HSAs can earn interest, but only if you keep money in a savings or money market account instead of spending it

A Health Savings Account itself does not automatically earn interest. What earns interest is the money inside it — and only if your HSA provider holds that money in an interest-bearing account. Many people with HSAs keep their balance in a non-interest-bearing checking account, which means their money sits flat. Others move their HSA funds into a savings account, money market account, or even invest in mutual funds or stocks through their HSA, which can generate returns.

The interest rate you earn depends entirely on your HSA provider and the account type you choose. Banks and credit unions that administer HSAs set their own rates, which change based on the federal funds rate and market conditions. A savings account at one provider might pay 4.5% annually while another pays 2%, or a money market account might offer different terms. You have to check with your specific provider to see what options they offer and what rates they currently pay.

Key Takeaways

  • HSA funds earn interest only if your provider offers an interest-bearing account and you choose to use it instead of a checking account.
  • Interest rates vary by provider and account type, so comparing what your current HSA administrator offers is the first step.
  • Some HSA providers let you invest in mutual funds or stocks, which can generate returns but also carry risk of loss.
  • Money you spend on may have access to medical expenses does not earn interest because it leaves the account.

How HSA providers structure interest-bearing options

Most HSA administrators offer at least two account types: a checking account with no interest, and a savings or money market account that does pay interest. Some larger providers like Fidelity, Lively, and HealthEquity also let you invest your HSA balance in a brokerage account with mutual funds, index funds, or individual stocks. The trade-off is that investment accounts carry the risk that your balance could go down as well as up.

To earn interest, you typically have to move your money from the checking portion of your HSA into the savings or investment portion yourself. This is not automatic. Some providers do this through a straightforward online transfer; others require you to contact them. Once the money is in the interest-bearing account, it begins accruing interest or investment returns based on the account type and the provider's current rates or market performance.

The amount of interest you earn depends on how much money you keep in the account and for how long. If you use your HSA to pay medical bills as they come in, you may have little or no balance sitting idle, so interest earned would be minimal. If you use your HSA as a long-term savings vehicle and only withdraw money for major medical expenses, a larger balance can generate meaningful interest over time.

Interest rates and how they compare to other savings accounts

HSA savings accounts typically pay rates in line with regular high-yield savings accounts at banks and credit unions. As of early 2024, some HSA providers offer rates between 4% and 5.35% on savings balances, though this varies. The rate your specific provider pays depends on their own banking relationships and how they manage HSA funds. Rates change frequently, so the rate you see today may be different in three months.

To find out what rate your HSA provider currently pays, log into your account online or call their customer service number. Your account statement or the provider's website should list the current annual percentage yield (APY). If your provider does not offer a competitive rate or does not offer a savings option at all, you can switch to a different HSA provider — though this involves paperwork and timing considerations with your employer or the previous administrator.

Investment options within an HSA and their potential returns

Some HSA providers go beyond savings accounts and let you invest your balance in mutual funds, exchange-traded funds (ETFs), or individual stocks. These accounts work like a brokerage account: you choose what to invest in, and your returns depend on how those investments perform. A stock fund might return 8% one year and lose 5% the next. A bond fund typically returns less but with less volatility. You bear the risk of loss, but you also have the potential for higher returns than a savings account.

To use investment options, most providers require you to have a minimum balance in the account — often $1,000 to $2,500 — before you can move money into investments. This is because they want to may support you have enough to cover near-term medical expenses from your checking or savings portion. Once you meet the minimum, you can choose which investments to hold and adjust them as you wish, just like in a regular brokerage account.

The advantage of investing HSA funds is that money can grow tax-free and remain tax-free when withdrawn for may have access to medical expenses. The disadvantage is that if you need the money for a medical bill and the market is down, you may have to sell investments at a loss. Many people use a hybrid approach: keep three to six months of expected medical expenses in a savings account, and invest the rest.

What happens to interest when you withdraw money for medical expenses

Interest earned on your HSA balance is yours to keep, whether you withdraw it or not. If you earn $50 in interest and then withdraw $200 for a medical bill, you keep the $50. The interest itself is not taxed as long as you use the HSA funds for may have access to medical expenses. If you withdraw money for a non-may have access to expense, you pay income tax on the entire withdrawal plus a 20% penalty — but the interest you earned is still part of that withdrawal and subject to the same tax and penalty.

Interest accrues daily or monthly depending on your provider's terms. Some providers calculate interest on your average daily balance; others calculate it on your ending balance. The difference is small but worth asking about if you have a large balance. Once interest is credited to your account, it becomes part of your HSA balance and is treated the same way as your original contributions.

How to move your HSA to a provider that offers better interest rates

If your current HSA provider does not offer interest or offers a very low rate, you can move your account to a different provider. This is called a trustee-to-trustee transfer or an HSA rollover. The process involves opening an account with a new HSA provider and asking them to contact your current provider to transfer the balance directly. You do not touch the money, so there are no tax consequences or contribution limits affected.

The transfer typically takes two to four weeks. During that time, your old account is usually frozen, so you cannot make withdrawals or new contributions. Once the transfer is complete, your new provider takes over and you can begin earning whatever interest or investment returns they offer. Keep in mind that if you are enrolled in an HSA through your employer, you may need to check whether your employer has restrictions on which providers you can use.

Before switching, compare what different providers offer: their current interest rates, minimum balances, investment options, fees, and customer service reputation. Some providers charge monthly maintenance fees or per-transaction fees that can eat into the interest you earn. Others charge nothing. Reading reviews from current users can help you understand what the experience is actually like.

Frequently Asked Questions

Can I earn interest on an HSA if I use it to pay medical bills every month?

You can earn interest on whatever balance remains after you pay your bills. If you spend most of your HSA balance each month, there is little money left to earn interest. Interest accrues only on the money sitting in the account, so the more you keep in the HSA and the longer you keep it there, the more interest you earn.

Do I have to pay taxes on interest I earn in my HSA?

No. Interest earned in an HSA is not taxed, and you do not report it on your tax return. The interest remains part of your HSA balance and is treated as HSA funds. If you withdraw the interest along with other HSA money for a may have access to medical expense, it is not taxed. If you withdraw it for a non-may have access to expense, both the interest and the withdrawal are taxed and penalized.

What is the difference between a savings account and a money market account in an HSA?

A savings account typically offers a fixed interest rate set by the provider. A money market account usually offers a variable rate that changes based on market conditions, and may offer check-writing or debit card access. Money market accounts sometimes pay slightly higher rates than savings accounts, but the difference varies by provider. Check your provider's current rates to see which is better.

Can I invest my entire HSA balance in stocks or mutual funds?

Most providers that offer investment options require you to keep a minimum balance in a non-invested account — usually $1,000 to $2,500 — to cover near-term medical expenses. You can invest the rest. Some providers let you invest more if you want, but keeping some money in a savings account protects you if you need cash quickly and the market is down.

What happens to my interest if I switch HSA providers?

The interest you have already earned stays in your HSA balance and transfers with you to the new provider. When your old provider sends your balance to your new provider, the interest is included. You do not lose it, and it is not taxed during the transfer.