This Common HSA Mistake Could Cost You Thousands of Dollars
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While health savings accounts have great potential to help Americans prepare for future health care expenses, a high percentage of account holders are not investing their HSA funds — and it's robbing some folks of thousands (or more) over time.
HSA accounts, available as companion savings vehicles for people with high-deductible health plans, are widely used by Americans due primarily to their "triple tax advantage."
HSAs can be funded with pre-tax dollars through payroll deferrals or via tax-deductible deposits. Contributions grow tax-free, and qualified withdrawals are not taxed. This combination of tax advantages can make an HSA even more powerful than a 401(k) because withdrawals from those retirement accounts are usually taxed as income. However, the contribution limit on an HSA ($4,300 per year for an individual) is much lower.
Don't forget to invest HSA funds
Fewer than one in six account holders invest their HSA funds, according to a new report from the Employee Benefit Research Institute, or EBRI, which analyzed a database of more than 14 million accounts.
Why is the share so low? To start, some employers do not offer HSA investing features. But that's not the entirety of the problem. After all, more than 64% of a surveyed group of employers had HSA investment options in a 2024 survey by the Plan Sponsor Council of America.
The EBRI report explains that "the ability to invest assets within the account" is "one of the largest advantages HSAs offer." That's why the institute is concerned that in 2023 "only 15% of account holders invested their HSAs in assets other than cash."
The statistic could be an indication that a large swath of people aren't investing their HSA funds simply because they're not aware that they can do so. (Typically, contributions can be invested in mutual funds, brokerage accounts or certificates of deposit.)
Other people likely know it's an option but are hesitant about subjecting their medical savings to market volatility.
Anticipating near-term health expenses? That could be a decent rationale for keeping HSA money in cash.
Still, investing some of your HSA funds in assets remains an option in these scenarios. "If account holders have a large enough buffer in liquid accounts to weather a large, unexpected health care expense, then they could be better off at retirement by investing some portion of their HSAs," the report said.
How to use an HSA to save
Even though the name "health savings account" implies you'd generally want to use your funds to pay for health expenses, that's not always the wisest move, according to the EBRI report. The data shows that many account holders are withdrawing funds to pay for medical expenses on an annual basis. Many of these people would be better off paying out-of-pocket, letting their HSA money continue to grow tax-free.
That approach may sound counterintuitive to many people, so additional education about optimal HSA strategies is needed, the EBRI report said. For example, people may not know that once you reach age 65, non-medical withdrawals don't incur the 20% penalties. At that point, withdrawals are simply taxed as income. And unlike flexible spending accounts (FSAs), there's no annual deadline to use HSA dollars.
It's also helpful that older account holders aren't required to take minimum distributions by the IRS, so it's up to you how to use your HSA money. Just keep in mind that to avoid penalties before age 65, funds must be used for qualifying medical or dental expenses including deductibles, copays, over-the-counter drugs and menstrual products.
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