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It pays to maintain a large HSA balance. Read on to see why. 

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Healthcare is an expense that tends to be largely unavoidable. Even if you’re a generally healthy person, at some point, you might get hurt and end up with a hefty ER bill. Or, you might end up needing to spend more money on medications when you’re older.

That’s why it’s so important to do what you can to save money for healthcare bills. And in that regard, you have options. You could contribute to a regular savings account. But if you’re eligible for a health savings account, or HSA, then it pays to put your money there, since you get a tax break on your contribution.

In this regard, HSAs are similar to traditional IRAs and 401(k)s. Fund an HSA to the tune of $2,000, and the IRS won’t tax $2,000 of your earnings the year you make that contribution.

Recent data from the Plan Sponsor Council of America tells us that HSA balances seem to be growing. And keeping your HSA well-funded is definitely a goal worth working toward.

HSA balances are up

The average HSA balance at the end of 2022 was $6,130. That’s up from $4,924 in 2021.

Now you may be wondering why it’s a good thing to have so much money in an HSA. And the reason is that HSAs are extremely flexible in that you can use your funds at any time. So the more of a balance you’re able to build, the more money you can reserve for healthcare during your retirement, when you’re likely to see your costs rise.

Furthermore, HSAs allow you to invest your balance so it grows into a larger sum over time. Not only are investment gains in an HSA not taxed, but neither are withdrawals, provided that money is used to cover qualifying healthcare expenses.

Should you increase your HSA contributions?

If you’re not contributing the maximum amount you can to an HSA, then it definitely pays to ramp up if that’s something you can afford to do. The more money you can bank for healthcare expenses, the more income you can shield from taxes, and the more of a balance you can grow eventually.

This year, your HSA contribution limit is $3,850 if you’re under 55 and have self-only coverage, or $4,850 if you’re 55 or older with self-only coverage. If you have family coverage, your limit is $7,750 if you’re under 55 or $8,750 if you’re 55 or older.

If you’re interested in contributing more than what you’ve put in so far this year but are worried that 2023 is almost over, here’s some good news. HSAs give you until the following year’s tax-filing deadline to make contributions. So you can fund your 2023 HSA all the way up to April 15, 2024.

And if you’re worried about overfunding your HSA, here’s another lesser-known rule. Once you turn 65, you can withdraw from an HSA without penalty to cover any expense — it doesn’t have to be healthcare-related. In that situation, you’ll be taxed on your withdrawal, but there won’t be any penalties to worry about.

So think about it this way. If you grow a large HSA balance and don’t end up needing to spend a lot of money on healthcare in retirement, you can always use your HSA as a general retirement account. That makes funding it to the max a really low-risk proposition.

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