HSA as a multi-purpose investment account
At my company (Tumblon), our health insurance plans are high-deductable + HSA. This is a great option for us, though it isn’t perfect for everyone. If you find yourself with a HSA, how should you think about it?
1. Minimally, it is a savings account for near-term medical expenses with some tax advantages. You deposit some of your income, pre-tax; and you can write checks or use a debit card against the account when you have medical expenses. These expenses are then tax free. You might want to put away at least enough to cover your high deductable for a year (at least $1,100 for an individual, and $2,200 for families) - that way, a year of major medical expenses won’t eat into your other finances.
2. But you might also want to look at it as a long-term medical savings account. So you’re healthy now, and you may not have many medical expenses this year; but what about 10 years from now? 20? Money you put away into an HSA is yours forever. Remember too that you can only contribute to an HSA in years when you’re covered by a high-deductable plan, but you keep the HSA forever. So if you work for a few years at an employer who offers a high-deductable plan, and then you move to another employer with a traditional plan, you can’t contribute any more to your HSA. But you still have it, and can use it to pay for co-pays, deductibles, eye exams, dental work, contact lenses, etc.
3. For this reason, you might want to think about your HSA as part of your emergency funds. Everyone should have money readily available for an emergency, like losing your job. 3-6 months is good. While you should probably have at least 3 months of this in cash (or a money market fund), your HSA could supplement these liquid funds. After all, medical expenses represent one major category of financial emergencies.
4. One step further: a HSA can actually be used as a tax-advantaged retirement account. Your HSA provider will usually give you some investment options where you can put some of your funds, just like a 401k. After you turn 65, you can withdraw these funds without a penalty. You have to pay tax on them when you withdraw, just like an IRA; so it isn’t a free lunch. But it is almost as good as an IRA, letting your HSA serve multiple purposes.
Two caveats.
First, HSA providers generally choose your investment options for you, so a HSA isn’t quite as flexible as an IRA. And just like a 401k, your options may be limited to high-fee mutual funds, so the HSA provider can get a nice commission.
Second, many HSA fees are high. Watch out for HSA accounts that charge $3/month + $50/year + 1% + $20 penalty if certain conditions aren’t met + $30 per investment.
The good news is that you can shop around. You aren’t limited to whatever HSA your employer recommends, and you can move from one HSA to another. So find one with low fees and investment options that you like, and you’ve got a flexible account that serves at least 4 purposes.
Take a look at the US Treasury HSA FAQ website for more.
