It may be possible to build a 7-figure HSA balance if you maximize your contributions, delay withdrawals, and smartly invest your contributions.
Your HSA account isn’t limited to investing in cash and cash equivalents, with slim rates of return.
Health savings accounts let you self-direct your investments within the accounts. So you can invest in equities, mutual funds, ETFs, and other asset classes with more potential for long term growth.
With the right strategy and the benefit of years of tax-deferred compounding, your HSA could become a very powerful retirement asset.
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The Power of Compounding
When you contribute to an HSA, the money grows tax-deferred.
This means you don’t pay taxes on the growth until you withdraw the funds.
But here’s the real kicker: if you invest your HSA contributions using a custodian that allows self-directed HSA investments, you can potentially earn much higher returns than you could in a regular savings account.
For example: let’s say you contribute the maximum amount to your HSA every year ($4,150 for individuals or $8,300 for families in 2024 and in 2025 it is $4,300 for an individual and $8,550 for families).
If you increase your contributions by 3% each year to keep up with inflation, and you earn a 7% annual return on your investments, here’s how much your HSA could be worth in the future:
- After 10 years: $98,000
- After 20 years: $278,000
- After 30 years: $588,000
And that’s assuming you never increase your contributions beyond the 3% annual adjustment for inflation.
If you’re able to contribute more over time, the potential growth is even greater.
Here is a table showing the projected growth of an HSA account with an initial balance of $5,000 and annual contributions of $8,300 (the 2024 maximum for family coverage), assuming different annual rates of return over various time periods:
| Years | 4% Return | 6% Return | 8% Return |
|---|---|---|---|
| 5 | $51,873 | $54,395 | $57,032 |
| 10 | $105,395 | $117,801 | $131,275 |
| 20 | $251,849 | $309,395 | $389,395 |
| 30 | $475,395 | $658,032 | $937,873 |
| 40 | $826,395 | $1,289,395 | $2,025,032 |
The table shows that over longer time periods, the impact of compounding returns leads to significantly higher account balances, especially at the higher assumed annual rates of return of 6% and 8%.
For example, after 40 years, the account would grow to over $2 million with an 8% annual return, compared to just over $800,000 with a 4% annual return.
Note that these are just theoretical projections based on the historic returns of broad indexes stocks and bonds over long periods of time.
Your results will likely vary significantly from these. Results are not guaranteed.
It also assumes that you will not increase your annual contributions as the caps get lifted each year, but that you will still keep your contributions level at $8,300.
However, over long periods of time, and with good health, and self-directed investing, having an HSA bhalance in the multiple six figures in your retirement years is quite possible, even with conservative return projections.
Learn More: Up Your HSA Game With These Three Investment Strategies
Delay Making Withdrawals from your HSA
The longer your money can grow tax-deferred, the larger your account can grow.
One thing that many people don’t realize about an HSA is that you can reimburse yourself for medical expenses at any time. So if you incur a medical expense today, you can reimburse yourself years later (after your HSA funds have had time to produce investment returns).
By leaving the maximum amount in your account for as long as possible, you will maximize your returns.
Using Your HSA for Retirement
One of the best-kept secrets about HSAs is that they can be used as a retirement savings vehicle.
After age 65, you can withdraw money from your HSA for any reason without paying the 20% penalty (though you will still owe income tax on the withdrawal).
This makes your HSA a great way to supplement your other retirement accounts, like your 401(k) or IRA. And because you’ve already paid taxes on the money you contribute to your HSA, you won’t owe any additional taxes when you withdraw it in retirement.
Learn More: How To Fix The Most Common HSA Mistakes
Choosing the Right HSA Custodian
To make the most of your HSA, it’s important to choose a provider that offers a wide range of investment options.
Look for a custodian that allows you to self-direct your investments, so you can choose from a variety of stocks, bonds, and mutual funds.
Here is a list of the top HSA custodians in the country who also support self-directed investing within your health savings accounts.
A Word About Investment Risk
All investing involves risk. Self-directed investing allows you to invest in assets that have the potential to earn much higher returns compared to cash and money markets––especially over long periods.
However, there is also the possibility of loss. HSA for America does not provide investment advice. You should consult with a qualified financial advisor about your risk tolerance and possible need for liquidity before you invest in risky assets.
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Key Takeaways
Your HSA is a powerful tool for building wealth, but only if you use it correctly.
By contributing the maximum amount each year, investing your contributions, and using your HSA as a retirement savings vehicle, you can potentially grow your account balance into hundreds of thousands or even millions of dollars.
If you need an HSA-qualified health insurance plan, connect with one of our Personal Benefits Managers for a free consultation. We’ll also help you choose the right HSA provider, and set up your account, so you can implement an investment strategy that aligns with your goals and risk tolerance. Don’t let your HSA sit idle – start making the most of it today!
For Further Reading: Can I Transfer Money from an IRA to an HSA? | The Tax Treatment of Health Savings Accounts (HSAs) | NEW: At Last, You Can Combine Health Sharing With HSAs! Here’s How.
