Overview
A Health Savings Account, or HSA, can serve several purposes within a financial plan.
It can help pay for qualified medical expenses today, provide money for future health care costs, and potentially function as a long-term investment account.
That flexibility creates an important question for people who have access to one:
Should you spend your HSA or invest it?
In a recent episode of Clear Money Talk, Tim Clairmont and Tyler Andrews, CFP®, NSSA®, Wealth Advisor, explored how HSAs work and how different financial circumstances may influence that decision.
Their discussion focused on the account’s unique tax advantages, cash flow, long-term investing, qualified medical expenses, and a strategy that allows some investors to reimburse themselves years after an expense occurs.
Why HSAs Can Be So Valuable
HSAs are available to people who meet certain eligibility requirements, including enrollment in a qualifying high-deductible health plan.
One of their biggest financial advantages is their tax treatment.
Tim described three important benefits.
Contributions may be tax deductible.
Money inside the account can grow tax deferred.
Withdrawals used for qualified medical expenses can generally come out tax free.
That combination makes the HSA unusual among savings and investment accounts.
Unused money can also remain in the account from year to year, allowing the balance to accumulate over time.
For people who can afford to contribute, Tim and Tyler discussed the HSA as a potentially high priority after capturing available employer retirement-plan matching contributions.
Spending Your HSA Can Make Sense
Using HSA money for current medical expenses is one of the account’s primary purposes.
That can be especially helpful when cash flow is tight or an unexpected medical expense occurs.
Using HSA funds may help preserve emergency savings and reduce the need to place medical bills on a high-interest credit card.
Young families or households with significant health care expenses may also find that using the account provides valuable financial flexibility.
The decision can depend on what other resources are available.
Someone with limited cash reserves may receive greater immediate value from using HSA dollars for a qualified medical expense.
Someone with stronger cash flow may have more flexibility to leave the money invested.
Investing Your HSA Can Create Long-Term Growth
People who can comfortably pay medical expenses from other income or savings may choose to leave their HSA untouched.
Many HSA providers allow account holders to invest some or all of their balance in investment options similar to those available within retirement accounts.
That creates an opportunity for the account to compound over many years.
For someone with a long time horizon, the combination of investment growth and the HSA’s tax advantages can make the account a useful part of retirement planning.
Investment choices should also reflect when the money may be needed.
Someone expecting to use HSA funds soon may prefer a more conservative approach.
Someone planning to leave the money untouched for many years may be comfortable considering investments with greater long-term growth potential.
The important step is knowing how the HSA is currently invested.
A balance intended for long-term growth may have limited opportunity to compound if it remains entirely in cash for years.
The Receipt Strategy Adds Flexibility
One of the more unique strategies discussed in the episode involves saving receipts for qualified medical expenses.
Under current rules discussed in the episode, someone may pay a qualified medical expense with money outside the HSA and save the documentation.
The HSA funds can remain invested.
Years later, the account holder may be able to reimburse themselves from the HSA for that earlier expense, provided the expense occurred after the HSA was established and proper records were maintained.
This can give the invested balance additional time to grow.
For example, someone may pay a $4,000 medical expense today and keep the receipt while allowing $4,000 inside the HSA to remain invested.
If the investment grows over the following decade or longer, the investor may later reimburse the original expense while keeping the remaining growth inside the account for future needs.
This strategy requires careful recordkeeping, but it can add another layer of flexibility to long-term HSA planning.
Contribution Priorities Matter
Tim and Tyler also discussed where HSA contributions may fit among other financial priorities.
Employer retirement-plan matching contributions may deserve the first available savings dollars because they provide additional money from the employer.
After capturing that match, maximizing an HSA can become another attractive priority for someone who qualifies and has enough available cash flow.
That approach can allow the account holder to cover current medical expenses while continuing to build a balance for future years.
The health plan itself should also make sense.
Someone considering a high-deductible plan should evaluate premiums, deductibles, expected medical expenses, prescriptions, and other out-of-pocket costs.
The HSA is one part of that larger health care decision.
So, Should You Spend Your HSA or Invest It?
The answer depends on your financial situation.
Spending HSA dollars can make sense when the money helps cover current medical expenses, protects emergency savings, or prevents high-interest debt.
Investing the account may be attractive when you have enough cash flow to pay medical expenses separately and want the HSA to compound for future health care costs or retirement.
Some people may use both approaches.
They can contribute as much as their situation allows, use part of the account when needed, and invest the remaining balance for the future.
The account can become even more flexible later in life. As discussed in the episode, qualified medical withdrawals can generally remain tax free, while after age 65, nonmedical withdrawals can be made without the additional 20% penalty, although ordinary income taxes may apply.
A useful question to consider is:
How can I use my HSA today while also taking advantage of its long-term financial potential?
Watch the full episode of Clear Money Talk for the complete conversation with Tim Clairmont and Tyler Andrews, CFP®, NSSA®, Wealth Advisor.
