Another followup to my article about HSA contribution limits for 2013… A reader named PC had the following to say about my plan to invest within our HSA:
I am not especially well informed about the HSAs but I understand the purpose of the HSAs is that they have a tax benefit in order to encourage savings for future healthcare costs.
Healthcare costs are usually large and unexpected in nature. Wouldn’t you want those ’savings’ to be readily available (i.e., liquid)?
It seems slightly odd to encourage stock market investments to be made using ‘healthcare emergency funds’.
That said, your strategy is fine assuming you have cash set aside, sufficient for those high deductibles.
PC hit the nail on the head at the tail end of his (her?) comment. I would never invest money that I might need in the short term. But money is fungible. That is, one dollar can be readily substituted for another dollar.
I look at it this way: I can either drain the HSA to cover our medical expenses and then invest in a taxable account, or… I can use those taxable dollars to pay for our medical care and keep the cash in our HSA for investing.
Yes, it’s possible to invest money in an HSA. In fact, with the right custodian, you can access a broad selection of low-cost mutual funds.
As a quick reminder, HSA contributions are tax deductible on the front end. You can then withdraw the funds tax free (with proper documentation) to reimburse eligible medical expenses. The beauty of this is that there is no requirement that you make the withdrawal immediately.
Because you can wait as long as you want to take the distributions (even after you’re no longer eligible to contribute to your HSA), you are free to invest the money and let it build. Importantly, you can also claim expenses that incurred after you lose HSA eligibility.
And finally… Once you reach age 65, you can take non-qualified distributions by paying taxes (just like a traditional IRA) and no penalties.
To sum up, contributions are deductible like a traditional IRA and eligible (medical-related) distributions are tax free like a Roth. Thus, assuming that you have enough medical costs to support all withdrawals, this is like a supercharged Roth IRA (tax deductible going in, tax free [including earnings] coming out).
And the worst case scenario is that this defaults back to being (essentially) a traditional IRA at age 65, when you can take taxable distributions whether or not you have medical expenses to back it up.
The only sticking point right now is that our HSA custodian is awful. The good news is that my employer is changing custodians in the near future. On top of that, I’m actually free to move the money to a custodian of my choice — though I’ve been letting the money accumulate (and earn interest) until the balance gets a bit bigger.