How to invest your HSA: Investment options for growth potential

Health savings accounts (HSAs) are a familiar way workers use pre-tax contributions to save for medical expenses. But HSAs can do more than help cover current qualified medical expenses; HSA dollars also can be invested to cover future qualified medical expenses and help build wealth for the future.

At the same time, you can gain tax advantages. HSAs, when administered by a bank or brokerage, allow for tax-free growth that can decrease your tax burden over the years. Seeing your HSA as a tax-advantaged savings vehicle, rather than just a spending account, gives you access to substantial benefits.

A health savings account, or HSA, is a way to contribute a certain amount each year specifically for approved qualified medical expenses. Unlike a flexible savings account (FSA), the funds in an HSA carry over each year. Anything you don't spend stays in your account.

HSAs have rules. Your expenses must meet the IRS definition of qualifying medical expenses for you to avoid paying taxes on them. If you withdraw HSA funds to spend on anything else, you can incur income tax and a 20% penalty. After you turn 65, the 20% penalty goes away, but you still must pay income tax on the distributions if they aren't for qualified medical expenses.

Many people allocate money each year to an HSA and then only use it on expenses as they arise. However, there's another strategy to consider: You can contribute to your HSA up to the maximum each year, and instead of spending all the money for current medical expenses, opt to save some of your dollars for the long term. This allows HSA contributions to build up in your account.

Once you've allocated the minimum required by your particular bank or brokerage to invest, HSAs can be invested in many of the same ways as a retirement account or brokerage account. Any returns generated by the growth of those investments won't be taxed, provided they only are withdrawn qualified medical expenses.

Few people make use of their HSA's powerful growth potential. That's partially because it's hard to shake the idea that if a medical expense comes up, you have this earmarked account specifically to spend on those costs. However, if you have the wiggle room in your budget to pay for current medical expenses another way, investing in your HSA can be a powerful source of tax-free growth.

Investing in your HSA and then spending it during retirement on qualified medical costs cuts out any of the taxation that would otherwise happen on these dollars, making each dollar you earn, save and invest go further.

While distributions from traditional IRAs or 401(k)s are taxed later when withdrawn or when the money goes in (for a Roth account), HSA investments have the potential to grow for decades and never be taxed, if you spend them on qualified medical expenses during retirement.

Even if you have low medical spending now, statistically you are likely to see growing medical costs as you age. Being able to spend from your invested HSA in retirement can reduce pressure on other retirement accounts when you need medical care or want to pay long-term care expenses that are HSA-eligible, subject to certain age-based limits.

Have health savings accounts with past employers?

Confused by lingering balances in old HSAs? Learn more about what you can do if you have multiple HSAs.

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Depending on your HSA provider, you may have a variety of options for investing your HSA. What you choose should be based on factors such as how risk-tolerant you are, how long you anticipate leaving the money invested, and how much growth potential you'd like in your HSA. If you follow conventional investing advice, you might opt for a slightly higher risk strategy in your younger years and move toward a lower-expected-return but lower-risk strategy as you approach retirement. It reduces the potential for big market drops that could down your investment values late in your investment journey. Investment-related fees vary by provider and investment option.

Here are three common categories of investment options and what makes them appealing to different investors.

Mutual funds are a collection of stocks, bonds and other investment opportunities selected and managed by financial professionals. The mutual fund managers almost always factor diversification into their decisions, so you don't need to do much on your end. At times, mutual funds may not perform as well as the market as a whole, but having a professionally managed mix tends to keep them more stable and potentially growing over time. In exchange for this expertise and ongoing management, investors in mutual funds often pay nominal fees and charges.

ETFs are similar to mutual funds, but they're traded in the market like individual stocks. That means their prices can fluctuate throughout the day. They have features such as automatically reinvesting your dividends, and with less active management by a financial professional, they often have lower fees.

