I have had a health savings account eligible insurance plan since they first became available. I love the triple tax advantages of the HSA.
- Pre-tax or tax deductible contributions
- Money grows tax free
- No taxes or penalties if money is withdrawn for approved health care spending
You can potentially never pay taxes on this money! Is that a great deal or what? Recently, though, we’ve decided to let our HSA dollars do even more for us. We’ve decided to invest our HSA in the stock market as a great way to improve our finances and here’s why.
Low Interest Savings Account
Currently our HSA is in a savings account. When we opened that account, I believe it earned 3% interest. Now it earns 0.19%. We made $2.94 in tax free money from our HSA last year. That’s enough to retire on, right?
We Don’t Want to Spend Our HSA Money Anymore
In past years, we have only put money into our HSA when we had a medical expense. Then we would withdraw it to pay the medical bill. Over the past couple of years, we’ve built up a little money, but not much because we wipe it out when we get hit with a health expense, like our emergency room trip last spring. Now that we have a big emergency fund, we are going to quit withdrawing money from the HSA.
Vanguard Funds for Your HSA!
Some insurance plans offer choices for investing HSA money, but mine does not. I had to set up your own HSA account with a financial institution that offers that type of account. Currently, we are using a local bank that only offers investments in a savings or money market account.
I did some searching and found that you can invest your HSA money in low cost Vanguard funds, which are my favorite. I chose to use a company called Health Savings Administrators. They will also take care of the paperwork and process of transferring money from a prior HSA. You are able to split money between stock investments and savings type accounts if you don’t want everything in risky investments.There are some legal rules when doing this, and you can’t have more than one HSA account at a time. If you do it incorrectly, you could be in for some penalties come tax time.
There is a fee of $45 per year plus 0.0008 per quarter capped at $20,000 of your account balance. You also would pay Vanguard’s fees for whatever fund you choose. In my case 0.17%. There are also some fees if you don’t want to have electronic statements, deposits, or withdrawals. It isn’t free, but we should make much more in returns, even with the fees, than we ever could in a savings or money market account.
If we max out our HSA every year, assuming the contribution limit never increased from the 2014 limit of $6550 and also assuming a 5% rate of return (I would expect an average stock historical stock market return of 10%, but we’ll be conservative and figure in inflation and fees), we should have over $340,000 by the time I’m 65. I do expect contribution limits to go up, and I’ll get to add another $1000 per year as a “catch up” contribution after age 55, but to keep it simple, you can see how much money can be generated over time if you let your investment continue to grow.
When doing research for some recent posts about long term care as a senior citizen, I found that the average cost per person is around $220,000 if you live to average ages. I always assume I’ll be one of the healthy ones, but I bet most people think that when they are younger.
That number is overwhelming, but if we can max out our HSA and not spend it, this makes me think we can self insure for long term care. If we don’t need that, we can save our medical receipts over the years and reimburse ourselves down the road. Right now, there is no limit on the lenght of time you have to reimburse yourself for medical bills paid out of pocket as long as they happened after you set up your HSA account. If we don’t use the money for medical bills, at age 65, we can use it for anything, penalty free, but income tax does apply if we don’t use it for medical expenses.
Laws may change, and I may get more risk averse as I get older, but for now investing our HSA money in Vanguard funds is the right decision. If you don’t have enough money in an emergency fund to cover your deductible, I would advise against this strategy. If you do, I think it’s a great way to get more tax free money!
I do not receive commissions from Vanguard or HSA administrators, but from my research, these are the best picks if you don’t have the ability to invest through your insurance company. If you know of better options for HSA investments that might have lower fees, please feel free to let me know. I am not a professional, so please do your own research and visit IRS.gov for official HSA rules.
Are you eligible for an HSA? If you have a health savings account, do you spend or invest the money you contribute?