HSA Investing for Muslims: Is It Halal?

One of the most tax-efficient methods Americans utilize to save for retirement is opening a Health Savings Account (HSA). This strategy has become very common in the United States over the years, but its potential can be misunderstood when approaching without the correct information on how to optimize it. The bulk of current discussions on HSAs are almost entirely focused on contribution strategies, tax benefits, deduction strategies, and more. While this is important information, it rarely touches on a crucial aspect: what actually happens to that money once it is invested.

For eligible Muslim professionals in the U.S. looking to open an HSA that adheres to Islamic principles, this angle is of vital importance. Tax-advantages are real and worth understanding, but they are only half of the equation. That said, this guide walks you through how HSAs work, why they are so valued from a tax perspective, and everything Muslim investors should know before opening one.

What is a Health Savings Account (HSA)?

An HSA is a tax-advantaged retirement account designed to help cover medical expenses. In order to be eligible to contribute to one, you must be enrolled in a High-Deductible Health Plan (HDHP). This is a type of health insurance plan in the United States that benefits from lower monthly premiums¹ with the tradeoff of higher up-front costs before the deductible is met by the provider. Contributions to an HSA come directly from your paycheck. This is commonly set up through payroll deduction via your employer (similar to a 401(k)) or made directly by an individual outside of payroll. Employers may also contribute to an employees’ HSA as part of their benefits package.

One of the most common points of confusion with HSAs is how they differ from a Flexible Spending Account (FSA) as both are used for medical expenses. The key difference is that with FSAs, unused funds are typically forfeited by the end of the year. This requires a great deal more maintenance and attention than many Americans have with their busy schedules and thus go under-utilized. The advantage with HSAs is that these same funds roll over year to year with no expiration and stay with you even if you change employers or health insurance plans. This is one of a handful of reasons why many Americans prefer HSAs over FSAs.

Why Many Investors Value HSAs

One of the main selling points for HSAs is that they offer what is considered a “triple-tax advantage.” The first point of this equation pertains to tax-deductible contributions. This refers to the fact that money contributed to an HSA, whether through direct contributions or payroll deductions, typically lowers taxable income for the year. The second advantage is that HSAs offer tax-free growth. Similar to a 401(k) or IRA, the balance of money inside an HSA account is able to grow tax-free on a yearly basis. They also offer tax-free qualified withdrawals. If funds are withdrawn from the account to cover medical expenses, they come out entirely tax free regardless of how much the balance of the account has grown. This combination is what sets HSAs apart from other tax-advantaged accounts which generally only offer tax benefits at one or two of the stages instead of all three (tax-deductible contributions, tax-free growth, tax-free withdrawals).

Can You Invest Money Inside of an HSA?

Funds within an HSA account often go under-utilized as many people don’t allocate them towards investments. Most HSA providers allow account holders to invest a portion of their balance once it has reached a minimum cash threshold. This varies by provider, but once met, allows the holder to invest their cash in options like Mutual funds, Exchange-traded funds (ETFs) and Index funds.

It is important to note that not every HSA provider offers the same investment menu. While some offer a wider variety of options comparable to a brokerage account, others offer a more limited set similar to an employer-based 401(k). Fortunately, HSA holders aren’t limited to their employer's set default provider like 401(k) participants are. That is why it is worth evaluating factors like investment menu, fees, and minimum thresholds before assuming you are stuck with the plan you’ve been enrolled in. If your employer’s provider offers a limited or low-quality investment menu it may be worth transferring your balance to a different HSA provider as that option is available.

Should You Invest or Keep Cash in Your HSA?

There is no single right answer to this question, as the decision largely depends on personal factors. That said, there are a few good rules of thumb to consider when approaching this. The first is expected medical expenses. If you anticipate needing funds for medical expenses in the near future, it’s a good idea to keep a portion of your HSA balance liquid in cash. Invested funds can lose value in the short term, and as we age it is safe to expect an emergency fund may be necessary for health-related events. Keeping a solid cash cushion offers individuals the peace of mind and financial flexibility for whatever may come even if you plan to invest the rest of your balance.

It is also important to consider your investment time horizon. If you are young and healthy, treating your HSA like a long-term, retirement-adjacent account might make sense in the near-term. For those prepared to ride out market fluctuations that may come, investing more of your balance can be a financially-safe strategy. It is smart to have a good grip on personal risk tolerance as it pertains to this matter. Some people may be more comfortable holding a larger balance of cash in their HSA while others may prefer allocating more towards investments. There is no universal approach to managing your HSA balance. Generally speaking, taking a measured approach towards investment and cash allocation within your HSA (pertaining to personal preference) is a smart idea.

Is HSA Investing Halal?

This question is one of vital importance to many Muslim professionals in the United States that doesn’t necessarily apply to the conventional HSA account holder. In the simplest terms, an HSA account is not inherently haram or halal on its own. What determines whether your HSA investments align with Islamic principles is the same distinction that makes a 401(k) or an IRA halal the quality of your investments.

