Health savings accounts (HSAs) are recognized for their unparalleled tax advantages among investment vehicles. Yet, a significant portion of HSA holders may not be maximizing these benefits, as recent data suggests.
Underutilization of HSAs
Only a small fraction of HSA participants, approximately 19%, choose to invest their funds, opting instead to keep their money in cash, akin to a traditional bank account. This insight comes from a survey conducted by the Plan Sponsor Council of America, an organization representing employer interests. Such a strategy contrasts sharply with financial experts’ advice, which encourages investing HSA contributions to support future health expenses in retirement, similar to the strategy employed with 401(k) plans.
The Value of HSAs
HSAs offer a triple tax advantage, making them an ideal choice for covering health-related expenses for those enrolled in high-deductible health plans. Contributions to an HSA are tax-deductible, and the account’s growth and withdrawals for qualified medical expenses are tax-free. This framework positions HSAs as a “perfect” investment vehicle, according to Lee Baker, a certified financial planner and member of CNBC’s Advisor Council.
Optimal HSA Strategy
The recommended approach to managing an HSA involves retaining an amount equivalent to the annual insurance deductible in cash, while investing the remainder. This strategy aims to maximize the account’s growth potential over time, ensuring funds are available for future health costs. However, not everyone can afford to pay current medical expenses out of pocket, leading to a reliance on HSA funds for immediate health costs.
Challenges and Solutions
Despite the clear benefits of investing HSA funds, about 40% of employers do not offer investment options for HSAs, limiting employees to cash holdings. Fortunately, individuals have the flexibility to open HSAs with different providers, allowing them to access a broader range of investment options beyond those offered by their employer.