[[HSA]] Investment Strategies: The Ultimate Tax-Advantaged Account

The Health Savings Account (HSA) is arguably the most powerful tax-advantaged account in existence. With triple tax benefits that no other account can match, an HSA can be a secret weapon for building wealth—if you use it strategically.

What Makes HSAs Special?

The Triple Tax Advantage:

Comparison to Other Accounts:

HSA Eligibility Requirements

To contribute to an HSA, you must:

1. Be enrolled in an HSA-eligible High-Deductible Health Plan (HDHP)
2. Have no other health coverage (except permitted)
3. Not be enrolled in Medicare
4. Not be claimed as a dependent

2024 HDHP Requirements:

HSA Contribution Limits

2024 Contribution Limits:

Important Notes:

• Contributions can be made by you, employer, or both
• Employer contributions count toward the limit
• Contributions can be made until tax filing deadline

The Stealth IRA Strategy

Here's How It Works:

1. Contribute the maximum to your HSA each year
2. Invest the funds in low-cost index funds
3. Pay current medical expenses out-of-pocket (if you can afford to)
4. Save your receipts for all medical expenses
5. Let the HSA grow tax-free for years or decades
6. Reimburse yourself later (no time limit on reimbursement!)

Why This Works:

• There's NO time limit on reimbursement
• A $500 medical expense today can be reimbursed 30 years later
• Meanwhile, that $500 grows tax-free
• At 8% return, $500 becomes $5,000 in 30 years

Investing Your HSA

Most HSAs Allow Investing

Once your balance exceeds a threshold (often $1,000-2,000), you can invest in mutual funds.

Typical Investment Options:

• Target-date funds
• Index funds (S&P 500, total market)
• bond funds
• Money market

Investment Strategy

For Long-Term Growth (Treating HSA as Retirement Account):

• Invest aggressively (80-100% stocks)
• Think of it as a super Roth IRA
• Time horizon of 20-40 years

If You Need Funds for Medical Expenses:

• Keep 1-2 years of expected expenses in cash
• Invest the rest

Recommended Allocation:

Best HSA Providers for Investing

Not all HSA providers are equal:

Avoid: Employer-provided HSAs with high fees or poor investment options. You can transfer to a better provider.

HSA vs. FSA: Key Differences

Bottom Line: HSAs are far superior if you qualify.

HSA in Retirement

After age 65, HSAs become even more flexible:

At 65+:

• Use for any purpose (not just medical)
• Non-medical withdrawals taxed as income (like Traditional IRA)
• Medical withdrawals still tax-free
• No penalty for any withdrawal

HSA as Retirement Account: Medicare doesn't cover everything. Average couple spends $315,000+ on healthcare in retirement. Your HSA can pay for:

• Medicare premiums
• Long-term care
• Dental and vision
• Prescription drugs
• All other medical expenses

Qualified Medical Expenses

What can you use HSA funds for tax-free?

Common Qualified Expenses:

• Doctor visits and copays
• Prescription medications
• Hospital stays and surgeries
• Dental care
• Vision care (glasses, contacts, LASIK)
• Mental health services
• Physical therapy
• Medical equipment
• Some over-the-counter medications
• Sunscreen (SPF 15+)

NOT Qualified:

• Cosmetic procedures
• Gym memberships (usually)
• General health items
• Insurance premiums (with exceptions)

Record Keeping for Reimbursement

Best Practices:

1. Create a folder (physical or digital) for HSA receipts
2. Save receipts for every medical expense
3. Include date, amount, and description
4. Keep a running total of unreimbursed expenses
5. Store copies of EOBs

Digital Tools:

• Take photos of receipts
• Use apps like Evernote or Google Drive
• Some HSA providers track expenses automatically

The HSA Optimization Playbook

Level 1: Basic (Better Than Nothing)

• Contribute enough to cover expected medical expenses
• Use HSA debit card for medical costs
• Keep funds in cash

Level 2: Intermediate (Good Strategy)

• Max out contributions
• Keep some in cash for near-term expenses
• Invest the rest

Level 3: Advanced (Optimal Strategy)

• Max out contributions
• Invest 100% in growth funds
• Pay all medical expenses out-of-pocket
• Save every receipt
• Let HSA grow for decades
• Reimburse yourself in retirement if needed

Common HSA Mistakes

HSA Math: Why It's So Powerful

Scenario: 30 years of maxed HSA contributions

Assumptions:

• Contribute $4,150/year for 30 years
• 8% average annual return
• 25% marginal tax bracket

You'd have over $500,000 for healthcare in retirement—plus saved $127,000+ in taxes.

Action Steps

The Bottom Line

The HSA is the most tax-advantaged account available to most Americans. If you're healthy enough to use an HDHP and have the cash flow to pay medical expenses out-of-pocket, the optimal strategy is clear: max contributions, invest aggressively, save receipts, and let it grow. Your future self—facing hundreds of thousands in retirement healthcare costs—will thank you.