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Investment Options for Health Savings Accounts

Investing in a health savings account allows you to save money on your taxes while putting money aside for future medical expenses. The money you invest in a health savings account, or HSA, grows tax-deferred, and as long as you use it for legitimate medical expenses, you can withdraw it at any time without paying a penalty.

  1. Savings Accounts

    • Since the money held in an HSA is earmarked for medical expenses, it is important not to take too much risk with it. Limiting risk is particularly important for new accounts, which will naturally have lower balances. As the amount of money in the account grows, you can branch out into other investments, but keeping that initial balance in a savings account makes a lot of sense. If you hold your HSA through a bank, a savings account might be the default investment vehicle.

    Money Market Funds

    • Many banks offer HSA funds, and those HSA customers often have access to a money market fund. Money market funds typically have higher balance requirements, and higher interest rates, than plain checking accounts. Depending on the HSA account and where it is held, you could have access to several different money market accounts, each with its own balance requirement and interest rate.

    Bond Funds

    • Bond funds can provide a bit more income without risking the money in the stock market. Investors can choose a number of bond funds for their HSA accounts, with the choice of funds determined by the custodian of the plan. If you hold your HSA at a large mutual fund company, you could have access to dozens of different bond funds.

    Stock Funds

    • If you hold your HSA through a mutual fund company, you can use the money to invest in stock mutual funds. Many HSA holders divide their money into two piles--one to be used for current year expenses and another to be used as an investment. For instance, you might keep several thousand dollars in a savings account or other stable vehicle to pay for current medical costs, while investing the remainder of the account in growth vehicles like stock mutual funds.

    Brokerage Accounts

    • Investors can hold health savings accounts through brokerage firms, and that allows those investors to put their money to work buying individual stocks if they wish. This strategy should be reserved for those who hold a high balance in their HSAs, since an unexpected medical expense could force the liquidation of those stocks. But if you have sufficient HSA funds to cover ongoing medical expenses, investing the rest in the stock market can be a good way to grow the money for the long term.

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