HSAs in every budget: Investing for retirement with your HSA

This is the last article in our series, “HSAs in every budget.” Read other articles here: “A guide for spenders” and “A guide for savers.”

Health Savings Accounts (HSAs) have been rising in popularity over the last several years,¹ thanks to their flexibility for both spenders and savers. Unfortunately, many HSA owners do not fully comprehend the power of HSAs.² Properly understanding how to use your HSA can help manage the money you contribute and have in the account — especially if you plan on holding on to your money for a while.

HSAs can be used to pay for eligible medical expenses at any time, as long as you have money in your account, but they make great resources for retirement as well. If you’re able to save funds in your HSA long-term, you can see exponential, tax-free growth over time.

* Your HSA plan may offer investment options once your balance reaches a certain threshold. All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. All security transactions involve substantial risk of loss.

Basic benefits of HSAs

HSAs are accounts designed to accompany High Deductible Health Plans (HDHPs), which is a type of medical insurance that typically offers lower monthly premiums in exchange for a high out-of-pocket annual deductible. To help mitigate the higher out-of-pocket costs associated with HDHPs, the federal government allows users to save money tax-free through an HSA.

You’ll often hear that HSAs are “triple tax-advantaged.” That’s because:

1. You don’t pay taxes on the money before it goes in.
2. You don’t pay taxes on the money you earn in the account (from interest or investment growth).
3. You don’t pay taxes on the money you withdraw (as long as it’s used for eligible health expenses). If money is used for non-eligible expenses, you will be taxed and also incur a penalty.

HSAs are fantastically flexible. You can add money straight from your paycheck before it is taxed. Because of that, the income amount that your taxes are based on is lower. Not only are you physically saving money (by placing dollars into a savings account), but it offers the potential of lowering your taxes.*

It’s important to keep in mind that the amount saved in taxes will vary depending on the amount set aside in the account, annual earnings, whether or not Social Security taxes are paid, the number of exemptions and deductions claimed, tax bracket and state and local tax regulations. You should consult a tax professional to discuss your specific situation.

While the IRS places limits on how much you can put in your HSA every year, there is no balance limit on your account, and your HSA is yours forever as long as there is money in the account. This gives you the potential to grow your savings through interest and investments.

Investing with your HSA

HSA money is never taxed if it’s spent on eligible health expenses. Before you spend it, you can grow it in the account tax-free.

Investing within your HSA is a simple process that gives you the opportunity to earn money with the money you’ve already set aside. It’s important to remember that all investing involves risk of fluctuating prices and the uncertainties of rates and return and yield inherent in investing. All security transactions involve substantial risk of loss. By keeping your money in your HSA long-term, your account has the potential to compound interest, which can then help to grow your balance beyond the contributions made by you and your employer.

Don’t worry, investing with your HSA does not mean your money is locked away. You can still access your funds if you need them unexpectedly. It’s just a matter of selling your investment holdings, which can be done quickly.

HSA investing with Voya

• Set a dollar threshold of the cash you want immediately available (we recommend your HDHP’s annual deductible). Everything over that amount will be automatically invested.
• Rely on Voya’s half century of experience in investment management and retirement. We’ve handpicked ~30 funds to simplify the investment process.
  • Choose a Target Date Fund (TDF) for confident, hands-off, balanced investing.
  • Pick your own investment mix, with funds ranging from bonds to stocks, from value to growth, from small to large cap and even international.
• Decide whether to participate in auto-rebalancing to truly put your investments on “cruise control.”

Adjust your investment strategy at any time — for current, future or all investments.

Retiring with your HSA

The retirement health care savings gap is real — many people underestimate how much money they need to pay for their health care in retirement. On average, men need $166,000 and women need $197,000.⁴ And those numbers only stand to increase with inflation and rising health care costs.

(Source: EBRI, Projected savings Medicare beneficiaries need for health expenses remained high in 2022, February 2023.)

Investing your HSA funds have the potential to help if you start thinking of your HSA as another way to save for retirement.

And don’t forget — HSA withdrawals for qualified health expenses are tax-free. It doesn’t matter if you contributed the money yourself, your employer contributed it or you earned it through investing. So, while many retirement accounts, like 401(k)s and Traditional IRAs, will have tax implications at a time when you have a fixed income, your HSA can help you pay your health care expenses without being taxed.

Log in to your Voya account to set up HSA investing today.

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How much is needed to have a 90% chance of covering health care costs during retirement?

• Women - $197,000
• Men - $166,000