Invest Your HSA Funds Proactively, Don't Just Hoard Them Languidly
Investing Health Savings Account (HSA) funds can significantly outperform keeping them in cash, particularly over long periods, thanks to the power of tax-free compounding growth. This strategy can result in a substantial increase in account balance compared to holding cash, which typically yields little or no real return.
HSAs offer a triple tax benefit—contributions are tax-deductible, investment growth is tax-free, and withdrawals for qualified medical expenses are tax-free. This allows invested funds to grow faster than taxable or cash accounts. For instance, investing $200 monthly from age 30 at a 10% compound annual growth rate (CAGR) could grow to nearly $1.3 million by age 70.
Cash held in an HSA or outside typically yields near-zero or very low returns, effectively losing value when adjusted for inflation. In contrast, investing in a diversified portfolio with a CAGR of 7% or more enables growth via compounding interest, leveraging the tax-free vehicle of the HSA to maximize accumulation.
The final value of an HSA investment depends strongly on CAGR. A higher CAGR (e.g., 10%) significantly multiplies the ending balance over decades, while a lower CAGR still outpaces cash but with less dramatic growth. Consistent contributions and reinvestment within the HSA amplify this effect.
HSAs are unique in that they do not require withdrawals at a certain age, allowing the invested funds to grow longer if not needed immediately. This flexibility enhances the benefit of long-term investment compounding. Financial advisors often recommend not using HSA funds prematurely but letting them grow over years like an IRA to prepare for large healthcare costs in retirement.
In 2020, the United States had a GDP per capita of $63,487, with nearly 19% of this amount spent on healthcare. Healthcare spending per capita in the United States was $11,945. To qualify for an HSA, one must be enrolled in a high deductible health plan (HDHP) with a deductible of at least $1,400 for individuals or $2,800 for families. In 2022, the HSA contribution limit for individuals is $3,650 and for families is $7,300.
If you invest your HSA balance instead of keeping it in cash, you could potentially afford all your healthcare expenses, even if they become expensive. Investing your HSA balance in a broad-market equity index fund like the Vanguard Total Stock Market Index Fund ETF (VTI) could potentially result in a much larger balance over time. The potential for long-term growth from investing your HSA funds depends on factors such as the CAGR and the length of time the funds are invested.
For example, if you contribute the HSA limit every year for three years and make no withdrawals during that period, you will have nearly $11,000 in the account by the end of year three. Compounding at 10% for 10 years could result in $49,537 in your HSA, which is nearly three times as much as if you kept the money in cash. After compounding at 10% for 20 years, you could have $208,939 in your HSA, which is nearly three times as much as if you kept the money in cash. Compounding at 10% for 30 years could result in over $600,000 in your HSA, which is nearly a half-million more than an all-cash HSA.
Investing your HSA funds could lead to a noticeably higher balance than if you just keep your money in cash, especially as time goes on. Norway, for instance, spent $6,748 on healthcare per capita in 2020, which is less than 10% of its GDP per capita. Investing your HSA funds wisely could help you sleep soundly at night, knowing you have enough money to cover your healthcare expenses.
- Instead of keeping HSA funds in cash, investing them could potentially grow your balance significantly, especially over long periods, due to the power of tax-free compounding.
- By investing in a diversified portfolio with a compound annual growth rate (CAGR) of 10%, for example, one could potentially accumulate over $600,000 by age 70, which is nearly a half-million more than an all-cash HSA.
- Financial advisors often suggest not using HSA funds prematurely but letting them grow over years to prepare for large healthcare costs in retirement, similar to an IRA.
- In the United States, about 19% of the GDP per capita is spent on healthcare, making a substantial HSA balance crucial for covering healthcare expenses, especially if they become expensive.
- Investing your HSA balance in a broad-market equity index fund such as the Vanguard Total Stock Market Index Fund ETF (VTI) could potentially yield a much larger balance over time, offering the potential for long-term growth.
