A health savings account, or HSA, is designed to give you tax advantages and help you manage and pay for your health care expenses. It can only be used in combination with a high-deductible health care plan.

With an HSA, anyone can contribute to the account — you, your employer, a family member or someone else. To set up the account, you must work with a bank, an insurance company or another party that the Internal Revenue Service has designated as a qualified trustee.

HSAs provide several tax advantages:

  1. You may deposit pretax dollars. That means the money you put in your HSA is not counted as income. This typically means you’ll pay less in income taxes.
  2. Any earnings are tax-advantaged. If you earn interest or have other appreciation, that money continues to grow tax-free.
  3. Any contributions that might be made by your employer also are not counted as income. 
  4. The money you spend on qualified medical expenses is exempt from income taxes.

Another feature of an HSA is that once you hit a certain savings amount (called the investment threshold), you can invest part of your HSA in mutual funds. The invested funds could grow in value more quickly than money that is simply earning interest. And if you keep investing in mutual funds over time, you could be creating a nice nest egg for health care costs in retirement.

However, investing money in mutual funds carries risks. Your money is not guaranteed to grow. The mutual funds could lose value, which means you would lose money. Unlike checking and savings deposits, investment funds are not insured by the FDIC — the Federal Deposit Insurance Corp.

To invest in mutual funds, you would typically set up an investment account. To make investing easier, you can set up an automated investment sweep. When you reach the investment threshold, excess funds will automatically be transferred to your investment account.

With an investment account, you can choose how to spread your money among the available mutual funds. You can move the money out of or between funds anytime. This is called rebalancing.   

Should you need any invested funds to pay for qualified medical expenses, you simply transfer them to your main HSA cash account.

Before deciding to invest funds, make sure you understand the risks. It might be good to talk with an investment advisor or financial counselor if you have questions.

Ready to learn more?

Optum Bank®, Member FDIC, with more than $2 billion in assets, is dedicated to providing products and services that help make the health care system work better for everyone. To learn how you can open a Health Savings Account, visit www.OptumBank.com.

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