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Investing in an HSA: Don’t Sit on Cash Like Everyone Else


If you’re not investing in an HSA, you’re missing out. You’re also far from alone.

In fact, by far and away, the most common Health Savings Account (HSA) holding is cash, and it’s not even close. That’s cash that’s earning measly interest that won’t even keep up with inflation, promising the account holder a negative real return.

An HSA  isn’t optimal for everyone, but it’s a wonderful investment account for those who have access and qualify to have an account.

Opening one is step one. Next, you should be sure to invest the money held inside your HSA.




What is a Health Savings Account?


An HSA is a retirement account that can be opened in conjunction with a high deductible healthcare plan (HDHP). That’s health insurance with a “high deductible” of $1,400 as an individual or $2,800 as a family in 2021.

The account is often described as triple tax-free, a unique and amazing feature of an HSA.

First, any money you contribute to the account is tax-deductible. With a maximum contribution of $7,200 (or $3,600 as an individual) in 2021, a high-income professional could save $3,000 or more on taxes each year with a maximum contribution.

Second, the money that remains in the account grows tax-free. Unlike an FSA (Flexible Savings Account), there is no use-it-or-lose-it component or limit as to how much can be rolled over from year to year.

Third, and this is the best part, the money can be withdrawn tax-free to pay for eligible healthcare expenses, of which there are many.

Essentially, it acts like a supercharged IRA for healthcare costs. Money is tax-deductible like a traditional IRA on the way in, and it’s tax-free like a Roth IRA on the way out (as long as you pay for eligible healthcare expenses).


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Two Ways to Use an HSA


People tend to use an HSA one of two ways. You can use it to pay for expenses as they arise or you can save receipts and leave all dollars in the account to grow tax-free for decades with the plan to withdraw all money spent on healthcare over the years later on.

There are pros and cons to each approach. Let’s discuss.


Pay As You Go

With this strategy, you pay for medical expenses with HSA money when the bills come in. The highest deductibles out there are equal to about two years’ worth of maximum HSA contributions.

If you don’t have a lot of out-of-pocket expenses, your HSA balance should still grow most years with this method. If you regularly have costly medical bills, you should probably avoid high-deductible health insurance, anyway, making an HSA non-accessible.

While this approach can be considered suboptimal — you’re not allowing all of your contributions to grow tax-free — it’s what I do. I find it’s easier and it eliminates the possibility of never taking money out tax-free for your healthcare expenses.

One strategy I do employ is to never pay a bill with a check or HSA debit card, which many banks will gladly issue with your account.

Instead, I use a rewards credit card to pay for the expenses, and I reimburse myself from my HSA. That nets me at least 2% back on the medical costs, which is significantly higher than the tax drag of maybe 0.5% that results from not leaving the money in the tax-advantaged HSA.


Saving Receipts

The second approach used by optimizers is to leave the money in the HSA, saving medical receipts for years and years. There’s no requirement to withdraw the money when it’s spent. One could cash in tens of thousands of dollars worth of receipts at once after 30 years of investing in an HSA.

In many ways, I consider myself an optimizer, but this is one of those situations in which I make a financially less-perfect choice. I don’t like the risks and “hassle” of this approach, although the hassle factor has decreased in recent years.

What risks, you ask? There’s the risk that you lose the paper and/or scanned digital receipts you’ve been saving for years. While you’ll take steps to ensure this never happens given how much money can be at stake, people have lost hundreds of millions of dollars worth of cryptocurrency by losing their paper passwords and/or digital keys.

Additionally, when the time comes to cash in those receipts and reimburse yourself with a massive tax-free withdrawal from your HSA, you may not be capable of doing so. You could lose mental capacity or worse, your life, before that day comes. Your next of kin may not know where or why you saved those healthcare receipts.

My fears may be overblown, and companies like Lively, Fidelity, Optum and others who offer HSA accounts, now make it easy to save your receipts digitally, storing them in the cloud for you.


