

As you can see from this table, your HSA brings all the tax efficiency of a 401(k) along with additional bonuses. For example, 401(k) contributions are subject to FICA payroll taxes, while HSA contributions are not. So, HSA contributions can go further than 401(k) contributions and can help you save faster.

In addition, HSAs do not have required minimum distributions. Plus, members age 65 and older can take taxable HSA distributions for any expense—just like a 401(k). And, of course, distributions are always tax-free when used for qualified medical expenses.³

Considering how much you’re likely to spend on healthcare in retirement, those advantages can translate into huge savings.

Maximize your spending power in retirement

Because you can take money from your HSA tax-free when you pay for qualified medical expenses, the money in your HSA goes further than the money in your 401(k).

Here’s a comparison for illustration based on a 22 percent effective tax rate.

An extra $66,000 by the time you retire can go a long way! See all the ways you can spend your HSA at the HSA Store.⁴

What is the best strategy for investing your HSA?

Given that a significant portion of retirement spending will go toward healthcare costs, it may not be ideal to use a 401(k) as your sole retirement savings vehicle. An HSA offers much more flexibility and empowers you to take distributions for qualified medical expenses — tax-free. Therefore, it could be prudent to use a 401(k) in conjunction with an HSA.

For many people, an effective contribution strategy may follow these four steps:

1. Max out your employer’s HSA match

Many organizations may offer an annual seed contribution. Other organizations offer an ongoing HSA contribution match. Usually, the match is dollar-for-dollar up to a specified limit. Given the short- and long-term flexibility associated with your HSA, it’s important to capture this match first. Don’t leave free HSA money on the table!

Keep in mind that your employer’s HSA contributions count toward your overall contribution limits. You can always view the latest IRS contribution limits at this page.

2. Max out your employer’s 401(k) match

Commonly, employers may match fifty cents on the dollar up to six percent of employee income. Other match plans go dollar for dollar up to an established percent of employee income. Regardless of the approach, an employer 401(k) match represents real income that should also be captured if available. Same thing: Don’t leave match money on the table!

3. Max out your HSA

Do your best to contribute up to the IRS contribution limits. Members 55+ can contribute an additional $1,000 beyond these limits. In most cases, it may be advantageous to maximize contributions to your HSA before maxing out your 401(k). FICA savings alone could justify prioritizing the HSA.

4. Max out your 401(k)

After maxing HSA contributions, then contribute additional money to a 401(k). Maxing contributions to both your HSA and retirement accounts should help you build a nest egg your future self will appreciate.

A note on daily spending:
There are some people, however, for whom this strategy may not be ideal. Consider that HSA dollars cover myriad over-the-counter medicines, including cough suppressant, pain relievers, and even menstrual care products. If inclined to regularly use the HSA for such routine purchases, then a unique long-term savings strategy should be considered. Please consult a professional to determine the best strategy for you.

It’s difficult to save for retirement if you’re regularly dipping into your HSA for routine spending. For some people, the 401(k) early distribution penalty serves to create the necessary savings discipline.

Frequently Asked Questions

Q: Is investing my HSA risky?
A: All investments carry some risk, similar to a 401(k) or IRA. However, many HSA providers offer a range of investment options, from conservative mutual funds to stocks, allowing you to choose a strategy that matches your comfort level and financial goals.

Q: Do I need a minimum balance to start investing my HSA?
A: Yes, most HSA administrators require you to keep a minimum cash balance (often between $1,000 and $2,000) in your account to cover immediate healthcare needs before you can invest any excess funds.

Q: What happens to my HSA investments if I change jobs?
A: Your HSA is portable, meaning it belongs to you, not your employer. If you change jobs or retire, your account—and all the investments within it—stays with you.

Have questions? Visit our Help Center.

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