Yes, HSA funds earn interest, but the rate depends on how your account is set up

Most HSAs held at banks or credit unions earn interest the same way a savings account does. Your money sits in an interest-bearing account, and the institution pays you a percentage of your balance each month or quarter. The rate varies widely—from nearly nothing at some providers to 4% or 5% at others, depending on current market conditions and the institution's terms.

However, not all HSAs earn interest. Some are held in custodial accounts that don't accrue interest at all. The difference comes down to where your account lives and what type of account structure your employer or HSA provider chose. Before you assume your HSA is earning money, you need to check your specific account's terms.

Interest earned on HSA funds is tax-free, just like the contributions and withdrawals themselves. That's one of the reasons HSAs are valuable long-term savings tools—the interest compounds without triggering a tax bill.

Key Takeaways

  • HSAs held at banks or credit unions typically earn interest at rates that change with market conditions, while custodial accounts often earn nothing.
  • You can find your account's interest rate in your account agreement or by calling your HSA provider directly.
  • Interest earned on HSA funds is tax-free and counts toward your annual contribution limit only if you withdraw it; the interest itself does not.
  • Some HSA providers let you move your money to a different institution if your current account earns little or no interest.

Where HSAs are held and what that means for interest

The institution holding your HSA determines whether interest accrues. Banks and credit unions offer HSAs as savings accounts or money market accounts, both of which earn interest. These accounts function like regular savings products—your balance grows with deposits, and interest is added on top.

Custodial HSAs, sometimes called "non-interest-bearing" accounts, are different. These are held by a custodian (often a third-party administrator) and typically don't earn interest at all. Your money sits in the account, but no interest accrues. Custodial accounts are sometimes used by employers who set up HSAs through payroll administrators or smaller providers.

Some employers or HSA providers give you a choice between account types. If you have that option and you plan to keep money in your HSA rather than spend it when ready, a bank-based or credit union account will grow your balance faster.

How to learn about your HSA earns interest and at what rate

Check your account agreement or the disclosure documents you received when you opened the account. These should state whether your HSA earns interest and, if it does, what the current rate is. The rate is often listed as an Annual Percentage Yield (APY).

If you can't find the documents, call your HSA provider directly. Have your account number ready and ask: "Does my account earn interest, and if so, what is the current rate?" They can tell you when ready and may also explain whether the rate is fixed or variable.

You can also log into your online account portal if your provider offers one. Many institutions display the current interest rate in the account details or FAQ section.

Interest rates vary by provider and change over time

HSA interest rates are not standardized. A bank offering 4.5% APY on HSA savings accounts might be next to a credit union offering 0.01%. The difference reflects each institution's own policies and the broader interest rate environment.

Rates also change. When the Federal Reserve raises or lowers its benchmark rate, banks and credit unions adjust their savings rates in response. An HSA earning 4% today might earn 3% in six months if rates fall. Conversely, if rates rise, your rate may increase too.

Because rates vary and change, it's worth checking your provider's rate once or twice a year. If you find that another institution offers significantly better rates and you have a substantial HSA balance, you may be able to transfer your account to earn more interest.

Moving your HSA to a different provider for better interest

You can transfer your HSA to a different institution if your current provider's interest rate is very low or nonexistent. This is called a trustee-to-trustee transfer, and it does not count as a withdrawal or trigger taxes.

Contact the new institution first and ask them to initiate the transfer. They will handle the paperwork and coordinate with your current provider to move the funds. The process usually takes one to two weeks. You'll want to do this when you have time to monitor both accounts and make sure the transfer completes.

One caveat: if your HSA is tied to your employer's payroll system, you may not be able to move it until you leave the job or your employer changes HSA providers. Ask your employer's benefits administrator whether transfers are allowed while you're still employed.

Interest earned does not count toward your contribution limit

The annual HSA contribution limit—currently $4,150 for individual coverage and $8,300 for family coverage in 2024, though these amounts change yearly—applies only to money you or your employer put in. Interest that accrues in your account does not count toward this limit.

This is a significant advantage. You can contribute the maximum amount, earn interest on that money, and the interest itself does not reduce how much you can contribute next year. The interest is essentially free growth.

If you withdraw the interest, it remains tax-free as long as you use it for may have access to medical expenses or you're over 65. If you spend it on non-medical expenses before age 65, you'll owe income tax on the withdrawal but not the 20% penalty that applies to non-medical withdrawals of contributions.

Why some people keep HSA money invested instead of in savings

If your HSA provider allows it, you can move funds beyond a certain threshold (often $1,000 to $2,500, depending on the provider) into investments like mutual funds or stocks. These investments have the potential to grow faster than interest-bearing savings accounts, but they also carry risk.

This is a longer-term strategy. If you need the money for medical expenses soon, keeping it in an interest-bearing savings account is safer. If you have years before you'll need to withdraw, investing part of your HSA balance may make sense—but only if you're comfortable with market fluctuations.

Not all HSA providers offer investment options. Check your account terms or ask your provider whether you can invest HSA funds and what the options are.

Frequently Asked Questions

Is the interest I earn on my HSA taxed?

No. Interest earned on HSA funds is tax-free. You don't report it on your tax return, and it doesn't reduce your contribution limit for the next year. This tax-free growth is one of the main reasons HSAs are valuable savings tools.

Can I move my HSA to a bank that pays higher interest?

Yes, through a trustee-to-trustee transfer. Contact the new bank and ask them to initiate the transfer. They'll coordinate with your current provider to move the funds without triggering taxes or penalties. The process usually takes one to two weeks.

What if my employer's HSA doesn't earn interest?

You may be able to transfer to a different provider that offers interest-bearing accounts. If your HSA is tied to payroll, ask your benefits administrator whether transfers are allowed while you're employed. Some employers restrict transfers until you leave.

Does interest earned count toward my annual contribution limit?

No. Your contribution limit applies only to money you or your employer deposit. Interest that accrues in the account is separate and does not reduce how much you can contribute next year.

What's the difference between an HSA at a bank and a custodial HSA?

Bank-based HSAs are held as savings or money market accounts and earn interest. Custodial HSAs are held by a third-party administrator and typically earn no interest. If you have a choice, a bank account will grow your balance faster through interest accrual.