Saving in your Health Savings Account
If you are reading this site, you probably know that not only is an HSA an awesome vehicle for saving for medical costs. Its triple tax advantage means that your contributions are tax free, qualified medical expenses are paid tax free, and any investment growth occurs tax free. The money is yours forever.
Using your HSA for medical expenses is like getting a 25% discount on medical care.
The cost savings alone are a great motivation to at least setup an HSA. Not doing so is literally leaving money on the table. But as you can see, there are further options you can use to your advantage.
How to Contribute?
So you have decided you want to contribute to your health savings account, but how do you do it? The easiest way is an automatic monthly contribution plan, be it through your employer or your own bank account. That way, the contribution happens without any action on your part and you aren’t tempted to spend it elsewhere. Each month that you get paid, a portion goes to your HSA where it lies ready, at your disposal.
The amount you contribute varies from person to person, but contribute whatever you feel comfortable with. Hopefully, you can contribute up to the contribution limit each year. That way, you are preparing your financial future in the best possible way with maximum tax benefit. But even if you can contribute $25 a month, do it! Over time, those savings will add up and build a great nest egg. Chart your progress and push yourself to improve your financial future.
While all of this is great for medical expenses, it is also a great way to build retirement savings as well. If you are saving for an HSA and don’t use (or need!) all of the funds, at age 65 the HSA can be used on a tax deferred basis! That means you only pay taxes on your contributions but not the 30+ years of growth on those contributions. Tax free money!
Investing your Health Savings Account
As with all investing, investing your HSA comes down to personal preference and risk tolerance. The following are some factors to consider when when investing your HSA.
Amount to Keep as Cash
You never know when a medical disaster will strike. However, with a funded HSA at your side, you have the cash reserves to meet your medical needs with ease. As you consider your HSA funds, you may want to maintain a portion in cash that is immediately available for paying expenses. This amount from person to person. It might be a target number, such as $1,000 or $3,000, or it might be a related amount, such as the amount of your deductible or out of pocket max. Having cash on hand is a double sided sword – while it earns little interest, it is readily available and prevents you from needing to sell an investment when an emergency arises.
Amount to Invest
Investing your HSA allows it to compound and grow over the years. Due to the miracle that is compound interest, this is by far the strongest way to grow your HSA savings. However, with every investment comes some risk of loss. When determining how much of your HSA savings to invest, consider your risk tolerance for these funds and what you are prepared to lose in the short-medium term. Your age and estimated requirements for the HSA should help guide your investing here.
If you choose to invest some or all of your HSA, consider the investment options available to you. These will be publicized by your HSA administrator and may take a form similar to a 401(k) with a menu of say 10 investing options to allocate your savings. This is great because it is a simple way to get started and easily diversify. Even better, HSA administrators like HSA Bank allow you to open a TD Ameritrade trading account within your HSA. Using that, you have a huge range of options in which to invest your HSA, including stocks, bonds, etf’s and commodities.