HSAs: The hidden gem for retirement planning and potential wealth accumulation

M1 Team
M1 Team June 9, 2023

It’s inevitable that you will incur medically related expenses over the years. They could be as simple as bandages from your local pharmacy or as expensive as corrective eye surgery. And these ancillary costs quickly add up, costing Americans roughly $12,000 per year, according to the U.S. Centers for Medicare & Medicaid Services.  

If those costs aren’t covered through your primary health insurance coverage, you’re responsible for picking up the tab — which is where a Health Savings Account (HSA) can step in to fill that gap. 

However, HSAs can also strategically be used to help save for retirement, and even potentially grow your net worth. But many people with this account make one crucial mistake with their HSAs that could potentially stymie significant growth. 

Here’s what you need to know about HSAs, and how you can maximize yours to complement your investing journey. 

What are HSAs and how do they work?

Health Savings Accounts were introduced in 2003 under the Medicare Prescription Drug, Improvement, and Modernization Act. The legislation aimed to provide individuals with a tax-advantaged savings tool to help cover medical expenses and save for future healthcare costs. HSAs are designed to work in conjunction with High-Deductible Health Plans (HDHPs) and provide consumers with a way to save for unexpected medical expenses. The approved expenses vary slightly with each provider, so be sure to check what yours covers. 

Typically, HSAs are connected to employer-sponsored healthcare plans that qualify as HDHPs. As of 2023, an HDHP is considered any health insurance plan with a deductible above $1,500 per year for individual plans and $3,000 for family plans. That means you’ll pay more out of pocket for medical services than you would with a lower deductible, although you’ll usually pay a lower insurance premium. 

The idea behind an HDHP is if you’re generally healthy and only visit the doctor for routine checkups, then you’ll save money versus someone who needs a lower deductible but pays a higher premium. Then, the money you invest in your HSA can be used to offset costs that the insurance plan won’t cover until you hit your deductible. 

There are also tax benefits for putting money in an HSA. Deposits made automatically from your paycheck are not subject to tax. Those funds can be used for qualified medical expenses using either the HSA-provided debit card, or they can be reimbursed if you use your own payment method. 

Pro tip: If you use the M1 Owner’s Rewards Credit Card (or another rewards credit card), you may be able to get reimbursed for the full purchase of approved medical products and keep the rewards you earn. For example, if you make a $50 purchase at Walmart on qualified expenses using the M1 Owner’s Rewards card, you can expense it to your HSA. The HSA provider will write you a check, and you will keep the $1.25 in rewards from the M1 Owner’s Rewards card. 

This is the more traditional way of using an HSA to have tax-free money for healthcare related expenses. But if you’re able to pay for your medical expenses out of pocket, you can use your HSA to invest for the future. 

How to invest in an HSA

Imagine your HSA as both a checking account and a brokerage account in one. The funds you take from your paycheck are put directly into the “checking account” portion of your account, waiting to be used. However, there is very little to no interest awarded in this account — so your funds will sit stagnant. In fact, less than 12% of HSA users invest their funds, according to the Employee Benefit Research Institute (EBRI)

If you want to grow your account balance, you may be able to invest the funds in equities that are available to you if offered by your HSA provider. 

Here are a few things to remember when investing in a HSA: 

Account limits: Like an IRA or 401(k), HSAs come with an annual maximum of how much you can invest. Here are the 2023 limits: 

  • Self-only: $3,850  
  • Family: $7,750 
  • Add an additional $1,000 in catch-up contributions for those over 55 years of age

Buying and selling: You can buy and sell equities in the investment portion of the HSA, completely tax- free. 

Minimum balance requirements: Many HSA providers require users to have a portion of their balance be in the “checking” portion of the account first. For example, my HSA provider requires me to have $1,000 in the account beforehand. 

But let’s say you’ve been investing for several years and have a major medical bill you need to pay for. You may be able to sell off your equities within the account and use those funds to pay for the medical expenses. 

The HSA is regularly called a “triple-tax advantage” because it can be a solid account for continuing to invest in your retirement. The magic of this account is simple: money goes in tax-free, can grow tax-free and can be withdrawn for qualified medical expenses at any time.

However, the real advantage is to keep your funds invested, and pay for your qualified medical expenses out of pocket. By doing this, you’re giving your investments time to grow. Once you hit 65 and enroll in Medicare, you’re no longer able to contribute to an HSA, and you’re able to withdraw your funds without a penalty. If you have money left over in the HSA after paying for qualified medical expenses, you will have to pay ordinary income tax when you withdraw it. (There is also an additional 20% tax if you withdraw any of the funds for a non-qualified medical expense before age 65.)

One nifty trick is to save your receipts for your medical expenses, and you can claim them for reimbursement at a later time. As an example, my 2021 corrective eye surgery receipt should still be valid to claim on my HSA when I decide to pull the funds out. And I can use that $4,000 (minus taxes) in any way I see fit, including potentially funding my high-yield savings account if needed.

Further reading: 5 ways to invest to potentially reduce your tax liability in 2023

Examples of using an HSA for retirement 

HSA contribution limits are going up in 2024, with limits of $4,150 and $8,300 for individuals and families, respectively. This is a sizeable increase from the 2023 limits of $3,850 and $7,750, respectively. These limits are analyzed each year to account for rising costs. Some years it can rise, while other years can remain the same. 

However, in 2021, the average HSA balance was a mere $4,318 — meaning that account holders are using this to offset medical expenses rather than investing the funds. 

Here’s what an HSA could potentially look like if untouched until retirement: 

Let’s say you max your HSA account from 25 to 65 years old, and the average annual limit is $4,500. If you invest every penny, and assume a conservative 7% average rate of return (S&P 500 has averaged a 9.87% return over the last 10 years), that will leave you with roughly $960,000 in retirement.  

Another example is a married couple investing the maximum from 30 to 65 years old, contributing the maximum $9,000 per year over the 35-year span. At a 7% average rate of return, that would accumulate to over $1.3 million. 

The M1 bottom line

There is no one right way to save for retirement, and using a Health Savings Account along the way is just one of the many vehicles you can use to potentially grow your net worth.

If you don’t qualify for a HSA, that’s ok! Focus your investing efforts using a traditional or Roth IRA to supplement your employer-sponsored retirement plan. If you’re able to fill those accounts, you could consider burying the remaining funds in a taxable brokerage account.

But regardless of the account(s) you choose to push towards your investing and retirement goals, it’s vital to begin investing sooner rather than later. The more time your money has to work for you, the better chance you have of growing your retirement nest egg and net worth.

M1 is not a bank. M1 Spend is a wholly-owned operating subsidiary of M1 Holdings Inc. M1 High-Yield Savings Accounts are furnished by B2 Bank, NA, Member FDIC. 

M1 and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.