To some extent, it’s understandable if people don’t put their HSA funds into the market if they plan to withdraw money soon for medical expenses and are worried about short-term market volatility. Money can be taken out of your HSA for healthcare at any time without a penalty or tax. But using your account this way means missing out on the major benefit it provides.
If you put money into an HSA and don’t invest it, it’s little more than a glorified savings account — albeit one that lets you lower your out-of-pocket medical costs a bit by covering them with pre-tax dollars. But if you invest, you can (hopefully) substantially grow the value of the tax-deductible contributions you’ve made, pay no taxes on the gains, and withdraw the money later without owing income tax. No other investment account provides this triple tax benefit; traditional and Roth IRAs and 401(k)s requiring you to choose either pre-tax contributions or tax-free withdrawals.
And because HSAs aren’t use-it-or-lose-it accounts, as flexible spending accounts are, you can leave your invested funds to grow for years and build a substantial nest egg. If you incur large healthcare costs in retirement, as many seniors do, you’ll have a pool of tax-free funds to tap. You can also take money out for any purpose after age 65 and pay only ordinary income tax on it, so if you don’t end up needing medical care, the money will still be accessible.