How to Start Investing Your HSA

Opening a health savings account (HSA) is a great step in the right direction for your financial future. Consider an HSA as your home for medical savings. With an HSA, you can put money aside every year to pay for qualified medical expenses in the future. With the long list of eligible medical costs you can use your HSA for, it's a powerful financial tool.

But you can do so much more than simply saving. If you're not considering HSA investment, you're missing out on piles of potential cash.

About HSA Investment

The beauty of an HSA is that it has three tax advantages. The first is that your contributions up to the annual limit are tax-deductible. The second is that qualified withdrawals are tax-free. Finally, the interest you earn through investments is tax-deferred.

Investing is the best way to make your medical expense nest egg grow. You don't need much to get started. Say, for example, that you only put a couple of hundred dollars a month into your HSA, starting at age 30. With investments, that figure can grow to well over a million dollars by the time you're 70 if you earn the stock market's standard annual return of 10 percent.

That figure makes a big difference considering how health expenses get higher as you age. You don't have to withdraw from your HSA at any specific point, so investing can help you maximize savings for long-term financial growth.

There are many ways to invest through HSA. Like a brokerage account or IRA, you need to have money in your account first. Once it's funded, you can choose what types of investments you want to make. Many providers offer simple tools and automatic rebalancing, making investment approachable even with little financial experience.

Typically, the best way to invest is with stocks, bonds, mutual funds, ETFs, etc. It's a hands-off process that can earn you substantial interest over time. Because you don't pay taxes on those gains, you can sit back and watch your HSA grow over decades.

Read a similar blog about invest HSA here at this page.

What is a Tax Deduction?

When filing your taxes, deductions are a way to reduce your taxable income. Sometimes called "write-offs," deductions typically come from expenses. Using tax deductions to your advantage can lower how much you owe, making it easier to navigate tax season.

But how do they work, and is an HSA tax deductible?

Standard vs. Itemized Deductions

There are a couple of ways to claim tax deductions. The most common is the standard deduction. This method applies to most people, and its figure varies every year. The standard deduction for the 2023 tax year is $13,850 for individual filers, $20,800 for heads of households and $27,700 for couples filing jointly.

Another option is to make itemized deductions. As the name implies, this route requires you to provide specific dollar amounts of eligible deductions. Choosing itemized deductions makes sense if your total surpasses the limits for standard deductions.

It's more difficult to claim itemized deductions. You must report fixed amounts on the Schedule A of Form 1040 or 1040-SR.

What Can I Claim as a Deduction?

There are many possible deductions available. You don't have to worry about individual items if you choose the standard deduction. But for itemized deductions, you must report accurate figures. Some options have limits, so it's wise to work with a tax professional if you have several deductions you want to claim.

The most common deductions include up to $2,500 in student loan interest, up to $750,000 of mortgage interest on secured home mortgage debt and up to $10,000 on state taxes.

Is an HSA Tax Deductible?

You can deduct contributions if you have a health savings account (HSA). You can claim up to the annual contribution limits as a deduction. For 2023, that's $3,850 for self-only coverage and $7,750 for family coverage.

That's not all. Taxpayers may qualify for deductions if they have substantial medical or dental expenses. You can claim up to 7.5 percent of your adjusted gross income.

Individual retirement accounts (IRAs), 401(k) plans and other qualifying retirement plans all come with tax-deductible contributions as well.

Read a similar article about Consolidated Omnibus Budget Reconciliation Act here at this page.