The number of health savings accounts held by Americans continues its slow and steady march upward.
There were more than 30 million HSAs at the end of 2020 — an increase of 6% from the previous year, according to an analysis by Devenir, a firm that provides HSA investment solutions.
This is just one of several HSA statistics that are trending higher, though. Devenir also reports that account holders contributed almost $42 billion to their HSAs in 2020, an 8% increase compared to 2019.
Thanks to a rising stock market, overall balances in HSAs grew much richer, to $82.2 billion. That is a year-over-year increase of 25%.
As the years pass, more people are likely to jump aboard the HSA bandwagon. By the end of 2023, the HSA market will exceed 36 million accounts holding more than $127 billion in assets, according to Devenir projections.
What is a health savings account?
An HSA is a type of tax-advantaged account designed to hold money for medical expenses. Despite its name, it can be either a savings account or an investment account, assuming you use an HSA custodian — such as Money Talks News partner Lively — that enables you to invest your contributions.
Those who invested their money in mutual funds or other similar assets — as opposed to just leaving their HSA deposits in a low-yielding but safer savings account — had a banner year in 2020, according to Devenir.
Thanks to a rising stock market, HSA investment assets jumped to an estimated $23.8 billion at the end of December, up a whopping 52% from the previous year.
Just 6% of HSA account holders invest a portion of their funds, but they have reaped the rewards of taking on a little more risk. Those who invest have an average account balances of nearly $18,000, which includes both deposits and investments combined.
As is the case for other tax-advantaged accounts, you can deposit only a certain amount of money in an HSA each year.
You can deposit pretax earnings in an HSA, meaning you get a tax deduction for contributions in the tax year for which you make them. Additionally, your deposits grow tax-free, and you can withdraw money tax-free, provided that you use it for qualifying medical expenses.
In other words, it’s possible to never pay taxes on money that goes through an HSA.
Not everyone is eligible for an HSA, however. They were created for folks with high-deductible health insurance plans. For the 2021 tax year, the IRS defines such plans as having annual deductibles of at least:
- $1,400 for self-only coverage
- $2,800 for family coverage
HSAs as retirement accounts
As we note in “3 Ways a Health Savings Account Can Improve Your Finances,” any money you put in an HSA — and any interest or investment gains that money earns — remains in the account year after year if you don’t spend it.
This is one of the advantages an HSA has over a health flexible spending account, or FSA. And it means you can use an HSA like an extra retirement account — a tax-free one, if you spend the money on qualified medical expenses. All you have to do is contribute to an HSA during your working years and not touch it until your golden years.
That’s easier said than done, of course. But the value of such discipline and patience is evident in Devenir’s research. The firm found that those who began investing in HSAs when they first emerged in 2004 now have an average balance of $57,968.
Even if you can’t manage to keep from withdrawing funds from your HSA annually, if you have a high-deductible insurance plan, it’s likely worth it for you to become the next person to take advantage of this tool.
After all, you will still save money by paying for medical expenses with tax-free dollars from the HSA. And that just might enable you to contribute a little more money to your actual retirement account.
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