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.

Laura Adams, MBA
7-minute read
Episode #548

3. Pay medical expenses out-of-pocket with no reimbursement.

HSA rules don’t require you to reimburse yourself for qualified medical expenses. You can opt not to make any account withdrawals.

You could choose to pay small healthcare expenses out of pocket, and reserve your HSA for large or unexpected qualified costs. The idea is that the more money you keep in the account, the more time it can grow tax free.

See also: 7 Simple Principles to Invest Wisely No Matter Your Age  

Should You Spend or Invest Your HSA Funds?

Let’s get back to Inu’s question about whether it’s better to spend your HSA or just keep it invested. The answer is it depends.

First, if you’re not maxing out a retirement account, be sure to do that before contributing more than your anticipated medical expenses to an HSA. Using an IRA or a workplace retirement plan, such as a 401k or 403b, should be your top investing priority.

While HSAs are loaded with tax benefits, they offer less flexibility than a retirement plan. Also, they’re not known for offering best-in-class investments with low fees. They can also come with additional account and investing costs, which may erode their net investment returns.

Spending your HSA gives you guaranteed tax savings, which could be more than 30%, depending on your income and tax rate.

If you’re maxing out a retirement account, then you’re in a good position to max out an HSA as well. If all or most of your HSA balance is invested in diversified funds, some might argue that it’s better not to spend it.

If you can afford not to tap your HSA, that gives you maximum tax savings. However, if your HSA funds are not invested and are earning no or tiny amounts of interest, you’ll probably come out ahead by spending them on qualified medical expenses. However, knowing which option would save the most depends on several variables.

On one hand, spending your HSA gives you guaranteed tax savings, which could be more than 30%, depending on your income and tax rate. Finding an investment to beat that would be difficult.

On the other hand, letting your HSA stay invested for decades could end up being more valuable with compounding interest. This depends on the return you get and how long the account remains invested.

Here’s how I use my HSA: I make monthly contributions in amounts that max out the account by the end of the year. Every month, I sweep amounts that exceed $1,000 into growth-oriented investments.

My husband and I use our HSA funds to pay qualified expenses as we go. Paying medical costs using pretax money is an immediate benefit that I don’t believe I could beat by leaving the account untapped. I can’t know which option is right for you, but the good news is that any way you choose to use an HSA saves money and is a huge win.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.