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HSA balances are climbing. Read on to see why these accounts are so valuable. 

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Healthcare is one of those expenses you often can’t avoid. And you might incur large medical bills at any time.

Even if you’re young and healthy, you never know when an injury might land you in the ER, leaving you to raid your savings account (or, worse yet, rack up debt) just to cover your costs. That’s why it really pays to fund an HSA, or health savings account, if you’re eligible to.

The average HSA balance during the first six months of 2023 was $4,397, according to recent data from Bank of America. And if you’re eligible for an HSA this year (more on that below), it pays to contribute as much as you can. Here’s why.

1. You get tax-free contributions

Many people are familiar with the concept of tax-free contributions to an individual retirement account (IRA) or 401(k) plan. HSAs work the same way.

This year, the limit for HSA contributions is $3,850 for individuals and $7,750 for families. So if you max out as a person with self-only coverage, you’ll avoid paying taxes on $3,850 of earnings. If you fall into the 24% tax bracket based on your income, that results in actual savings of $924.

2. You get tax-free investment gains

You may be familiar with flexible spending accounts, or FSAs, which also let you set aside money for healthcare on a tax-free basis. But despite their name, FSAs aren’t very flexible. They generally require you to spend down your entire balance within your plan year or risk forfeiting some of your money.

HSAs don’t make you do that. You can carry funds forward as long as you want, and you can invest the money you don’t need right away. Better yet, you get to enjoy tax-free gains on your HSA investments.

3. You get tax-free withdrawals for medical expenses

A big benefit to saving for retirement in a Roth IRA or Roth 401(k) is that your withdrawals from your account are tax-free. The same holds true for HSA withdrawals taken for medical expenses.

Now, if you remove funds from an HSA for non-medical purposes, you’ll not only be taxed, but also penalized. However, that penalty goes away once you turn 65. At that point, you can remove funds from an HSA for any purpose without a penalty, which means that account can serve as a backup retirement plan of sorts.

It pays to contribute to an HSA

Having money in an HSA gives you a means of paying for healthcare expenses when they arise out of the blue. Plus, you get to enjoy the tax benefits listed above.

The only thing you’ll need to be mindful of is that your health insurance plan must conform to certain rules for you to be able to participate in an HSA. This year, your plan may qualify if you have an individual deductible of $1,500 or more, or a family-level deductible of $3,000 or more. Your plan must also come with an out-of-pocket maximum of $7,500 or less for self-only coverage and $15,000 or less for family coverage.

If your health plan is HSA-compatible, then it pays to sign up, even if you can only contribute a few hundred dollars a year. And if your employer doesn’t offer an HSA, don’t sweat it. As long as your health coverage renders you eligible, you can open an HSA independently through a bank or credit union that offers one and start reaping the benefits detailed here.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Bank of America is an advertising partner of The Ascent, a Motley Fool company. Maurie Backman has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.

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