Investing Your HSA Balance


Whatever you do with your receipts, if you build up an HSA balance, which is likely either way, don’t do what most people do, which is sit on cash.

The Employee Benefit Research Institute found that only 10% of HSAs that had been open for 10 years had any non-cash investments. At 1 year, it was a paltry 2%, and even at 15 years, only 17% of accounts had any investments in stocks or bonds.

These numbers are mind-boggling. 98% of new accounts are all-cash, and 90% of accounts that have been funded for 10 full years are earning little to no interest.

There is a real opportunity cost to sitting on cash, especially in an account that can quickly reach tens of thousands of dollars. When invested for more than a decade, a six-figure HSA is certainly possible, especially If you’re one who saves receipts.

Most Health Savings Accounts do have a minimum balance that must be in cash, but it’s usually in the range of $1,000 to $2,000, or less than a years’ worth of contributions.

The rest can be invested much like the money in a taxable brokerage account, IRA, or a 401(k).  Just like a 401(k), your investment options may be limited to a selection of mutual funds representing a wide variety of asset classes. Target date funds are often an option, as well, and you may have the option to choose your own stocks via a brokerage account option within the HSA.


Why Invest in an HSA


Over time, investing in stocks and bonds allows you to take advantage of compound interest, allowing your assets to grow. Whereas cash will fail to keep up with inflation, U.S. stocks have beat inflation by more than 7%.

In the short-term, stocks and bonds will experience more volatility, but when looking at multiple decades, you’re extremely likely to have a positive return. Even with 2 of the 3 biggest market declines of the last century occurring since the year 2000, $1,000 invested in US stocks (as represented by the S&P 500 index) in January of 2000 just before the dot-com bubble burst would be worth $3,523 today according to the S&P 500 calculator.

What if you end up with far more than you could possibly spend on healthcare? Most of our healthcare dollars are spent towards the end of life, and you can spend HSA dollars on Medicare premiums (Parts B & D) plus Medicare Advantage plans). Yes, Medicare costs money, and those costs can really add up.

Nevertheless, if you do have more HSA money than you know what to do with, you don’t have to spend it all on eligible healthcare expenses. At age 65 and after, you can opt to withdraw the money for any reason at all and spend it on whatever you want with one important caveat.

The withdrawals will be taxed just like a withdrawal from a traditional, tax-deferred IRA or 401(k) when not used to pay for healthcare. If you go this route, the money will be double-tax advantaged like a 401(k) since you already got tax-deductible contributions and tax-free growth, but not triple-tax advantaged as an HSA will be when used to pay for eligible expenses.


How to Invest in an HSA


I like to keep things simple, and this account, while it could grow to be six figures, will still likely be a small portion of your overall investment portfolio.

As such, I recommend choosing one low-cost index fund like a total stock market fund and investing the entirety of your non-cash HSA balance (once you’ve met the cash minimum requirement) in that one fund. If you prefer, you could go with a three-fund portfolio, but for an account like this, I think even three funds is overkill.

Lively gives you access to thousands of no-transaction-fee mutual funds, ETFs, stocks, and bonds offered by TD Ameritrade. Fidelity offers a similarly wide variety of investment options. Any HsA provider should offer feasible, low-cost investment options.

If you plan to grow your HSA balance, which I highly recommend, don’t be like so many others letting their balance languish in cash holdings. If you’re not already, do yourself a favor and start investing in an HSA today.



Do you invest in an HSA? Do you prefer to spend as you go or save receipts?


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24 thoughts on “Investing in an HSA: Don’t Sit on Cash Like Everyone Else”

  1. My concern is the amount of information on the receipt. If I understand correctly the receipt should have itemized information, date of service, Patient name, physician’s office/hospital, amount, method of payment etc. Is there an exact information on this. I fear that some of my receipts will become ineligible for payment and it may be difficult to procure the correct receipt many years from now.

