You’ll often hear people talk about how HSAs are triple tax-advantaged. That means you get:

  • Tax-free contributions. HSA contributions don’t have taxes withheld so the entire amount goes to your HSA.

  • Tax-free growth. Whether you keep it as cash or invest it for the long term, you won’t pay taxes on any earnings.

  • Tax-free withdrawals. Unlike accounts where you pay taxes when you take out money, HSA money is tax-free to withdraw and use for medical expenses.

Whether or not you invest your HSA money, you’re going to get those benefits. But investing HSA money comes with other advantages, too.

Investing can be more powerful than saving

Saving and investing are both ways to grow your money. Money held in cash earns interest (Forma offers 0.15% APY, almost 3 times the national average!) and money that’s invested earns returns based on market performance. The benefit of tax-free growth applies to both the interest you earn on cash and the returns you make on investments, but it gets a little more complicated when you take inflation into account.

In the most general terms, inflation refers to the rising prices of goods and services over time, which in turn reduces your purchasing power. In other words, it decreases the value of any money you hold in cash.

Unfortunately, the average interest rate for savings accounts isn’t likely to keep up with inflation, so even though you’re earning interest, large amounts of cash are going to lose value over time.

That’s where investing comes in. While you’ve probably heard about the stock market fluctuating, it has historically returned an annual average of 10% since 1928—much higher than interest rates. So if you leave your money invested over the long-term, it’s more likely to grow its purchasing power over time. (Although remember investing always comes with risk.)

And if you’re investing your HSA money, you don’t pay taxes on your contributions, you don’t pay taxes on returns, and you don’t pay taxes on withdrawals.

You can use it for retirement

Some people use their HSA as a kind of “medical retirement account”, and invest all their HSA money instead of paying for expenses as they go. Because saving for retirement is a long-term goal, you have the time for your returns to compound and to wait out any market downturns.

You can still only use it for qualified medical expenses, but you’ll probably have higher medical costs when you’re in retirement age, and HSA money never expires. That's true even if you choose a different health plan in the future

And unlike other retirement accounts like IRAs, there aren’t age restrictions on when you can take money out!

Should you invest your HSA money?

Short answer: it depends on your goals. If you want to use your HSA to pay for medical expenses as they come up, or are personally more risk-averse and don’t want to keep too much money in the stock market, you might want to keep more money in cash.

If you’re more comfortable with risk—or plan on not touching your HSA money until way down the road—you might want to invest more.

But the good news is that you can do both! You can invest some of your money and keep the rest in cash, and reassess as interest rates, inflation, and market volatility change over time.

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