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Should You Spend or Invest Your HSA Funds?

Understand the many benefits of using a health savings account (HSA) and whether it’s better to spend your balance on medical costs or keep it invested for the long term.

By
Laura Adams, MBA,
Episode #548
Should You Spend or Invest Your HSA Funds?

More HSA Benefits to Know

In addition to its triple tax advantages, there are even more benefits you get from using an HSA. In general, you’re not allowed to use it for health insurance premiums. But there are exceptions, including using HSA funds to pay for:

  • Long-term care insurance at any age
  • COBRA health insurance continuation after you leave a job
  • Health insurance while receiving unemployment compensation

After your 65th birthday, there are even more allowable ways to spend your HSA, including:

  • Certain Medicare premiums
  • Health insurance premiums when offered by an employer
  • Non-medical expenses that are penalty-free, but still subject to income tax

In other words, an HSA morphs into something that looks like a traditional retirement account if you keep it long enough. That’s a great reason to max it out every year, even if you don’t expect many medical expenses.

If you qualify for an HSA, they're available at many banks, credit unions, brokerages, and specialty institutions. Shop around to find one that gives you diversified investment options, low fees, and a convenient online experience. A couple of great places to open your account are Lively and HSA Bank.

See also: 7 Micro Habits That Create Financial Success

3 Strategies for Using an HSA

"Shoebox" your HSA, which creates an IOU to yourself that you redeem any time you like.

Because an HSA offers so many tax benefits and extra flexibility in retirement, you may be like Inu, who’s wondering if it’s better to spend the funds or keep them invested and growing year after year.

When you boil it down there are three strategies for using an HSA.

1. Make tax-free withdrawals to pay current medical expenses.

You typically receive a debit card with your account to pay qualified medical costs in real time. This is the traditional and most popular way to use an HSA, especially if you don’t have other savings to pay a medical bill.

If you have a remaining balance, you can let it grow for future use, including in retirement.

2. Pay medical costs out-of-pocket and make withdrawals in the future to reimburse yourself.

HSA rules don’t require you to pay qualified expenses within a certain period. If you have the cash to pay them, you can reimburse yourself later from the account and let the full balance stay invested and grow in the meantime.

This is known as “shoeboxing” your HSA, which creates an IOU to yourself that you redeem any time you like. Just be sure to keep good records to verify expenses, how they were paid, and that you didn’t take them as an itemized medical deduction on your taxes.

Also note that you can’t use HSA funds to pay expenses that occurred before you opened the account.

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