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3 ways to use your health savings account

Key takeaways

  • Understand what kind of HSA user you are, based on your primary goals for using your HSA.
  • Decide how to invest your HSA balance to have the opportunity for growth, realize the tax benefits, and be better prepared to cover medical expenses when they arise.
  • Consider investments that best suit your goals, time horizon, financial situation, and risk tolerance.

Millions of Americans use a health savings account (HSA) to pay for qualified medical expenses with pre-tax income, but an HSA also offers investing advantages that can support longer-term goals. Whether you already have an HSA or are thinking of opening one (which you can do only if your health care plan is HSA-eligible), tapping the full potential of this multi-faceted savings, spending, and investing vehicle starts with understanding how it can help you meet your financial needs—today and tomorrow.

The fundamental power of an HSA is its triple tax advantage. The money you contribute isn't subject to federal income tax, earnings accumulate tax-free, and withdrawals are not subject to federal income tax when they’re used for qualified medical expenses.1 Only contributions through employer payroll deduction are not subject to the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) taxes.

These advantages offer a powerful incentive to use your HSA as an investment vehicle in addition to other tax-advantaged accounts, such as a 401(k) and individual retirement accounts (IRAs).

HSA owners generally use their account in 3 ways:

  1. Paying current qualified medical expenses
  2. Saving for a potential medical emergency or for a planned procedure (e.g., braces for a child)
  3. Investing for health care expenses in retirement

Although you may consider one of these approaches to be your primary reason for having an HSA, they're not mutually exclusive. They can be pursued in combination to maximize the benefit of an HSA as part of your financial plan.

Tip: See current HSA contribution limits along with the different ways you can contribute to an HSA.

Consider your cash needs for spending first, before investing

If you want to make the most of your HSA by investing some of the balance, how much should you hold back in cash in your core account to cover near-term expenses?

It depends. One way to manage your money in your HSA is to set a "cash target." That's the amount of money kept in cash in your core account at any moment.

For example, say you had $5,000 in your HSA. You may think of $2,500 as your cash target. After you’ve hit that number, you begin investing any money above that baseline. You aim at keeping enough cash at that level throughout the year, using it as a "safety net" to help pay medical bills.

Tip: In general, the amount to keep in uninvested cash in your core account should be equal to your expected annual out-of-pocket medical expenses or your in-network deductible amount. See ways to help estimate your HSA cash target.

Let's look at how you might invest your HSA dollars for each of the primary ways you might use them.

1. Paying for current medical expenses

If you anticipate having health care expenses, including elective procedures that aren’t covered by your health plan, consider increasing the amount you save in your HSA. This could allow you to potentially grow your HSA cash balance and still have money available to invest.

Another strategy for using your HSA: Try to cover smaller bills out-of-pocket from your personal savings and then use your HSA for larger current ones or investing for future needs.

Reviewing your medical expenses for the past couple of years can give you a good idea of how much you can grow your HSA balance by contributing more than you spend. Then, rather than holding the extra money in a taxable brokerage account, you can increase how much you contribute to your HSA and invest it for potential tax-free growth.

If you need money quickly from your HSA for an unexpectedly large medical expense, simply place a trade and have the money available in your HSA within a few days.

Tip: Learn more about HSA eligibility along with ways to use a Fidelity HSA for savings and spending.

Scenario Amount to invest General investing strategy Hypothetical asset allocation*
Someone who is worried about a medical emergency that could occur at any time $5,000 Avoid risk 100% in cash in a core account
Someone who does not know when they should tap into money in their HSA or how to invest $10,000 Keep cash target high in case you need help paying for major medical bills; invest the rest in a balanced portfolio; consider Fidelity Health HSA Savings Fund Asset allocation of HSA Fund - 30% stocks (with potential to range from 20% to 40%) - 70% bonds (with potential to range from 60% to 80%)
Someone who is saving for health care expenses in retirement $25,000 Invest for retirement in a balanced portfolio - 10% in cash in a core account - 50% in stocks - 40% in bonds
* These are hypothetical use cases for investing in noncash options within an HSA. Asset allocations are generally based on Fidelity Health Savings Index fund. As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation and your evaluation of the security.

2. Saving for a possible medical emergency

Accidents do happen. And using your HSA as a "rainy day" health care fund to cover a medical emergency is another popular strategy, especially if you're able to pay routine medical costs from your household cash flow. If a sudden financial need throws a wrench into the household budget, your HSA can help you cover some of your medical costs.

Investing a portion of your account may help you grow your balance faster.

Tip: To get started putting your cash to work in your HSA, see the list of Fidelity HSA® Funds to Consider.

3. Boosting your retirement savings

An HSA may be the most tax advantaged of all retirement savings plans. In addition, an HSA does not require you to begin taking distributions at age 73, like IRAs and 401(k)s. Not having to pay taxes on withdrawals used for qualified medical expenses can be a big plus for your retirement budget.

On average, according to the 2023 Fidelity Retiree Health Care Cost Estimate, a 65-year-old retired couple may need approximately $315,000 in after-tax savings to cover health care expenses throughout their retirement. A 65-year-old individual may need $157,500 in after-tax savings to cover health care expenses.

If you've been fortunate enough to accumulate more money in your HSA than you need to cover current and future retirement health care costs, you can withdraw the money for something other than a qualified medical expense (like taking a family vacation or buying a car) after you reach age 65 without having to pay a penalty. You will, however, owe income tax on the withdrawal.

Read Viewpoints on 5 ways HSAs can fortify your retirement

Deciding how to invest your HSA

Regardless of your primary intent for your HSA, investing a portion of your account can be a smart move. When you’ve decided how much that will be, you can begin considering the investments that best suit your goals, time horizon, financial situation, and risk tolerance.

You can choose to manage your investments yourself with a self-directed Fidelity HSA®. Or choose the Fidelity Go® HSA. It’s an easy, affordable way to enjoy the benefits of professional money management. Learn more.

Consider a health savings account (HSA)

With an HSA, you can pay for qualified medical expenses in a tax-advantaged way.

More to explore

Investment help for HSAs

Get investment help, or consider Fidelity's Health Savings funds, designed for HSA investing.

Open a Fidelity HSA

Save for qualified medical expenses in a tax-advantaged way, now through retirement.

Estimate based on individuals retiring in 2023, 65-years-old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates projected with Mortality Improvements Scale MP-2020 as of 2022. Actual assets needed may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Cost Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, original Medicare. The calculation takes into account Medicare Part B base premiums and cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

1. Contributions, earnings, and distributions are tax-free for federal tax purposes when used to pay for qualified medical expenses. Each state may decide to follow the federal tax guidelines for HSAs or establish its own. As of the publication date of this article, only California and New Jersey tax eligible contributions to HSAs. These states regard HSAs as regular taxable brokerage accounts, so residents have to declare any capital gains, interest, and dividends they receive to the state. New Hampshire and Tennessee tax earnings but not contributions. The triple tax advantage applies to state taxes as well, in most states.

IMPORTANT: The projections or other information generated by the Fidelity Go analysis tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.

In identifying investment options to include in the Fidelity HSA Funds to Consider, Fidelity only considered Fidelity open-end mutual funds and open-end mutual funds offered by a limited universe of third-party fund companies that participate in an exclusive marketing, engagement and analytics program with Fidelity for which they pay Fidelity an annual fee. The only third-party fund companies whose funds were eligible for this program were companies that generally have a track record of generating the strongest customer demand for their products from across Fidelity's customer channels and have been paying Fidelity a sufficient level of compensation for the shareholder servicing performed by Fidelity.​

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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