However, the difference between a traditional retirement account and an HSA is that it is primarily considered a medical spending account. If you intend to keep your HSA balance primarily in a non-interest-bearing cash option, doing so is not inherently impermissible. That said, for Muslim professionals who choose to invest a portion of their balance, reviewing the quality of investment options is a necessary step. If your HSA provider’s investment menu includes primarily Mutual or Index funds, those holdings may include exposure to industries that don’t align with Shariah principles.

Wahed provides educational resources to help Muslim professionals understand how investments may be assessed for Shariah compliance. For those looking for assistance in this process, Wahed has appointed the Shariyah Review Bureau (SRB)², an institution composed of a body of scholars with Islamic finance presence over 15 jurisdictions, to facilitate external Shariah review and oversight. Our screenings ensure that all investments made through our firm are Shariah compliant, and where applicable, information is provided to help investors dispose of incidental non-compliant income. This guidance can provide peace of mind for those looking to adhere to investment practices aligned with Islamic principles. If you have any further questions for us as it pertains to this matter feel free to contact us via our website.

How Does an HSA Fit into a Long-Term Financial Plan?

An HSA account is best optimized when viewed as one component of a broader financial strategy as opposed to a standalone account. It offers a number of use cases and advantages that can be utilized based on personal preference, the bulk of which have been listed below.

First and foremost, it is a great vehicle for emergency savings. If you do not have access to a sufficient emergency fund elsewhere, an HSA can be used for necessary medical expenses while acting as a safety net for other related emergencies.

It is also a great component to retirement planning. Many financial planners view an HSA as a supplemental addition to an individual's retirement plan alongside a 401(k) or IRA account as it offers unique advantages beyond what they can provide. As mentioned earlier, in the U.S. qualified medical expenses in retirement tend to be significant, but fortunately they can be paid for tax-free through HSA funds. Unlike a 401(k) or IRA, an HSA has no required withdrawals tied to retirement age for medical spending. Even better, after an individual holder turns 65 funds³ can be withdrawn penalty-free for non-medical reasons as well.

Employer benefits play into this structure as well. If your employer contributes to your HSA or offers a matching contribution, this is worth factoring into your overall benefits strategy similar to how you would evaluate a 401(k) match.

Lastly, for those who have maxed out tax-advantaged options (401(k), IRA), an HSA can serve as an additional tax-efficient vehicle before turning into a standard taxable brokerage account. Since an HSA offers the triple tax-advantage mentioned earlier (tax-deductible contributions, tax-free growth, tax-free withdrawals), in some cases it can be a more tax-efficient place to store savings than other brokerage accounts which are subject to capital gains tax. This may be particularly relevant for high-income individuals who have already prioritized their other retirement accounts.

Viewed this way, an HSA serves as a complimentary asset to broader financial goals that can strengthen your overall plan. That said, the accounts you use and the utilization of them should reflect your full financial picture and preferences, not just optimized for which one offers the best tax benefits in isolation.

Strengthen Your Financial Plan With Purpose

Overall, an HSA can serve as a powerful addition to a Muslim professional’s financial plan. It offers meaningful tax advantages alongside the flexibility to invest and save for the future. That said, as with any retirement account its value is highly dependent on disciplined use. Investing thoughtfully, reviewing your holdings regularly, and choosing investments that reflect your principles all hold significant weight to this equation. Approached this way, an HSA becomes a notable building block in a financial strategy built on faith-aligned decision making and tax-efficiency.

Common Mistakes to Avoid

• Investing money needed for near-term medical expenses. Funds you expect to use soon shouldn't be exposed to market risk.
• Assuming all HSA investment options are Shariah-compliant. As with any account, fund menus are not pre-screened for Islamic principles, and this needs to be verified directly.
• Forgetting to review investment allocations. Set-it-and-forget-it can lead to a portfolio that drifts out of alignment with your goals or risk tolerance over time.
• Overlooking employer contributions. Some employers contribute to HSAs, and failing to account for this can mean missing out on additional funds.
• Failing to keep records for qualified medical expenses. Proper documentation matters, particularly if you plan to reimburse yourself for past medical expenses using HSA funds down the line.

Sources:

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1. Healthcare.gov: “High Deductible Health Plan (HDHP)”
2. Wahed.com: Shariah
3. Healthcare.gov: “Understanding Health Savings Account-eligible Plans”

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Disclaimer: 

Wahed Invest LLC (Wahed) is a U.S. Securities and Exchange Commission (SEC) registered investment advisor. Wahed Invest provides brokerage services to its clients through its brokerage partner Apex Clearing Corporation, a member of NYSE - FINRA - SIPC and regulated by the SEC and the Commodity Futures Trading Commission. Registration does not imply a certain level of skill or training. Wahed does not intend to offer or solicit anyone to buy or sell securities in jurisdictions where Wahed is not registered or a region where an investment practice like this would be contrary to the laws or regulations. Any returns generated in the past do not guarantee future returns. All securities involve some risk and may result in loss. Any performance displayed in the advertisements or graphics on this site are for illustrative performances only.

Wahed does not provide tax advice.

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