Here's What Happens to the Extra Money in Your HSA

Healthcare can be a huge expense at any stage of life, so it's important to save for it. And in that regard, you have options. 

You could pump money into a regular savings account and dip in as needed. Or, you could save for healthcare in a tax-advantaged manner by funding a flexible spending account (FSA) or health savings account (HSA). 

If you have an FSA, you may be aware that if you don't spend down your entire plan balance by the end of the year, you could end up forfeiting funds. But HSAs work differently. In fact, having extra money in an HSA is not a bad thing at all.

When you're left with a surplus

HSA contributions currently max out at $3,850 for self-only coverage and $7,750 for family coverage (and they're set to rise in 2024). If you're 55 or older, you're allowed to make a $1,000 catch-up contribution to your HSA, the same way savers 50 and older can make a catch-up contribution to an IRA.

But let's say you're single and put $3,850 into your HSA this year, only you end up with just $1,000 worth of medical bills. That leaves you with $2,850 to spend. The good news, though, is that you don't have to spend it now.

Unlike FSAs, HSAs don't force you to deplete your plan balance every year or risk losing your money. Quite the contrary -- HSAs are built to encourage you to carry funds over from one year to the next. 

Unlike FSAs, HSAs allow you to invest money you don't withdraw right away. Investment gains in an HSA are then yours to enjoy tax-free, and withdrawals are tax-free when used for qualified medical expenses. 

So, let's say you're left with $2,850 in your HSA at the end of the year. You could conceivably invest that money for another 25 years until you need to withdraw it. If your investments generate an average annual 8% return during that time, which is a bit below the stock market's average annual 10% return, that $2,850 will grow into about $19,500.

In fact, one thing you may specifically want to do with your HSA is try not to spend your entire balance every year, but rather, invest some of that money and reserve it for retirement. At that stage of life, you might need more money to spend on healthcare, and money might be tighter due to you not working. So it's a good thing to have that extra cash.

There's really no risk 

You might worry that leaving too much money in your HSA will mean potentially losing some down the line if you don't end up needing all of it for healthcare purposes. But here's another cool feature of HSAs. Once you turn 65, you can take a withdrawal for any purpose without incurring a penalty. That withdrawal does not have to be medical in nature. 

So, let's say you end up with a $200,000 HSA balance in retirement and you find that you're only spending $5,000 a year on healthcare. Unless your retirement lasts 40 years, at that pace, you won't end up using your entire balance. But if you're 65, you can start withdrawing funds for non-medical purposes, and all that'll happen is you'll be taxed on your withdrawals. That's no different than the taxes you pay on traditional IRA withdrawals.

All told, having extra money in an HSA is a good thing. So if it's your first time funding one of these accounts and you're left with a surplus at the end of the year, that's definitely nothing to panic over.