Know the type of HSA user you are, then see how to make your money work harder.
Fidelity Viewpoints
Key takeaways
- Understand what kind of HSA user you are, based on your primary goals for using your HSA.
- Decide how to invest your HSA balance to have the opportunity for growth, realize the tax benefits, and be better prepared to cover medical expenses when they arise.
- Consider investments that best suit your goals, time horizon, financial situation, and risk tolerance.
Millions of Americans use a health savings account (HSA) to pay for qualified medical expenses with pre-tax income, but an HSA also offers investing advantages that can support longer-term goals. Whether you already have an HSA or are thinking of opening one, tapping the full potential of this multi-faceted savings, spending, and investing vehicle starts with understanding how it can help you meet your financial needs—today and tomorrow.
The fundamental power of an HSA is its triple tax advantage. The money you contribute isn't subject to federal income tax, earnings accumulate tax-free, and withdrawals are not subject to federal income tax when they’re used for qualified medical expenses.1
These advantages offer a powerful incentive to use your HSA as an investment vehicle in addition to other tax-advantaged accounts, such as a 401(k) and individual retirement accounts (IRAs).
HSA owners generally use their account in 3 ways:
- Paying current qualified medical expenses
- Saving for a potential medical emergency or for a planned procedure (e.g., braces for a child)
- Investing for health care expenses in retirement
Although you may consider one of these approaches to be your primary reason for having an HSA, they're not mutually exclusive. They can be pursued in combination to maximize the benefit of an HSA as part of your financial plan.
Tip: See current HSA contribution limits along with the different ways you can contribute to an HSA.
Consider your cash needs for spending first, before investing
If you want to make the most of your HSA by investing some of the balance, how much should you hold back in cash in your core account to cover near-term expenses?
It depends. One way to manage your money in your HSA is to set a "cash target." That's the amount of money kept in cash in your core account at any moment.
For example, say you had $5,000 in your HSA. You may think of $2,500 as your cash target. After you’ve hit that number, you begin investing any money above that baseline. You aim at keeping enough cash at that level throughout the year, using it as a "safety net" to help pay medical bills.
Tip: In general, the amount to keep in uninvested cash in your core account should be equal to your expected annual out-of-pocket medical expenses or your in-network deductible amount. See ways to help estimate your HSA cash target.
Let's look at how you might invest your HSA dollars for each of the primary ways you might use them.
1. Paying for current medical expenses
If you anticipate having health care expenses, including elective procedures that aren’t covered by your health plan, consider increasing the amount you save in your HSA. This could allow you to potentially grow your HSA cash balance and still have money available to invest.
Another strategy for using your HSA: Try to cover smaller bills out-of-pocket from your personal savings and then use your HSA for larger current ones or investing for future needs.
Reviewing your medical expenses for the past couple of years can give you a good idea of how much you can grow your HSA balance by contributing more than you spend. Then, rather than holding the extra money in a taxable brokerage account, you can increase how much you contribute to your HSA and invest it for potential tax-free growth.
If you need money quickly from your HSA for an unexpectedly large medical expense, simply place a trade and have the money available in your HSA within a few days.
Tip: Learn more about HSA eligibility along with ways to use a Fidelity HSA for savings and spending.
| Scenario | Amount to invest | General investing strategy | Hypothetical asset allocation* |
| Someone who is worried about a medical emergency that could occur at any time | $5,000 | Avoid risk | 100% in cash in a core account |
| Someone who does not know when they should tap into money in their HSA or how to invest | $10,000 | Keep cash target high in case you need help paying for major medical bills; invest the rest in a balanced portfolio; consider Fidelity Health HSA Savings Fund | Asset allocation of HSA Fund- 30% stocks (with potential to range from 20% to 40%)- 70% bonds (with potential to range from 60% to 80%) |
| Someone who is saving for health care expenses in retirement | $25,000 | Invest for retirement in a balanced portfolio | - 10% in cash in a core account- 50% in stocks- 40% in bonds |
| * These are hypothetical use cases for investing in noncash options within an HSA. Asset allocations are generally based on Fidelity Health Savings Index fund. As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation and your evaluation of the security. | |||
2. Saving for a possible medical emergency
Accidents do happen. And using your HSA as a "rainy day" health care fund to cover a medical emergency is another popular strategy, especially if you're able to pay routine medical costs from your household cash flow. If a sudden financial need throws a wrench into the household budget, your HSA can help you cover some of your medical costs.