    • Another reason to consider paying as you go, I suppose.

      In my experience, I’ve never been asked for any sort of proof when I make withdrawals from my HSA to cover medical expenses (that I’ve paid by credit card, typically). I have the receipts saved and scanned, but the IRS hasn’t asked to see them. If I were to be audited, however, the receipts and what’s on them would be important.


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  3. What do you do when you have access to an HSA with an HDHP? But you lose access to the HDHP because I was laid off and the HSA is portable so I can keep the account. I have lost the ability to contribute pre tax. My potential new job does not have an HDHP and no HSA. What should I do? Leave the monies invested and just let it ride until retirement. I have a long time until retirement

  4. I love using HSA. I don’t have a lot of medical fees and have been saving up years for it. I think one year, I got like +40% on my HSA investments.

    Unfortunately, since I live in California, once I’ve closed the trade, I did have to pay ordinary tax on it.

    But I feel good with my HSA regardless – I’ve more than enough for my deductible for years and it’s only growing from there. It’s not really one of my main investment accounts, but it’s nice to know that 10-20 years from now, my HSA account will be even larger.

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  6. I couldn’t agree more on the benefits of an HSA. With so many headwinds people have in their financial lives, it’s troubling to know that most HSA owners are just sitting on the cash which continues to erode with inflation. Employers like to keep it simple and work with their bank to set these up, but there is little to no discussion about being able to pick your own HSA account outside of their sponsored bank, so you can have an HSA that allows investing. Remember that if your employer only lets you deposit in their sponsored bank HSA, there is nothing stopping you from then transferring this to a different HSA that you set up at Fidelity or similar provider that lets you invest the funds.


  7. I use a slightly different approach. I keep cash equal to the amount of my deductible. It’s there and ready to pay any medical bills that occur.

    I reimburse myself annually for a couple of reasons:
    1. My insurance (and probably most) provides an end of year summary, so instead of adding up receipts, I use what they show as out of pocket costs (I keep the receipts as backup, but use their reporting for calculating my withdrawal. I don’t think the IRS cares how you demonstrate out of pocket cost).
    2. I consider reimbursement of cash spent out of pocket to be equal to my marginal tax rate.

    This way, I don’t have to worry about keeping track of receipts forever and, if my math is right, earning a return equal to marginal tax rate (plus the additional 2% of using a double cash back credit card)

    What’s your thought on taking the allowed distributions/reimbursement in the year they occurred? Does it make sense that it’s equivalent of a return equal to marginal tax rate?

    • I think that makes perfect sense, and I agree with your assessment of the return. I look at it as my out-of-pocket medical costs being less than stated by a percentage equal to my marginal tax bracket(s). So a $1,000 medical bill really only costs me $600 to $700. Same numbers, just a different way of thinking about it.

      I take money out every time I pay an eligible bill. That way, I don’t forget about something like dental and orthodontic bills, which aren’t going to show up on an insurance summary. I guess I could also do this for OTC medications, but we don’t spend a whole lot on those, so I don’t bother.


  8. Thank you for your article.

    companies like Lively, Fidelity, Optum and others who offer HSA accounts, now make it easy to save your receipts digitally, storing them in the cloud for you.

    I have looked for such a feature on my Fidelity account, but cannot find it. Was this an error in the article, or did I just not look hard enough?

    • Good question.

      It looks like Fidelity’s online storage isn’t directly associated with the HSA account, but they do offer online digital storage of documents (like medical receipts) via Fidsafe.

      If you are going to take the receipt-saving route, it may be best to keep copies elsewhere in cloud storage that you can control, since the HSA companies could take away your access if you leave them for a different provider. Or they could get out of the HSA business at some point.


  9. would you still recommend investing in an HSA for those who live california and NJ? I understand they do not treat HSAs in the same tax beneficial manner as the rest of the country.

    • Certainly.

