Investing Your HSA: How to Grow Your Health Savings for Future Wealth

Alex always played it safe with money. He saved, paid bills on time, and contributed to his 401(k). When he opened an HSA, he assumed it was just a special savings account for doctor visits. Every year, he contributed what he could, but he kept the money in cash, using it for medical co-pays and prescriptions.

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Jordan was a great saver as well, but when it came to his HSA account, she saw things differently. Instead of spending her HSA contributions each year, she let them grow, untouched, in a well-diversified investment portfolio while paying out-of-pocket medical expenses whenever possible.

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Fast forward 30 years. Alex, now retired, is shocked by how much healthcare costs have risen. His HSA has barely kept up with his medical expenses, and he’s forced to dip into his IRA for medical bills, paying taxes on every withdrawal.

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Jordan, however, has a dedicated tax-free healthcare fund worth over $250,000. She doesn’t worry about Medicare premiums, long-term care, or out-of-pocket costs draining her retirement savings.

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The difference? Jordan preserved and invested her HSA, while Alex used his HSA to pay for medical expenses and left any remaining balance sitting in cash.

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Most people don’t realize that an HSA can be one of the most powerful investment accounts available. If you’re not investing your HSA, you’re missing out on decades of tax-free growth that could give you peace of mind in retirement.

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The Retirement Strategy Hiding in Your HSA

Most people understand 401(k)s and Roth IRAs, but few recognize that an HSA offers a unique tax advantage that neither of them can match.

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• 401(k)s and Traditional IRAs allow for tax-deductible contributions and tax-deferred growth, but withdrawals are taxable in retirement.
• Roth IRAs offer tax-free growth and tax-free withdrawals but require contributions to be made with after-tax dollars (they are not tax-deductible).
• HSAs are the only account that can offer all three benefits: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals.

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If you are currently covered under a High Deductible Healthcare Plan and are eligible to have an HSA, funding it as part of your overall retirement saving strategy should be a priority.

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Why? Medical expenses are inevitable, so having a dedicated, tax-free fund to cover them in retirement means you won’t have to dip into less tax-efficient accounts down the road. 

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How to Invest Your HSA for Long-Term Growth

Step 1: Choose the Right HSA Provider

Not all HSAs allow the option to invest, so the first step is confirming you’re with a provider that offers access to mutual funds, ETFs, and other investments. Many banks only provide low-interest cash accounts, which can limit your growth potential.

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If your current HSA does not offer investment options, consider transferring your funds to a provider that does.

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Step 2: Decide How Much to Invest vs. Keep in Cash

While investing your HSA is smart, you may need some liquidity for near-term medical expenses. A good rule of thumb:

• Keep one to two years' worth of expected medical costs in cash.
• Invest the rest for long-term growth based on your retirement timeline.

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If you rarely dip into your HSA, you could likely afford to invest more aggressively and take advantage of long-term market growth.

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Step 3: Select an Asset Allocation That Fits Your Needs

Your risk tolerance and time horizon should guide how you invest your HSA.

• If retirement is far away (20+ years): A higher stock allocation (70-90%) can maximize growth.
• If you’re nearing retirement (5-10 years): A more balanced mix of stocks and bonds (50-60% stocks) helps reduce risk.
• If you plan to use your HSA soon: A more conservative mix with 30-40% stocks and the rest in bonds or cash ensures stability.

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Because HSAs have no required minimum distributions (RMDs) like IRAs, you can let your investments grow indefinitely if you don’t need the funds right away.

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Mistakes to Avoid When Investing Your HSA

Mistake #1: Not Fully Funding Your HSA Each Year

Many people contribute to their HSA sporadically or only put in enough to cover immediate expenses. However, not maxing out your contributions each year is a missed opportunity.

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For 2025, the IRS allows $4,300 for individuals, $8,550 for families, and an extra $1,000 for those 55+ (catch-up contribution).

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Since HSA contributions are tax-deductible, fully funding your account reduces your taxable income while building a tax-free healthcare fund for the future. Plus, since unused funds roll over indefinitely, contributing the maximum each year allows you to take full advantage of tax-free growth over time. If you’re not contributing the full amount, you’re leaving tax savings and investment potential on the table!

Mistake #2: Not Investing at All

Many HSA account holders never invest their funds because they assume the money should be available for immediate use. However, if you can cover medical expenses out of pocket today, investing allows your HSA to grow tax-free for decades.

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Mistake #3: Choosing an HSA Provider With High Fees

Some HSA providers charge investment fees, trading fees, or require a minimum balance before you can invest. These costs eat into your returns, so it’s important to compare providers and choose one with low-cost investment options.

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Mistake #4: Using Your HSA for Small, Everyday Expenses

Using your HSA for every small medical expense might seem convenient, but it prevents your balance from growing. Instead, consider paying for minor medical expenses out of pocket and saving your HSA funds for larger healthcare costs in retirement.

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Mistake #5: Forgetting the “Save Your Receipts” Strategy

This is one of the biggest overlooked strategies when it comes to HSA accounts. If you pay for medical expenses out of pocket (rather than using your HSA account), you can save those receipts and take a future distribution from your HSA to offset that out of pocket expense.

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For example, if you have $5,000 in medical expenses today but can afford to pay out of pocket (OOP), you can leave the $5,000 in your HSA and let it continue growing tax-free. Then, as long as you saved your receipt as proof of payment, you can withdraw that $5,000 from your HSA tax-free as reimbursement–even if it’s decades later!

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How an HSA Fits Into Your Retirement Plan

After age 65, HSA funds can be used tax-free for medical expenses, including:

- Medicare premiums (except Medigap)

- Long-term care insurance premiums

- Dental, vision, and hearing care not covered by Medicare

- Out-of-pocket medical costs

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If you withdraw HSA funds for non-medical expenses after age 65, you simply pay income tax, just like an IRA or 401(k), but avoid the 20% penalty that applies to non-medical expense distributions before 65.

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What Happens to Your HSA After You Pass Away?

If left to a spouse, the HSA remains intact and continues to be used tax-free for medical expenses. If left to a non-spouse, it is treated as taxable income, so using it during your lifetime is often the best approach.

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Which Future Will You Choose?

Let’s finish by revisiting Alex and Jordan. Alex used an HSA only for short-term expenses and ended up with $15,000 at retirement. Jordan contributed regularly, invested wisely, and saved receipts for decades, allowing the HSA to grow to $250,000.

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By age 65, Jordan had a tax-free healthcare fund that could cover Medicare, long-term care, and other medical expenses without tapping into taxable accounts.

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The key consideration? Investing your HSA can help you build a firm foundation for your future finances.

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If you’re ready to make the most of your HSA and want personalized guidance, Wealthquest can help you integrate it into a comprehensive retirement plan.

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