HSA Investing Basics: Your Secret Weapon
The HSA is the most tax-efficient account in existence. Tax-deductible going in, tax-free growth, and tax-free withdrawals for medical expenses. Here is how to use it as a wealth-building tool.
Don't have time? Here's what you need to know:
- 1The HSA is the only account with triple tax benefits: deductible contributions, tax-free growth, and tax-free medical withdrawals
- 2Pay medical bills from cash, save receipts, and reimburse yourself from the HSA tax-free years later
- 3After age 65, HSA funds can be used for any purpose (not just medical) with just income tax -- like a traditional IRA
- 4You need a High Deductible Health Plan (HDHP) to be eligible for HSA contributions
The Only Account With Three Tax Benefits
No other account in the U.S. tax code gets triple tax treatment. Contributions are tax-deductible (like a traditional IRA). Growth is tax-free (like a Roth IRA). And withdrawals for qualified medical expenses are also tax-free. No account matches this.
The 2024 contribution limits are $4,150 for individuals and $8,300 for families. If you are 55 or older, you can contribute an extra $1,000. Many employers also contribute to your HSA as a benefit -- check your plan documents.
Using Your HSA as a Stealth Retirement Account
Here is the strategy: pay current medical bills out of pocket (if you can afford to), and let your HSA balance grow invested in stock ETFs for decades. Keep your medical receipts. Years later -- even in retirement -- you can reimburse yourself tax-free for those old medical expenses. There is no time limit on reimbursement.
This turns your HSA into a super-charged retirement account. $4,150/year invested at 8% for 30 years grows to roughly $508,000. All of it can be withdrawn tax-free if you have accumulated enough medical receipts over the years. After age 65, you can withdraw for any reason (not just medical) and just pay income tax -- exactly like a traditional IRA.
| HSA Feature | Detail |
|---|---|
| 2024 Limit (Individual) | $4,150 |
| 2024 Limit (Family) | $8,300 |
| Catch-Up (55+) | Extra $1,000 |
| Tax on Contributions | Deductible |
| Tax on Growth | None |
| Tax on Medical Withdrawals | None |
| Non-Medical Withdrawals (before 65) | Income tax + 20% penalty |
| Non-Medical Withdrawals (after 65) | Income tax only (like traditional IRA) |
What to Invest Your HSA In
Most HSA providers require you to keep a minimum cash balance (often $1,000-$2,000) before you can invest the rest. Once you clear that threshold, invest in a low-cost total market index fund. If your HSA is at Fidelity, buy VTI. At HealthEquity or other providers, look for the lowest-fee S&P 500 or total market fund available.
If your employer's HSA provider has terrible fund options with high fees, you can transfer your HSA balance once per year to a provider with better investments. Fidelity offers an HSA with zero account fees and access to all their commission-free ETFs.
Tip: Keep a folder (digital or physical) of every medical receipt and explanation of benefits. These are your proof for tax-free reimbursements from your HSA years or decades later.
Who Can Open an HSA
You must be enrolled in a High Deductible Health Plan (HDHP). For 2024, that means a minimum deductible of $1,600 (individual) or $3,200 (family). You cannot be enrolled in Medicare, claimed as a dependent on someone else's tax return, or have other non-HDHP coverage.
If you are young and healthy, an HDHP paired with an HSA is often the cheapest and most financially optimal health insurance option. You pay lower monthly premiums and funnel the savings into your HSA for long-term growth.
Frequently Asked Questions
What happens to my HSA if I switch to a non-HDHP health plan?
You keep the money and can still use it for medical expenses or invest it. You just cannot make new contributions while you are on a non-HDHP plan. The account and its investments remain yours permanently.
Is it really worth paying medical bills out of pocket instead of using my HSA?
If you can afford it, yes. A $500 medical bill paid from your HSA costs you $500 of tax-free investment growth. That same $500 invested at 8% for 20 years would grow to about $2,330. Pay the bill from cash, keep the receipt, and reimburse yourself tax-free from the HSA anytime later.
Can I use my HSA for dental and vision expenses?
Yes. Dental work, prescription eyeglasses, contacts, eye exams, and many other out-of-pocket health costs qualify. The IRS has a broad list of qualified medical expenses in Publication 502. Even sunscreen and over-the-counter medications qualify since 2020.
Further Reading
Free Tools
Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.