The Health Savings Account (HSA) is one of the most attractive tax-advantaged accounts available.
With an HSA, you get a tax deduction for the contribution, the money grows tax-free, and when you withdraw you don’t pay taxes on qualified costs.
Not only is there very favorable tax treatment with the HSA, but it’s also possible to invest the money in your HSA to get more from it over the long run. With this in mind, crypto enthusiasts may be wondering, "Can I invest in crypto in my HSA? And if so, how?"
The short answer is, yes, it’s possible to hold cryptocurrencies in an HSA. But it takes extra steps and you need to be prepared for the costs involved. Here’s what you need to know about how to invest in crypto in your HSA.
What Is An HSA?
A Health Savings Account (HSA) is a tax-advantaged account that allows you to grow your wealth over time. Like other tax-advantaged accounts, though, there are rules with the HSA.
While there are no income restrictions, you do need to be enrolled in a high-deductible health plan. Additionally, you can’t be enrolled in Medicare and still make contributions to an HSA.
Your annual contribution limits are based on whether you’re single or have a family and these limits change each year. In 2023, the contribution limit for self-only coverage is $3,850. You can check with the IRS each year to review the contribution limits.
Unlike a Flexible Spending Account (FSA), you don’t have to use up your HSA at the end of the calendar year. Instead, unused money continues to grow in your account. If you invest the money in your HSA, it has the potential to grow at a faster rate.
You can withdraw money from your HSA at any time, without penalty, as long as the money is used for qualified medical expenses. If you use the money for something else, you’re charged a 10% penalty and you have to pay taxes. However, once you reach age 65 this penalty goes away, so your HSA will simply function like another IRA.
Because the HSA is so powerful, many investors like the idea of using it as a way to build wealth for the future, especially since it can be a tax-free way to cover healthcare costs later in life.
How To Invest In Crypto In Your HSA
One of the challenges to investing in crypto in your HSA is the fact that most custodians don’t offer cryptocurrencies as an option. Their investment options are typically limited to stocks and funds. Whether you go through your work for an HSA, or whether you open your own account, your investments are generally limited.
However, just as you can open a self-directed IRA for crypto retirement account investing, it’s possible to do the same with an HSA. With the help of a self-directed HSA, you can add crypto to your long-term portfolio — and improve your tax efficiency.
In order to invest in crypto, you need to set up a trading account that’s owned by your HSA. This takes extra steps, so it’s important to be careful to complete the paperwork correctly. Here's what you'll need to do:
- Look for a custodian for your crypto HSA. There aren’t very many, but some custodians that offer self-directed IRA services may also offer HSAs. DirectedIRA, for example, offers a Crypto HSA in addition to its self-directed IRAs.
- Open a crypto HSA. You might need to go through extra steps, such as setting up a separate entity or opening another self-directed IRA, which will be held inside the HSA. The IRA will do the cryptocurrency trading, but because the IRA is helf by the HSA, it all works out.
- Authorize a crypto trading account specific to the HSA. Many crypto HSA custodians will help you set up a crypto trading account. It’s important to note that this trading account will be separate from other accounts you have. It will likely be with a major exchange, like Coinbase or Gemini.
- Follow the instructions to fund your account. Once everything is in place, you need to watch for instructions on how to fund your account and trade. Make sure you keep your HSA assets separate from your other assets.
After setting up your account, you can then hold and trade crypto in your HSA account. It’s important to note that annual HSA contribution limits apply across all of your accounts.
Let's say that you have self-only coverage in 2023, which means your annual HSA contribution limit is $3,850, and you're already setting aside $2,000 in a traditional HSA. In this case, you can only put a maximum of $1,850 into your crypto HSA.
Crypto HSA Fees
When opening a crypto HSA, be aware that there might be higher fees than what you’d see with a more traditional account. Depending on how you handle your crypto HSA, you could have start-up fees of up to $500 or more.
Some of the other ongoing fees you’re likely to encounter with a self-directed HSA that connects with a crypto exchange include:
- Annual fee
- Trading fees
- Processing fee to fund the crypto account
- Additionally processing fees
- Potential storage fees
Before you open a crypto HSA, make sure you understand the fees and how they work. Depending on the situation, you might be better off simply using a more traditional HSA with low (or even no) fees and managing your crypto elsewhere. Run the numbers to see if they make sense for you.
Pros And Cons Of A Crypto HSA
Before you jump through the hoops associated with investing in crypto in your HSA, weigh the pros and cons to make sure you want to go through the trouble.
The Bottom Line
Even though cryptocurrencies aren’t traditionally considered for tax-advantaged accounts like HSA and IRAs, it’s possible to create workarounds by using self-directed accounts. However, when you use one of these accounts, you need to find a custodian that can help you remain in compliance with IRS rules. That can result in more fees and paperwork.
While it can feel attractive to hold cryptocurrencies in an HSA and reap the triple tax benefits, it’s important to carefully consider whether the hassles and costs are worth it. You should also weigh the risks associated with investing in cryptocurrencies like Bitcoin and Ethereum and prepare for the volatility that's likely to be involved.
Miranda Marquit, MBA, has been covering personal finance, investing and business topics for more than 15 years, and covering crypto topics for more than 10 years. She has contributed to numerous outlets, including NPR, Marketwatch, U.S. News & World Report and HuffPost. She is an avid podcaster, co-hosting the podcast at Money Talks News. Miranda lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors.