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[Prefer to listen? You can find a podcast version of this article here: E265: Should I Invest the Funds in My HSA?]

Health Savings Accounts (HSAs) are often misunderstood. Many people think of them as simply a place to park money for upcoming medical expenses. But HSAs can be much more powerful, especially when you consider the option to invest the funds.

If you have an HSA and you're wondering whether you should invest the balance or leave it in cash, it helps to understand how HSAs work and the long-term potential they offer.

How an HSA Works

An HSA is a tax-advantaged savings account designed to help you pay for qualified medical expenses. To be eligible, you must be enrolled in a high-deductible health plan (HDHP). The IRS sets annual contribution limits, which for 2025 are $4,300 for individuals and $8,550 for families, with an additional $1,000 catch-up contribution for those 55 and older.

What makes HSAs unique is their triple tax advantage:

1. Contributions are tax-deductible (or pre-tax if made through payroll deductions).
2. Earnings grow tax-free.
3. Withdrawals for qualified medical expenses are tax-free.

You can use the funds to pay for a wide range of healthcare expenses, including doctor visits, prescriptions, dental care, vision, and even some over-the-counter medications.

But here's where it gets interesting—HSAs don't have a "use-it-or-lose-it" rule like FSAs (Flexible Spending Accounts). Funds stay in the account year after year, and you can continue to grow your balance over time.

Investing Your HSA Funds vs Keeping Them in Cash

Most HSA providers allow you to invest your balance in mutual funds, ETFs, or other securities once you've met a minimum cash threshold (often around $1,000–$2,000). The idea is to give your HSA similar growth potential to other investment accounts like a 401(k) or IRA.

The Case for Investing

If you're not using your HSA funds regularly to cover immediate medical expenses, investing can be a smart move. Here’s why:

• Compound growth: Just like your retirement accounts, your HSA balance can grow significantly over time if invested wisely.
• Long-term medical expenses: As you age, your healthcare costs will likely rise. Having a well-funded, invested HSA can provide tax-free funds when you need them most.
• Tax efficiency: Because earnings grow tax-free and withdrawals for qualified expenses are also tax-free, HSAs offer a better tax deal than traditional IRAs or 401(k)s.

The Case for Keeping Cash

On the other hand, if you frequently dip into your HSA to cover medical costs, it might make sense to keep a portion or all of it in cash.

• Liquidity: Cash is immediately available when you need it. No need to worry about market timing or selling investments at a loss.
• Short-term needs: If you anticipate medical expenses in the near future, market volatility could pose a risk to invested funds.
• Simplicity: Not everyone wants to manage another investment account, especially if the balance is relatively small.

The decision largely comes down to your timeline and risk tolerance. If you're using your HSA like a checking account for regular expenses, staying in cash might be more practical. But if you're treating it as a long-term asset, investing can unlock much greater value.

Remember that cash stays stable, but money that is invested in the stock market can fluctuate in the short term. While we normally expect growth from investments over the long term, there's no guarantee that your account balance will be stable in the short term. Investments can experience loss, which is a risk of investing HSA funds.

A Strategic Approach: Reimburse Yourself Later

One often-overlooked strategy is to pay out-of-pocket for your current medical expenses and let your HSA grow untouched. Later in life—when you may be retired or facing higher healthcare costs—you can withdraw those funds tax-free by reimbursing yourself for the expenses you incurred years earlier.

Here’s how it works:

1. Save receipts: Whenever you pay for a qualified medical expense out of pocket, keep the documentation.
2. Let your HSA grow: Leave the funds invested so they can compound over time.
3. Reimburse later: There’s no time limit on when you can reimburse yourself, as long as the expense occurred after your HSA was established.

This strategy turns your HSA into a stealth retirement account. You're essentially getting tax-free growth and tax-free withdrawals years later—provided you keep good records.

Let’s say you paid $1,000 out of pocket for a medical procedure in 2025 and left your HSA untouched. If that $1,000 invested in your HSA grew to $2,500 over 15 years, you could reimburse yourself for the original $1,000 and still have $1,500 left in the account to use for future expenses—all tax-free.

The Bottom Line

An HSA can be more than just a place to park cash for next year's medical bills. With a strategic approach, it can serve as a powerful investment vehicle and a supplemental retirement account.

If you’re able to pay for healthcare costs out of pocket and don’t need to access your HSA funds in the short term, investing those dollars could offer significant long-term benefits. On the other hand, if you rely on your HSA for regular medical spending, keeping some or all of it in cash may provide the liquidity you need.

Also worth noting: after you turn 65, the rules around HSA withdrawals become even more flexible. At that point, you can take withdrawals for any purpose (not just qualified medical expenses) without penalty. If you use the funds for non-medical expenses, you’ll pay ordinary income tax on the withdrawal (similar to a traditional IRA), but no 20% penalty. And if the funds are used for qualified medical expenses, they remain completely tax-free.

This gives your HSA added versatility in retirement. Even if you don’t need it for healthcare, it can function as another retirement savings bucket.

Either way, don’t let your HSA sit idle. Understanding how it fits into your broader financial plan can help you make the most of one of the most tax-efficient accounts available.