Most decisions, financial and other, can be simplified into a few basic choices.

Health Savings Accounts (HSAs) : Spend, Save or Invest? Some Considerations

Perhaps the only decisions more personal than health decisions are the financial ones — How much should I save? Where should I save? Where can I find help if I need it? These are big questions and deserve attention. Your choices create options after only a few years, and become life-altering over a career.

Health Savings Accounts (HSAs) have recently arrived on the scene as part of this broad financial puzzle. Connecting both health and wealth, HSAs serve double-duty in your financial planning, as HSAs allow you to save money on today’s qualified medical expenses while also providing the option to save for long-term healthcare costs. HSAs also provide additional flexibility by allowing withdrawals for non-qualified health expenses (penalty free after age 65). Account holders need not worry about their funds becoming “trapped” in a health-only savings account.

Even still, it is natural to wonder whether and how much of one’s HSA should go towards retirement. Below we will outline a few concepts to help with your decision.

Perhaps the only decisions more personal than health decisions are the financial ones — How much should I save? Where should I save? Where can I find help if I need it?

Keep in mind, however, the following are only general principles. Consider seeking the guidance of a competent financial advisor, such as a CFP certificant, who can evaluate your current situation and provide specific recommendations to help you achieve your goals.

Seven financial planning-like questions to consider. Remember, there is a “cheat sheet” at the very end:

1. Emergency savings fund. Before maximizing your HSA, a more important and versatile account for many will be your “rainy day” fund for emergencies. A common rule of thumb is 3–6 months of salary savings in a readily accessible account to cover job dislocations, medical emergencies and other of those blessedly infrequent life crises that require a large cash outlay.

2. Annual plan deductible. Many plans require a certain cash balance minimum before accessing the brokerage feature (both Lively and HealthSavings Administrators do not). Knowing your plan’s out of pocket deductible is available in cash can provide a peace of mind that is probably worth more than any foregone market gains.

3. Identified health expenses. Often, particularly as we get older, we begin to plan for bigger medical procedures. If this is you, or could be you, consider saving funds in your HSA and make appropriate allocations to adjust for the timing of your anticipated expenses. As an example, you may want to keep a larger amount in cash or short-term securities offered through the brokerage feature for known upcoming expenses.

4. Logging medical expenses. Chances are we will all pick up medical expenses for “bumps and scrapes” over the years. As these dollars are eligible “withdrawal IOUs,” account holders should keep track of these receipts to make the most of their account growth. If not you could potentially risk overlooking the tax-deferred and perhaps tax-free advantages these expenses create by “shoe-boxing” your receipts for withdrawal at a later date. If you log your medical expenses and intend to keep those amounts invested in the market, consider a heavier equity orientation.

Connecting both health and wealth, HSAs serve double-duty in your financial planning, as HSAs allow you to save money on today’s qualified medical expenses while also providing the option to save for long-term healthcare costs.

5. Employer contribution matching. Generally speaking, employees should take full advantage of their employer’s retirement savings match — free money still beats “tax-free.” If you aren’t already taking full advantage of your employer’s retirement savings plan match dollars then you should probably use an appropriate budget allowance to grab this free money before maxing out your HSA contributions.

6. Budgeting and Cash Flow. While this is not a general-purpose financial planning post, the fact is all your accounts ultimately roll into one large account — you. As a result, and as you can read elsewhere, generally your best financial move is to pay off outstanding credit card and other high interest consumer debt. If you need to spend your HSA funds to make room in your budget to pay your revolving line of credit from your credit card, then you should consider doing so. Few will recommend you pay 25% short-term interest for the opportunity to earn a market return over time.

7. Retirement Planning. As mentioned above, an HSA can be used not only for tax-free withdrawals for qualified medical expenses at any point after the HSA has been established, HSA funds can also be used for non-medical expenses (note — a penalty applies if used in this way before age 65). Because of this account feature an HSA is also a very good way to supplement your retirement savings plan through another tax-deferred, and quite possibly tax-free, savings account. Even if you expect to remain healthy your entire life and rarely use the medical system, HSA investing could still be a very good financial planning strategy.

Saving versus investing in an HSA is often part of a broader set of financial planning decisions. The HSA provides account holders a great way to save tax free for both near term and far-off health expenses, and even allows for tax deferred savings for non-medical expenses (remember the age 65 requirement to avoid the non-qualified withdrawal penalty). Be sure not to overlook other legs of your “financial wellness” stool.

Retirement not as far off as it may sometimes seem.

For those looking for the “quick” answer, we generally recommend as follows:

1. Keep the annual deductible in the cash/checking account of the HSA. Consider increasing your savings balance to the max annual out of pocket of your annual insurance plan if you are more risk averse.

2. Invest the rest in the brokerage feature and consider “mirroring” the portfolio of your 401(k), assuming this is allocated based on your age, goals and risk profile.

3. If you can pay out of pocket for health expenses, keep the HSA funds invested in the market and maintain a record of your health costs for future, tax-free withdrawal.