Don’t Keep Your HSA Balance In Cash – Put It To Work Instead | Smart Change: Personal Finances

(Ryan Sze)

In 2020, the United States had a gross domestic product (GDP) per capita of $63,487. In the same year, health expenditure per capita reached $11,945, implying that the country spent nearly 19% of its GDP per capita on health care.

This fraction is nearly double what peer countries spend on health care. For comparison, Norway’s GDP per capita in 2020 was $68,359, but the Scandinavian country only spent $6,748 on health care per capita, just under 10% of its GDP per capita. inhabitant.

It is therefore not surprising that health care in the United States is rather expensive. Fortunately, some very tax-efficient accounts, like a Health Savings Account (HSA), can help offset some of these costs.

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And an HSA is not strictly Saving account. While you can treat it like a rainy day fund and keep it in cash, it may be best to put your HSA balance to work, especially if you don’t anticipate healthcare expenses in the near future or if you have a large account balance.

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Investing in your HSA

In 2022, the HSA contribution limit is $3,650 for individuals and $7,300 for families. To qualify for an HSA, you or your family must be enrolled in a high-deductible health plan (HDHP), with a deductible of at least $1,400 for individuals or $2,800 for families.

While this contribution limit may seem small — and in some cases doesn’t even cover a year of healthcare expenses — it can add up over time. If you go for several years without needing to withdraw from your HSA for health care, you could have a large amount in the account.

For example, suppose you contribute to the HSA limit every year for three years and make no withdrawals during that time. By the end of the third year, you will have nearly $11,000 in the account.

Still, this assumes you leave your money in cash and earn no interest. How about investing your money instead? If you put the money in a large-scale equity index fund like the Vanguard Total Stock Market Index Fund ETF (NYSEMKT: VTI) and achieve a compound annual growth rate (CAGR) of 10% (roughly equal to the long-term average annual return of the underlying index), you would have just over $12,000, or about $1,000 more than if you hadn’t invested at all.

But what if you did this for a long period of time – for 10, 20 or even 30 years? Here are the numbers:

A length of time

Cash only (0% CAGR)

Bear Cases (8% CAGR)

Base Case (10% CAGR)

Bull Case (12% CAGR)

10 years

$36,500

$45,554

$49,537

$64,017

20 years

$73,000

$166,939

$208,939

$262,847

30 years

$109,500

$413,257

$600,074

$880,381

As you can see, you end up with a a lot greater HSA if you invest the balance instead of keeping the funds in cash. As time increases, so does the gap between an all-cash HSA and an HSA that has been put to work and invested.

For example, you will have $208,939 in your HSA after compounding at 10% for 20 years, which is almost three times more than you would have had by keeping the money in cash. And over 30 years, you’ll end up with over $600,000 – nearly half a million more than an all-cash HSA.

Make your HSA work for you

The CGS are above all a tool for covering health expenses. But these costs often arise sporadically, and you could go several years without having to spend much before suddenly incurring a hospital bill or major surgery.

During these years, continue to make contributions to the HSA. And once the money is in your account, make sure it’s working hard for you. By investing these HSA funds, you could end up with a significantly higher balance than if you just kept your money in cash, especially over time. This way, you’ll be able to sleep soundly at night knowing that you can comfortably afford all of your health care, no matter how much it costs.

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Dumb Contributor Ryan Sze has no position in the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.

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