Does Your HSA Earn Interest and Grow Tax-Free?

Yes. An HSA earns interest on its cash balance and can grow further through investments, and that growth is tax-free at the federal level as long as the money stays in the account or is eventually spent on qualified medical expenses. Interest, dividends, and capital gains earned inside the account are not counted as taxable income, and you can buy and sell investments within the HSA without triggering capital gains tax.¹

How Cash Balances Earn Interest

Every HSA holds a cash portion that works much like a savings account, and your custodian pays interest on that balance. Rates vary sharply between providers. Many large custodians pay somewhere between 0.01% and 0.20% APY on typical balances, with slightly higher tiers for larger amounts. Fidelity, at the other end, pays 1.84% APY regardless of balance size as of early 2026.² Because the difference between the lowest and highest payers is that wide, the custodian you use is the single biggest factor in how fast the cash side grows.

Cash held at an FDIC-insured bank carries deposit insurance. Without named beneficiaries, your HSA cash is treated as a single ownership account and insured up to $250,000, combined with any other single accounts you hold at the same bank. With named beneficiaries, coverage can reach $250,000 per beneficiary, up to $1,250,000 per account holder.³ The insurance covers only the cash portion. Mutual funds, ETFs, and other market investments held inside the HSA are not FDIC-insured.

Investing HSA Funds for Larger Growth

p>Most HSA providers also offer an investment sub-account, where you can move cash into mutual funds, exchange-traded funds, index funds, or other market instruments. Some custodians require you to keep a minimum cash balance, often somewhere between $1,000 and $2,000, before you can invest. Others set no minimum at all. Once you clear whatever threshold your provider has, the excess can be transferred into the funds the custodian makes available.

This is where the larger long-term growth tends to happen. A diversified portfolio of index funds tracking broad stock markets has historically returned far more than bank interest over long periods, though nothing is guaranteed and balances can drop during market downturns. Some account holders invest most of the balance and pay current medical bills out of pocket, letting the account compound for years.

Expense ratios matter. Low-cost index funds may charge as little as 0.05% annually, while actively managed funds can run 0.65% or more. Over decades, even a small difference in expense ratios compounds into a real drag on your returns. Some providers also add a separate monthly or annual investment administration fee on top of the fund costs, so read the full fee schedule before you pick where to invest.

How the Tax-Free Growth Works

An HSA carries what’s often called a triple tax advantage: contributions are deductible (or pre-tax if made through payroll), the money grows tax-free inside the account, and withdrawals for qualified medical expenses are never taxed. The growth piece is grounded in federal law, which excludes interest, dividends, and capital gains earned inside the HSA from your taxable income while the funds remain in the account.⁴ Selling a fund at a gain inside the HSA does not create a tax event the way it would in a regular brokerage account, and the IRS confirms that earnings stay tax-free as long as they remain in the account or are used for qualified medical expenses.¹

You don’t owe tax on the internal earnings, but you may still need to file Form 8889 with your federal return. The IRS requires the form in any year you or your employer make contributions, you take distributions, or you acquire an HSA interest because of an account holder’s death.⁵ The form reports contributions and distributions rather than the internal growth itself, but skipping it when required can generate IRS notices.

State Tax Exceptions

Federal law is only part of the picture. California and New Jersey do not offer a state income tax deduction for HSA contributions and may tax interest and investment gains earned inside the account at the state level. If you live in either state, factor state tax into any projection of how the account will grow.

What Can Slow the Growth

Administrative fees quietly work against the interest and returns the account earns, and they hit small balances hardest. Some custodians charge monthly maintenance fees that can easily exceed the interest earned on a low-balance cash account.³ Many waive those fees once the balance passes a set level or while you’re still receiving employer contributions. Paper statement fees, outbound transfer fees, and account closure fees are also common.

On the investment side, expense ratios keep working every year. A fund charging 0.60% annually costs $6 per $1,000 invested each year, against $0.50 for a fund at 0.05%. Compounded over 20 or 30 years, the gap is substantial. When comparing providers, weigh the cash interest rate and the cost of the investment options together. A high interest rate paired with expensive funds may not beat a lower-rate provider with cheap index funds if you plan to invest most of the balance.

The other thing that erases growth is pulling money out for the wrong reason. Withdrawals for qualified medical expenses are tax-free at any age. Take money out for a non-medical reason before age 65, though, and you owe ordinary income tax on the amount plus a 20% additional tax. The 20% penalty goes away at 65, but ordinary income tax still applies to non-medical withdrawals after that age.¹ Between the tax and the penalty, an early non-medical withdrawal can wipe out years of tax-free growth.

Keeping the Growth Going

If your current custodian pays little interest or charges high fees, you can move the money elsewhere without losing the tax treatment. There are two ways to do it, and the difference matters.

A trustee-to-trustee transfer sends the funds directly from your old custodian to the new one. There’s no limit on how often you can do this, and the money never passes through your hands.⁵
A rollover means the old custodian sends you a check, and you deposit it into the new HSA within 60 days. You can only do one rollover per 12-month period, and missing the 60-day window turns the amount into a taxable distribution, potentially with the 20% penalty on top if you’re under 65.⁵

Trustee-to-trustee is the safer route. Neither method counts against your annual contribution limit, since you’re moving existing money rather than contributing new money.

Losing your qualifying High Deductible Health Plan coverage stops new contributions, but the balance itself doesn’t disappear. It stays in the account, keeps earning interest or investment returns, and can still be used tax-free for qualified medical expenses.¹

Growth ends when the account changes hands at death, and who inherits it decides whether the tax shelter continues. A spouse named as beneficiary simply takes over the HSA as their own, and the account keeps its tax-advantaged status. A non-spouse beneficiary is different: the account stops being an HSA immediately, and the full fair market value becomes taxable income to that person in the year of death, reduced by any of the deceased’s qualified medical expenses the beneficiary pays within one year.¹

1
Internal Revenue Service. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
2
Fidelity Investments. Interest Rates
3
FDIC.gov. Health Savings Accounts
4
Office of the Law Revision Counsel. 26 USC 223 Health Savings Accounts
5
Internal Revenue Service. Instructions for Form 8889