They have options that may be invested across an entire index if they are index ETFs. This allows you to essentially diversify across a very wide swath of the market and take advantage of long-term growth trends. Much like mutual funds, they may have features like automatically reinvesting your dividends. However, with less active management by a financial professional, they often have lower fees. If your HSA has no-commission ETFs, that's an additional cost reduction as well.

Bonds often will yield lower returns, on average, than ETFs or mutual funds, but they often have the advantage of being less risky. The returns don't tend to bounce around as much as investments that are heavily focused on the stock market. Bond funds may be an option if you'd like an average return higher than most bank account savings' rates, but with lower risk than investing in stock-focused funds.

If you want to make up for lost time investing in your HSA, there's a little-known move that allows you to roll over some IRA cash into your HSA. Doing this correctly and without incurring penalties involves following applicable rules. It's advisable to chat with a financial advisor before making this particular move, since it can be complicated and not all rules are listed below.

First, ensure your funds are in an IRA. If the funds you'd like to roll are currently in a 401(k), you will need to complete a rollover to an IRA. Then you can do a rollover to your HSA once—and only once—with a limit based on whether you're an individual or contributing to family coverage and whether you're 55 or older.

In 2024, the limit for individuals is $4,150. For family coverage, the limit is $8,300, with an extra $1,000 included on both limits if you are older than 55. Once you've done this rollover, you won't be able to do it again. However, if you have the funds to reach the full limit, these dollars can help build the nest egg in your HSA for investing, as well as for spending tax-free on qualified medical expenses in the future.

Other people opt to make this one-time transfer when they know they have a very big health expense and want a penalty-free way to access their IRA funds for that cost.

As mentioned before, the 20% penalty on spending your HSA for non-health care purchases goes away in retirement, starting at age 65. Strategically, it still may make sense to use other funds first, because non-health-care expenses incur income taxes while health care expenses don't.

But if you're trying to bridge some gaps in cash flow, using an HSA during retirement can be useful, especially if you invested the HSA many years back and benefitted from compounding returns.

What are the contribution limits for HSAs?

For individual coverage, you can contribute up to $4,300 in 2025. For whole family coverage, you can contribute up to $8,550. These amounts change periodically, so check the limits each year before setting up your contribution plan. Some people may qualify to contribute to an HSA for only part of the year. IRS rules can help you determine if your partial-year HSA eligibility qualifies you to contribute.

What are the eligibility requirements for HSAs?

The most important qualification for an HSA is that you have a high deductible health plan (HDHP). You cannot have disqualifying supplemental health coverage, cannot be enrolled in Medicare and cannot be claimed as a dependent on someone else's tax return. You can contribute on behalf of a whole-family plan or as an individual, but there are no joint HSAs. If two people have HDHPs and want to have HSAs, they'll need to each establish and contribute to their own.

How do I choose the right HSA provider?

Many employers will select an HSA provider. For HSA funds from former employers or if your employer allows you to choose your preferred HSA provider, it's a good idea to assess your options, including banks and credit unions. Factors that impact the best HSA provider for you include ease of use, availability of your preferred investing options and clear, minimal fees. Once you select an HSA provider, you may want to roll over or transfer funds from a previous HSA to consolidate your accounts.

What are the fees associated with HSA investing?

Investing with an HSA can have annual recordkeeping fees as well as maintenance, transfer and minimum-balance fees. In addition, many investments charge fees just as they do in any brokerage account. For instance, if you invest in mutual funds with specific fund expenses, those fees will still apply to your HSA investing.

Can I withdraw money from my HSA for non-medical expenses?

While you can withdraw money from your HSA for non-medical expenses, it's costly. You'll pay a 20% penalty, and the withdrawal will be considered taxable income for that year. This penalty can even be applied to "gray area" expenses that you thought were qualified medical expenses but weren't. It's important understand what qualified medical expenses are before making any withdrawals.

While the choices for saving for future medical spending as well as retirement can feel complex, Thrivent financial advisors make it their priority to understand all the options and help you weigh them. Talking with an expert can help you determine if investing in an HSA can address your goals, taking your risk tolerance and other savings options into consideration too, as you chart a course toward your financial future.