Turbocharge Your HSA: An Introduction to Self-Directed HSA Investing

by | Sep 18, 2023 | Health Savings Account | 0 comments

Do you want to earn greater expected returns on the assets in your HSA? Learn all about Self-Directed HSA investing and what it can do for your portfolio.

An Introduction to Self-Directed HSA Investing

You don’t have to treat your HSA assets like a passbook savings account. That’s a good way to have inflation eat away at the purchasing power of your HSA account over time.

Instead, you can potentially keep up with or even beat inflation by investing your HSA assets in a variety of investment options.

Depending on the custodian or third-party HSA administrator you choose, you can potentially invest your HSA assets in: 

  • Mutual Funds
  • Stocks
  • Bonds
  • Etfs
  • Real Estate 
  • Precious Metals

…And more! 

This flexibility allows you to tailor your investments based on your risk tolerance and financial goals.

Potential for Higher Returns

By diversifying your investments within your HSA, you have the potential to achieve higher returns compared to the standard interest rate offered by some HSA providers. 

When managed effectively, self-directed HSAs may generate significant growth over time, contributing to a larger pool of funds available for qualified medical expenses, or to supplement retirement savings after age 65.

Tax Advantages of Self-Directed HSA Investing

Just like regular HSAs, self-directed HSAs offer you triple tax benefits. 

Your contributions are tax-deductible, earnings are tax-free, and qualified withdrawals for medical expenses are also tax-free. This unique combination of tax advantages can provide significant savings and allow for potential growth on a tax-free basis.

Considerations and Risks

While self-directed investing in your HSA can be advantageous, it’s important to be aware of potential risks and considerations:

Complexity and Responsibility.  With a self-directed HSA, you take on the responsibility of managing your investments. This includes researching investment options, monitoring performance, and making informed decisions. It’s crucial to have a solid understanding of investment principles and stay informed about market trends and risks.

Market Volatility and Risk. Investing in stocks, bonds, or other assets within your HSA carries inherent market risks. The value of your investments can fluctuate, potentially leading to losses or reduced returns. It’s important to carefully assess your risk tolerance and diversify your investments to mitigate potential losses.

Qualified Expense Compliance. While self-directed HSAs provide you with a wider range of investment options, it’s important to ensure that any HSA funds withdrawn are used exclusively for qualified medical expenses. Failure to comply with HSA rules and using funds for non-qualified expenses may result in tax penalties and loss of tax advantages.

How To Choose an HSA Administrator or Custodian

To establish a self-directed HSA, you need to find an administrator or custodian that supports these types of accounts.

Here are some key steps to help you find and select a suitable provider:

  • Research and Compare Options. Take the time to research different HSA providers that offer self-directed investment options. Look for established financial institutions or specialized custodians with experience in self-directed HSAs.
  • Evaluate Fees and Costs. Compare the fees charged by different providers, including account maintenance fees, transaction fees, and investment-related fees. Pay attention to any additional costs associated with self-directed investments.
  • Consider Customer Support. Assess the level of customer support and educational resources provided by potential HSA administrators. Look for providers that offer reliable customer service, investment education, and online tools to assist you in managing your self-directed investments.
  • Review Investment Options. Evaluate the available investment options and consider whether they align with your investment goals and risk tolerance. Ensure that the administrator provides access to the types of investments you’re interested in pursuing.
  • Seek Professional Advice. If needed, consult with a financial advisor who specializes in self-directed investing or HSA strategies. They can provide valuable guidance in selecting an HSA administrator, understanding investment opportunities, and managing investment risks.

Looking for a custodian or third-party administrator for your health savings account? We’ve done the legwork for you! Visit this page for a guide to some of the top HSA custodians in the country.

Any of these vendors can establish a health savings account for you that supports self-directed investing.

Here are some additional blogs on the topic: Higher 2024 HSA Contribution Limits Allow You To Save Even More on Taxes | The Best Health Savings Account Administrators in 2023 | How Much Can an HSA Save in Taxes? | Up Your HSA Game With These Three Investment Strategies | The 2024 Guide to Qualified HSA Funding Distributions (QHSAFDs)

Here are some additional pages related to this article: Healthshare Plans | The HSA Secure Plan

Compare Pricing on the Best HSA Plans Available


Frequently Asked Questions

What is a Self-Directed HSA?

A Self-Directed HSA is a specialized type of Health Savings Account that allows you greater control over your investment choices. Unlike a standard HSA where you may be limited to a selection of mutual funds, a self-directed HSA lets you invest in a wider array of options, such as real estate, private equity, and more.

How is a Self-Directed HSA different from a regular HSA?

A Self-Directed HSA differs from a regular HSA primarily in terms of investment choices. While a regular HSA might limit you to stocks, bonds, or mutual funds, a Self-Directed HSA permits a broader range of investments.

Who can open a Self-Directed HSA?

Anyone eligible for a regular HSA can also open a Self-Directed HSA. Eligibility typically requires enrollment in a High Deductible Health Plan (HDHP) and having no other first-dollar medical coverage.

Can I convert my existing HSA into a Self-Directed HSA?

Yes, you can usually roll over or transfer your existing HSA into a Self-Directed HSA. You’ll need to check with the custodian of your new Self-Directed HSA for specific procedures.

What types of investments can I make with a Self-Directed HSA?

You can invest in a variety of asset classes like real estate, private lending, precious metals, and private companies, among others. However, IRS regulations do prohibit certain types of investments such as collectibles and life insurance.

What is an HSA custodian? 

A custodian is a financial institution that holds and safeguards the assets in your HSA. Custodians ensure compliance with IRS rules and regulations.

What is the role of a third-party administrator for a Self-Directed HSA?

A third-party administrator (TPA) handles the administrative responsibilities for your Self-Directed HSA, such as record-keeping, tax reporting, and disbursement of funds.

Do I need both a custodian and a third-party administrator?

Not necessarily. Some custodians offer in-house administrative services, negating the need for a separate third-party administrator. Others may require you to engage a TPA.

How do I choose a custodian for my Self-Directed HSA?

Factors to consider when choosing a custodian include the range of investment options, fees, customer service, and the availability of educational resources. Some custodians specialize in certain investment types, so make sure your chosen custodian aligns with your investment strategy.

Are there any fees associated with a Self-Directed HSA?

Yes, most custodians and third-party administrators charge fees for account maintenance, transactions, and other administrative services. Always inquire about fees upfront.

 What are the annual contribution limits for a Self-Directed HSA?

The contribution limits for a Self-Directed HSA are the same as those for a regular HSA. These limits are set annually by the IRS.

As of 2024, the maximum HSA contribution limitswill increase to $4,150 for self-only HSAs and to $8,300 for family HSAs. These are increases of $300 and $550, respectively, from the 2023 limits.

Are HSA contributions tax-deductible?

Yes, contributions to an HSA are tax-deductible up to the annual limit.

Can I use Self-Directed HSA funds for medical expenses?

Yes, funds from a Self-Directed HSA can be used tax-free for qualified medical expenses, similar to a regular HSA.

For full information on what constitutes a qualified medical expense, see IRS Publication 502 – Medical and Dental Expenses.

What happens to my Self-Directed HSA when I turn 65?

HSAs are portable, so if you change jobs, your HSA moves with you and the funds remain available for qualified medical expenses.

Can I lose money in a Self-Directed HSA?

Yes, the investments within a Self-Directed HSA carry risks, and it is possible to lose money. 

Always conduct thorough research and consider consulting a financial advisor, especially for more complex investment choices.

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