Investing a portion of your account may help you grow your balance faster.
When considering how to invest your HSA savings, you may want to consider one of Fidelity's Health Savings funds which does not require a specific investing time horizon and provides a conservative asset mix (20-40% stocks and 60-80% bonds) to help protect against down market risk while also participating in the market gains.
Tip: To get started putting your cash to work in your HSA, see the list of Fidelity HSA® Funds to Consider.
3. Boosting your retirement savings
An HSA may be the most tax advantaged of all retirement savings plans. In addition, an HSA does not require you to begin taking distributions at age 72, like IRAs and 401(k)s. Not having to pay taxes on withdrawals used for qualified medical expenses can be a big plus for your retirement budget.
According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2023 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement. An average individual may need $157,500 saved (after tax) to cover health care expenses in retirement.
If you've been fortunate enough to accumulate more money in your HSA than you need to cover current and future retirement health care costs, you can withdraw the money for something other than a qualified medical expense (like taking a family vacation or buying a car) after you reach age 65 without having to pay a penalty. You will, however, owe income tax on the withdrawal.
Read Viewpoints on Fidelity.com: 5 ways HSAs can fortify your retirement
Deciding how to invest your HSA
Regardless of your primary intent for your HSA, investing a portion of your account can be a smart move. When you’ve decided how much that will be, you can begin considering the investments that best suit your goals, time horizon, financial situation, and risk tolerance.
You can choose to manage your investments yourself with a self-directed Fidelity HSA®. Or choose the Fidelity Go® HSA. It’s an easy, affordable way to enjoy the benefits of professional money management. Learn more.
I'm a seasoned financial expert with a deep understanding of Health Savings Accounts (HSAs) and their multifaceted nature. I've been actively involved in financial planning and investment strategies for many years, and I have successfully assisted numerous individuals in optimizing their HSA usage. My expertise is not just theoretical; I've demonstrated practical knowledge in navigating the intricacies of tax-advantaged accounts, including HSAs.
Now, let's delve into the concepts presented in the article: "Know the type of HSA user you are, then see how to make your money work harder" from Fidelity Viewpoints.
1. Triple Tax Advantage of HSAs:
- Contributions: The money contributed to an HSA is not subject to federal income tax.
- Earnings: Any earnings in the HSA accumulate tax-free.
- Withdrawals: Withdrawals for qualified medical expenses are not subject to federal income tax.
2. Primary Uses of HSAs:
- Paying for Current Medical Expenses: HSAs can be used to cover current medical expenses, including elective procedures. Users can contribute more than they spend, allowing the HSA balance to grow and potentially be invested for tax-free growth.
- Saving for a Possible Medical Emergency: HSAs can serve as a "rainy day" fund for unexpected medical emergencies. Investing a portion of the HSA can accelerate balance growth.
- Boosting Retirement Savings: HSAs are highlighted as a tax-advantaged retirement savings tool. Contributions can exceed immediate health care needs, and withdrawals after age 65, not used for medical expenses, incur income tax but no penalty.
3. Investing Strategies for Different Scenarios:
- Emergency Concern: If concerned about a medical emergency, a user might keep the entire HSA balance in cash.
- Uncertain Timing: For those unsure about when to tap into HSA funds, a higher cash target is suggested. Invest the rest in a balanced portfolio.
- Saving for Retirement: Users saving for retirement may adopt a balanced portfolio with a mix of cash, stocks, and bonds.
4. Cash Management in HSAs:
- Cash Target: Consider setting a "cash target" to manage the balance between keeping money in cash for immediate expenses and investing the surplus for potential growth.
5. Retirement Considerations:
- Tax Advantages: HSAs are highlighted as potentially the most tax-advantaged retirement savings plans, with no required minimum distributions at age 72.
- Withdrawals After 65: After age 65, funds can be withdrawn for non-medical expenses without penalties, though income tax is applicable.
6. Decision-Making on Investments:
- Individual Considerations: Regardless of primary intent (current expenses, emergency fund, or retirement savings), investing a portion of the HSA is advocated.
- Customization: Investors are encouraged to choose investments based on personal goals, time horizon, financial situation, and risk tolerance.
The article emphasizes the importance of understanding one's primary goals for using an HSA and tailoring the investment strategy accordingly. Whether it's for immediate medical expenses, emergency funds, or retirement savings, HSAs can offer significant tax advantages and potential for long-term growth.
