Should You Open a CD in Your HSA?

Health savings accounts (HSAs) are tax-advantaged savings vehicles that help you save and invest for medical expenses. HSAs are funded with pre-tax dollars, which can lower your tax bill now, and you never pay taxes on investment returns when the funds are used for medical expenses. This makes HSAs one of the most powerful investment vehicles at your disposal, as you can keep all your investment gains for yourself.

Many HSA holders choose to invest in stocks, funds, or other investments to grow their contributions. However, with certificate of deposit (CD) rates trending higher than they've been in decades, some may wonder if it's worth putting some money in a deposit account instead. If your HSA allows you to invest in CDs -- and most do -- let's take a look at when it might be worth opening one in your account.

Invest in CDs for guaranteed returns

Aside from their high rates, CDs have one thing going for them -- they can offer you stable, guaranteed returns. The upfront CD rate tells you how much interest you're guaranteed to earn over the length of your term (provided you leave your money in place for the duration). It doesn't change, even if ongoing market rates decline.

For example, the best CD rates right now pay at or above 5.00% APY. Meanwhile, the federal funds rate, which largely influences CD rates, is likely going to decline in the near future. If you lock in a 5.00 APY now, you could set yourself up to earn a solid rate at a time when going rates are much lower than that.

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Capital One 360 Performance Savings APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings Member FDIC.	APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0
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This might be more appealing than investing in the stock market. Stocks, though they offer unlimited growth potential, can also result in losses that could weaken or deplete your HSA money. Likewise, investing in a CD might be better than leaving your money as cash in your account, as your CD earnings can help you keep pace with inflation -- while cash could lose purchasing power.

Depending on who manages your HSA, your CD options may be limited to brokered CDs. Brokered CDs don't have early withdrawal penalties; rather, you would need to sell your CD on a secondary market if you wanted to cash out early. Brokered CDs also don't earn compound interest, but simple interest. Often, your CD earnings will be transferred into a separate account, either on a monthly, semiannual, or annual basis.

Avoid investing in CDs for long-term growth

Although CDs can be good instruments for increasing wealth in the short term, they're not great vehicles for long-term growth. Even the best CD rates cannot compete with the gains offered by the stock market for long-term investors. So if you have a long time horizon, your HSA funds might be better invested in stocks and index funds.

Consider, for instance, that the S&P 500 has generated an annual average return of 10% over the last 50 years. True, this doesn't mean it will generate 10% every year -- some years it will be 22%, others -5% -- but over long periods, it tends toward that annual growth rate. Investing steadily in an S&P 500 fund, then, could offer you greater growth potential than the fixed rate on a CD.

Truth be told, nothing should stop you from combining CDs and equity investments. Diversifying your assets in this way can give you equal parts security and growth. Just be sure you're investing that money in something, even if it's in a savings account. Holding large swaths of cash in an account that doesn't earn interest in today's high-rate environment could mean missing out on easy earnings.