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Health savings accounts (HSAs) are often touted as excellent retirement savings tools. This is due to a combination of their “triple tax benefit” and the way money in those accounts gets treated once an account owner reaches age 65.

The triple tax benefit is the fact that money can be contributed pre-tax, grow tax-deferred, and be withdrawn tax-free for qualified medical purposes. The age 65 benefit is that once an owner reaches age 65, that person can withdraw money for any purpose and only pay ordinary income taxes on their gains. That makes the HSA act similar to a traditional IRA and tempting to use as a retirement plan. That’s especially true since healthcare costs tend to rise as you age, adding to the account’s impact.

Yet as awesome as those accounts can be, there is one massive string attached to them. To be able to contribute to a health savings account, you must only be covered by a high deductible health insurance plan. That means if you get sick or injured or otherwise need substantial medical care, you’ve got to cover the first part of the costs of that care out of your own pocket. That raises a key question: Should you really invest your health savings account in 2023?

The trade-offs you face

The key to being able to invest your HSA is to have money set aside to cover your actual healthcare costs. You can either save additional money outside of your HSA in order to cover those costs, or you can use the money you’re socking away inside your HSA to do so.

There are advantages and disadvantages to each approach. The key advantage of using money from outside your HSA is that you can keep the money inside that HSA compounding for your future. The key disadvantages are that you need to come up with that money in the first place, and money you’re spending on healthcare from outside your HSA is generally after-tax money.

Sure, you can eventually reimburse yourself from your HSA instead of spending money directly from it, but that doesn’t change the fact that you have to come up with the money in the first place. If you’re already maxing out a 401(k) and an IRA, it might be very tough to also both max out an HSA and save up enough cash to cover your actual medical expenses from outside of that plan.

On the flip side, the key advantages of using money from inside your HSA stem from the fact that you’re already saving that money, in a tax-advantaged way, specifically for healthcare costs. By taking out that pre-tax money to use it for a qualified and untaxed purpose, it’s some of the least expensive money you can get your hands on quickly for covering your healthcare costs.

Of course, there are at least two key disadvantages of using your HSA to cover your healthcare costs. First, since you’ll want to have cash available to cover those costs, at least part of your HSA shouldn’t be invested aggressively for your future. Second, once the money is spent, it’s no longer available to compound within your account.

It depends on how you'll cover your actual healthcare costs

Put it all together, and the basic answer is that as long as you have the money available as cash to handle your actual healthcare costs, then it’s perfectly fine to invest your HSA in 2023. Whether that means you have cash available outside the plan to cover those costs or simply build up a cash buffer inside the plan and then invest money above that is up to you.

Regardless of where you’re going to pay your actual healthcare costs from, there are two numbers on your cost structure you should pay attention to: your deductible and your out-of-pocket maximum.

Generally speaking, you will pay for the first dollars of your healthcare costs per year, up to the deductible amount. After that point, your health insurance will kick in and pay a portion, up until you reach your out-of-pocket maximum. From then on, covered costs within the year will be your insurance’s problem, not yours.

At a bare minimum, you’ll want to have at least your deductible amount socked away as cash before you even consider investing your HSA money. Beyond that, it’s a trade-off between your risk tolerance, health status, and overall financial position. The stronger the rest of your financial foundation, the less you’ll need in cash specifically to cover healthcare costs.

Get started now

No matter where you plan to cover your healthcare costs from, it’s important to recognize that a surprise illness or injury can happen at any time. So get started now socking away the cash you’ll need to cover your near-term medical needs. That way, you’ll have a better shot of having money available to invest for your retirement. Whether or not your HSA plays a role in your overall retirement plan, when you need the money, you’ll be glad you have something socked away.

This article was written by Chuck Saletta from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to [email protected].