Becoming an HSA Millionaire: Is It Possible?

Individual Retirement Accounts (IRAs) and 401(k)s are two of the most popular tax-advantaged retirement savings accounts in the United States. In fact, it's estimated that over 60 million taxpayers have IRAs, which is also roughly equivalent to the number of 401(k) plan participants nationwide.

Meanwhile, there are about 30 million Health Savings Accounts (HSAs) in existence. As of 2021, they hold a combined $82.2 billion in assets, implying an average HSA balance of about $2,740.

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Millions of IRA and 401(k) millionaires

The average HSA balance is significantly lower than the average 401(k) balance, which, in the same year, stood at $129,157. (Curiously, the median 401(k) balance was a much more modest $33,472.)

Things get even more interesting when we look at the upper tail of the distribution. Fidelity, the United States' largest 401(k) custodian, noted in the fourth quarter of 2021 that it had custody of 442,000 401(k) accounts with balances above $1 million. Meanwhile, the company counted 376,100 IRAs with a million-dollar balance or greater.

Combined, that's 818,100 retirement accounts holding over $1 million -- and that's at Fidelity alone. Vanguard, one of the world's largest money managers, reported that it had 55,900 401(k) millionaires and 126,800 IRA millionaires -- and this was data from 2018, when market indices like the Vanguard Total Stock Market Index Fund ETF (VTI 0.02%) or the Invesco QQQ Trust (QQQ 0.34%) were noticeably lower than they are now.

All told, there could be millions of IRAs and 401(k)s worth $1 million or more. While this is a substantial population of soon-to-be wealthy retirees, it's also not too surprising -- for two reasons.

First, the annual contribution limit for an IRA in 2022 is $6,000, while the 401(k) annual contribution limit is even higher, at $20,500. On top of that, certain tax strategies like the mega backdoor Roth IRA can help taxpayers funnel even more money into their retirement accounts.

Next, both IRAs and 401(k)s come with stringent withdrawal rules that effectively bar withdrawals before the age of 59 1/2. Taken together, these two rules help set the stage for prudent saving and long-term compounding -- forces that feed on each other to create enormous amounts of wealth. In this light, it's hardly any wonder why so many IRA account holders and 401(k) plan participants are so wealthy.

The HSA millionaire: Far more elusive, but not impossible

These rules stand in sharp contrast to HSAs, which allow annual contributions of just $3,650 for individuals or $7,300 for families. In addition, HSAs have less restrictive withdrawal rules and allow distributions for a broad array of "qualified medical expenses" -- which can range from dental treatment and artificial limbs to hearing aids and psychiatric care.

This means that it's more difficult for funds in an HSA to experience the benefits of uninterrupted compounding. Nonetheless, it's not impossible -- even if you withdraw and spend a good portion of your HSA contributions every year.

Let's say Tim is single. He contributes the maximum amount allowed, $3,650, to his HSA every year. However, Tim spends half of his contribution, $1,825, every year on qualified medical expenses. He then invests the remaining half, or $1,825 annually, in a broad-market index fund like the SPDR S&P 500 ETF Trust (SPY -0.05%), which has historically posted a compound annual growth rate (CAGR) of around 10%. Let's see what happens over a sufficiently long period of time.

Interestingly, at a 12% CAGR, Tim becomes an HSA millionaire by year 38. At a 10% CAGR, the base case, Tim crosses the $1 million mark by year 43. Even if Tim compounds at just 8% a year, he'll become an HSA millionaire by year 50.

As a reminder, this is the case even after Tim withdraws half of his annual contribution to fund qualified medical expenses every single year -- meaning that it's possible to become an HSA millionaire even if you routinely need to take money out of the account to cover your healthcare costs.

Keep in mind the purpose of an HSA

HSAs are first and foremost meant to help taxpayers defray the high costs of healthcare. In other words, HSAs aren't intended as retirement accounts or long-term savings vehicles -- and you should expect to regularly spend down your account balance. In years when you incur substantial bills, you may even have to withdraw more than you contribute -- and that's completely normal.

So, even if you never become an HSA millionaire, that's nothing to worry about. After all, that's what IRAs and 401(k)s are for! Simply try to save and invest as best you can, and you'll be well on your way toward financial health and happiness -- HSA millionaire or not.