A health savings account is, first and foremost, designed to save for medical expenses.
It was introduced in 2003, shortly after high-deductible health plans, to encourage people with this type of plan to prepare for potentially costly out-of-pocket expenses. Though HDHPs offer a lower premium, the trade-off is a higher deductible (what you pay out-of-pocket before insurance kicks in).
However, financially savvy individuals who have access to HSAs aren't necessarily using them to save for health costs that arise. Rather, they're using this account as an investment tool to supplement their retirement funds.
More specifically, they're maxing out the account (the contribution limit for 2024 is $4,150 for individuals and $8,300 for families) and investing their funds. Like an IRA, you can invest your HSA balance in mutual funds, stocks, or ETFs, depending on what the plan offers. Then, they are paying for any medical expenses out-of-pocket rather than dipping into the HSA so their money can continue to compound over time.
If you can afford to use it as an investment tool, it's an incredibly powerful one with a triple tax benefit: you can contribute pre-tax dollars (which reduces your taxable income), your contributions and earnings grow tax-free over time, and you can withdraw your money tax-free to cover qualified medical expenses.
"The first 10 years of my career, I worked mainly with high-income individuals and families, and the biggest strategy we used was to max your health savings account every single year," said Brent Weiss, a financial planner and cofounder of Facet Wealth.
That's not to say this strategy is only for the wealthy. I'm using it, after all.
Investing my HSA money was a smart move for me — it could result in a six-figure difference in funds by the time I retire — but after talking to Weiss and other millennial millionaires about HSAs, I realized I made two mistakes in the process.
1. I let my money sit in a non-interest-bearing account for 2 years
When you open an HSA and start making contributions, your money isn't automatically invested.
"Health savings accounts are sitting in general bank accounts; they're not high-yield accounts," Weiss pointed out, meaning the money is essentially earning zero interest.
I'd been maxing out my HSA, which was a good start. But I let my money sit in the non-bearing cash account for two years. While that might make sense for someone who doesn't have an emergency fund or needs to access their HSA funds frequently, as a healthy 31-year-old who rarely seeks medical care and has a solid cash cushion, I actually fall into the category of people who should be investing this money.
In early 2024, I finally took action and requested to move money from my HSA to my HSA investment account. My provider requires me to keep $500 in my cash account, but anything else was fair game to invest in any of the 25 options available to me. I kept the $500 minimum and transferred the rest (about $4,400) into the Vanguard Target Retirement 2050 Fund (VFIFX).
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That relatively simple change will make a significant difference over time.
If I continue to invest $345 a month (the max I can based on 2024 contribution limits) into a target date fund, by 2050 (or in 26 years), I'd have about $345,000 in my account, assuming a 7.67% return (the average return of my fund since inception).
That number looks very different if I chose to leave the money in the cash account for those 26 years: It would amount to about $112,000.
It looks slightly different had I started investing two years ago when I had the option to. Assuming an initial investment of $0, a monthly contribution of $345, a 28-year time horizon, and a 7.67% return, I'd have $373,000.
Those couple of idle years theoretically cost me about $28,000.
Touching the HSA money also cost me. Had I paid out of pocket for various medical expenses and spent a little less liberally on HSA Store products, I'd have more money invested and compounding over time.
2. When I finally invested my HSA funds, I didn't leave enough in the cash account
As I learned after talking to Weiss, who also uses an HSA to invest, it's smart to keep some cash in the account that you could easily access for a medical emergency. However much you choose to hold liquid is situational and depends on your risk tolerance.
He prefers to keep the one-year deductible in cash. The deductible varies by plan — mine, for example, is $2,000. But to be considered an HDHP in 2024, the minimum annual deductible is $1,600.
If you have a lower risk tolerance, you might prefer to keep the out-of-pocket max (the most you could spend on covered healthcare in a year). Again, this varies by plan — mine is $3,250 — but cannot exceed $8,050 for self-only coverage in 2024.
I followed neither of these smart rules of thumb and, instead, only kept the $500 I was required to leave in cash. I didn't realize it at the time, but that was a risky move.
Now that I've spoken with Weiss, I'm building my cash balance up to the one-year deductible amount before I invest more.
While I made some early mistakes, Weiss assured me I'm on the right track by emulating what wealthy individuals are doing.
"Educate yourself on what the high-earners are doing with their money" including maxing out HSAs, he said. "People may go, 'I'm not a high earner yet.' Or, 'I'm not wealthy yet.' And that's fine. Look at what other successful people are doing to create wealth, and if you educate yourself on all those different ideas, you can get a head start on so many other people your age."
