91% of people with a health savings account make this mistake

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The vast majority of health savings account owners have not invested their money-in the long run, this is likely to lose them.

According to a study published by the Employee Welfare Institute on Thursday, only 9% of account holders invested part of their HSA balance in 2020. The remaining 91% hold the entire balance in cash.

HSA owners can invest money in mutual funds (such as mutual funds that track the S&P 500 index) and other options that are generally available to retirement savers.

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Paul Fronstin, director of EBRI’s health research and education program, said that the low share of investment accounts is worrying because it shows that many people are not taking full advantage of HSA. However, he said that some people may have valid reasons not to do so.

“For the same reason, you want to invest in a 401(k) in a mutual fund, and you can do the same in an HSA,” Franstine said.

HSA savers who are able to invest at least a portion of their money will usually see their savings grow at a faster rate, so they have more money to pay for medical expenses in their later years-when they are more likely to need care, Frans Ting said.

According to data from Fidelity Investments, in 2021, 65-year-old retired couples will need to save an average of approximately US$300,000 (after taxes) to pay for their post-retirement health care expenses.

Investors are also more likely to keep up or beat healthcare inflation. Fronstin said that savings held entirely in cash may depreciate relative to the future cost of care.

According to EBRI’s data, in 2020, the average account containing investments other than cash increased by US$3,420, while the average non-investment account increased by US$170. (Account contributions may be part of the reason for this discrepancy.)

Not everyone can use

HSA is a tax-friendly savings account. Compared with retirement accounts, they enjoy unique benefits because they don’t need to tax their savings if they are used for qualified medical expenses. (Retirement savings are taxed on contributions or withdrawals, depending on the type of account.)

These accounts are only for people with high deductible health plans. Over the past decade, these health plans have become increasingly popular among private sector employers, and the use of HSA has skyrocketed.

According to data from HSA provider Devenir, as of June, there were approximately 31 million accounts, about five times the number in 2011. They hold 93 billion U.S. dollars, up from about 12 billion U.S. dollars a decade ago.

The share of investment accounts is growing, but at a slow pace. According to EBRI data, in 2015, 4% of HSAs invested at least some savings.

“It’s rising at the speed of a snail,” Francine said.

Of course, not everyone has the means to invest.

Doing so will mean paying short-term medical expenses (possibly hundreds or thousands of dollars) out-of-pocket to maintain the investment of HSA funds and leave more room for investment growth.

Fronstin says that one strategy that might help such savers: hold enough cash in the HSA to cover your annual health deductible and use the remainder for investment.

There are other valid reasons why you may not invest in HSA savings.

For example, some HSA administrators may not even provide investment to users; many require a minimum balance (perhaps $1,000 or $2,000) before users start investing.

According to EBRI’s data, the latter requirement may cause problems for most account holders-approximately 40% of accounts will be less than $500 at the end of 2020.

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