      Everyone gets the federal income tax deduction, regardless of where you live. If you’re in NJ or CA, you don’t get a state income tax deduction. Neither do people in 7 states that don’t levy a state income tax.

      It’s still a great deal, though, and I’m not alone in that opinion.


  10. I opened an HSA account in 2006 after becoming an IC in the ER. The account has been maxed out almost every year and invested in equal shares of VG 500 index, VG mid cap index and VG small cap index. It has grown to approx 175K with the majority being investment returns. Very happy I moved it from the cash account years ago!!!

    I plan to use the money for LT Care insurance premiums, Medicare premiums, possible COBRA coverage, and other costs that come up as we gracefully age. Unfortunately, I’m sure there will be more than enough expenses in the future for the two of us.

    • That’s awesome. It’s a big balance, but I agree that you’ve got a good chance of having that much and more in eligible expenses, eventually.


  11. Fidelity has the best HSA option, no monthly fee, can easily and cheaply trade stocks. Kiplinger Personal Finance magazine agrees.

    I have found the HSA option to be super attractive and rewarding.

    A couple of things to be aware of…you can either indicate a medical expense when you itemize deductions, or get reimbursed via your HSA account, but not both.
    Any remaining HSA balances when you and your spouse pass away are not inheritable (they are taxable),

    • Good question, PVG.

      Prior to enrolling in Medicare, you can, as long as you have a high-deductible healthcare plan that allows for it. Earned income is not a requirement for contributing to an HSA.


  12. FYI for NJ taxes, the HSA is basically another taxable account- This creates an issue when filing NJ taxes bc most HSA providers dont provide you with tax forms (since its federally not taxed) so you’d have to figure out cost basis, qualified dividends, etc yourself. Definitely not something I may be able to do in 30 years when I pull the money out. For this reason I have my money in there as treasury funds (not state taxable) but not in stocks. When I had access to the HSA I guess I gained in getting the slight federal tax deduction. Perhaps if I move to a different state, I would switch to investing in equities with what I have in there, but the juice isnt worth the squeeze to do so right now.

    • This is true in California as well. For that reason, I’m invested in T-bonds in my HSA at Fidelity (no fees!) and consider it as part of my asset allocation to bonds.

      I have heard of CA people who invest their HSA in something relatively straight forward like a total stock market index and calculate and pay the state taxes annually.

  13. Isn’t investing in all stocks within an HSA too volatile and risky – particularly if you are using the money to pay for healthcare expenses as you go along? I am going to have access to an HSA soon and I was planning on going with a 60/40 stocks/bonds mix.

    • I consider it part of my overall asset allocation, so it could be in REITs, stocks, or bonds, and my balance is < 0.5% of my overall investment portfolio. If you want to consider it separately and give the account its own allocation, that's reasonable, too. Having a more conservative allocation will keep you from having to sell low when the stock market is down. That issue can be eliminated by considering it part of a larger portfolio -- you can always rebalance elsewhere by buying into stocks (in an IRA or 401(k)) to maintain your desired stock allocation if you sell some to pay for expenses from the HSA. Cheers! -PoF

  14. I have an HSA that allows investments which I take advantage of.

    The cost is $3/mo and although the choices are a bit limited there are still funds I can take advantage of. Over the years my gains from these investments is over $20k.

    I take the approach of using this as a stealth IRA with the triple tax benefit. I have been saving receipts but wish there was a better way. Given that a 65 yo couple has anticipated medical expenses of greater than 250k for remainder of life it may be a moot point anyway as those expenses when it is my turn will likely be more than enough than my HSA balance

    • That’s a good point, but I would definitely hang on to those receipts in both paper and digitized form, preferably with cloud storage backup.

      Who knows what expenses we’ll be paying out-of-pocket versus via tax dollars in the future. There’s been plenty of talk of Medicare-for-all and single-payer healthcare during our physician careers.



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