The number of people using health savings accounts continues to grow, but many people are making a decision that prevents them from getting the most out of these tax-advantaged savings vehicles.
There were more than 32 million HSAs at the end of 2021, an increase of 8% from the previous year, according to an analysis by Devenir, a firm that provides HSA investment solutions.
Devenir also reports that account holders contributed more than $42 billion to their HSAs in 2021, a 2% increase compared to 2020.
Thanks to a rising stock market, overall balances in HSAs grew richer, to $98 billion. That is a year-over-year increase of 19%.
As the years pass, more people are likely to jump aboard the HSA bandwagon. By the end of 2024, the HSA market will exceed 38 million accounts holding $150 billion in assets, according to Devenir projections.
All of this sounds like good news, with one possible, large caveat. An overwhelming percentage of those with HSAs — about 93% — do not have any of their HSA funds invested in the stock market.
Should you invest health savings account money?
To be sure, keeping HSA funds out of the stock market is the right approach for millions of people. This is especially true if you take a lot of money from your HSA to pay for medical expenses each year.
But those who save the maximum amount in their HSA — in 2022, that is $3,650 for individuals and $7,300 for families — and do not spend most of what is in their account year after year are missing a tremendous opportunity to grow their money.
An HSA is a type of tax-advantaged account designed to hold money for medical expenses. Despite its name, it can be either a savings account or an investment account, assuming you use an HSA custodian — such as Money Talks News partner Lively — that enables you to invest your contributions.
You can deposit pretax earnings in an HSA, meaning you get a tax deduction for contributions in the tax year for which you make them. Additionally, your deposits grow tax-free, and you can withdraw money tax-free, provided that you use it for qualifying medical expenses.
In other words, it’s possible to never pay taxes on money that goes through an HSA.
As we note in “3 Ways a Health Savings Account Can Improve Your Finances,” any money you put in an HSA — and any interest or investment gains that money earns — remains in the account if you don’t spend it.
This is one of the advantages an HSA has over a health flexible spending account, or FSA. And it means you can use an HSA like an extra investing account.
So by investing at least some of your funds in the stock market — and using a long-term investment horizon — you create an opportunity to build a huge pool of money that can allow you to eventually use the cash to:
- Pay for health care expenses in retirement
- Create a back-door IRA
- Leave more money for heirs
We explain these options in “5 Reasons to Use a Health Savings Account as a Retirement Fund.”
Again, this doesn’t mean everyone should invest their HSA funds. There are plenty of good reasons for some people to keep HSA funds out of the market.
But surely, more than 7% of account holders would find a strategy of investing HSA money to be useful and potentially even game-changing for their finances.
Unsure of whether you should invest HSA money in the stock market? Stop by our Solutions Center and find a financial adviser who can help you find the strategy that is right for you.