This Is the Average HSA Balance. How Do You Compare?

Healthcare expenses can strike at any time. And while you could always put extra money into your savings account to cover them, a better bet may be to contribute to a health savings account, or HSA.

During the first six months of 2023, the average HSA balance was $4,397, according to a recent report by Bank of America. HSA balances also grew almost 12% from the end of 2021 to the end of 2022.

Not everyone can fund an HSA, though. To be eligible, you must be enrolled in a high-deductible health insurance plan. This year, that means having a plan with an individual deductible of $1,500 or more, or a family-level deductible of $3,000 or more.

But if your plan qualifies, then it pays to try to max out your HSA this year if you can (and also, in the future). Doing so could not only set you up nicely to cover sudden medical expenses, but it could also shield more of your income from taxes.

A great account to take advantage of

Whether your current HSA balance is more than $4,397, less than $4,397, or around that amount, it almost doesn't matter. Your goal should be to contribute as much money as possible to your account this year, and every year going forward that you're eligible for an HSA.

And if you're thinking, "I'm generally healthy and don't need to spend much on medical bills," you may want to reconsider.

First of all, an injury can happen at any time. So even if you're someone who trains for marathons and eats piles of vegetables daily, you're not immune to breaking a bone or getting hurt and needing treatment that leaves you liable for a host of out-of-pocket expenses.

Secondly, HSAs are extremely flexible in that you can carry funds forward and use your money at any time. You're actually encouraged to carry money forward, because HSAs let you invest unused funds so your balance can grow. And so while you might have great health now, in your 20s or 30s, things might look different once you reach your 60s.

What's more, contributing heavily to an HSA means avoiding taxes on more of your income. This year, HSA contributions max out at $3,850 for self-only coverage and $7,750 for family coverage. So if you're single and hit that limit, you'll have $3,850 of earnings that the IRS won't tax you on.

Meanwhile, investment gains in an HSA are tax-free. So are withdrawals used to cover qualified healthcare expenses.

There's really no risk with HSAs

You may be hesitant to grow your HSA balance too much for fear of ending up with money you don't need. After all, what if your health remains strong through the years and, come retirement, you have a $300,000 HSA balance?

Fidelity says the average 65-year-old retiring this year can expect to spend an average of $157,500 on medical expenses throughout retirement. If you end up with a similar tab, a $300,000 balance leaves you with an overage.

When you're under 65 years old, HSA withdrawals used for non-medical expenses are subject to early withdrawal penalties. But once you turn 65, those penalties go away, thereby allowing your HSA to serve as a backup retirement savings plan.

In any scenario, HSA withdrawals used for non-medical purposes are subject to taxes. But so are traditional IRA or 401(k) withdrawals. So all told, if you wind up with extra money in your HSA beyond what you need for healthcare spending, you're really not in a bad spot at all. You can just wait until your 65th birthday and use that money any way you please.

That's why it pays to try to grow your HSA balance -- regardless of how it compares to the average today. The more money you have in that account, the more tax savings you get to reap, and the more of a financial cushion you get to enjoy down the line.