Health Savings Accounts (HSAs) are one of the most useful tools that qualifying Americans can set up to help them grow money for their retirement medical costs. Healthcare costs in the U.S. continue to outpace GDP growth, causing many aging citizens worry that their savings will not be able to insulate them from future medical bills. 

Healthcare costs are also rising exponentially, with no indication that they will slow anytime soon. Studies show that an average American couple at the age of 65 can expect their total healthcare costs to triple in the next 20 years, or by the time they reach the age of 85. While part of this is a reflection of most individuals requiring increasing amounts of healthcare service as they age past 65, much of it is also due to rising costs, unrelated to frequency of medical needs. 

HSAs are a great way to offset this problem, in part because they fall into a tax category affectionately known as “triple tax exempt.” When you contribute money to your HSA account, your contributions will not be taxed, your investment decisions once the money is in your account will not be taxed, and any money you take out of the account for qualified medical expenses will not be taxed. 

These tax exemptions result in an extremely powerful tool that allows careful investors to easily outpace inflation and rising health costs while only contributing a relatively small amount of money to their HSA each year. And there’s good news: the Internal Revenue Service (IRS) has announced that they are raising the annual cap for both family and individual contributions to HSA for 2022. In 2022, the annual amount you can contribute to a HSA for yourself will go up by $50, from $3,600 to $3,650. This seemingly small increase may be confusing to some investors who are not familiar with HSAs. While $50 seems like an extremely small annual increase, it is actually a substantial amount when you look at the possible scale of the total value you stand to gain over the course of your life.

How are HSAs changing in 2022?

While this may seem like an insignificant change, it can have a large impact on the total amount of money you will accrue over the lifetime of your HSA. An extra $50 per year over a period of 30 years at an interest rate of 7% amounts to a gain of more than $5,000. A single individual investing the new maximum annual rate over 30 years can expect a return of almost $400,000.

HSAs also allow for family accounts, which will have a new capped annual contribution rate of $7,300. By maxing out annual contributions with a standard 7% interest rate, a couple could have over $1 million in their HSA at the end of 30 years.  

One of the most advantageous elements of a HSA is that the IRS routinely monitors inflation and adjusts the maximum annual contribution amount. This ensures that savers can beat inflation by a standard margin. By using the Consumer Price Index for All Urban Consumers the IRS regularly calculates the amount that they need to raise the maximum annual HSA contribution to continually safeguard Americans’ investments. 

The IRS does this partially because, at their core, HSAs are tax exempt savings accounts. While HSAs allow you to invest your saved money at the same time, the IRS has a responsibility to keep the fundamentals of the HSA program viable so that savings don’t lose value over longer periods of time. This means that if you choose to create a HSA, the IRS will continue to do what they can to keep beating inflation and rising healthcare costs. 

With this in mind, it can be useful to look at the IRS’s decision to raise the maximum annual contribution limit as a recommendation rather than an option. By raising the limit, they are essentially suggesting that contributing this new amount of money annually is the best strategy for getting the most out of any HSA.

Why choose an HSA in 2022?

Nothing in the investment world is absolutely guaranteed. However, a HSA account focused on tax-free and low-risk investment options is a great way to have a high level of security, and also achieve a high average annual return rate of somewhere around 7%. It’s also fairly easy to calculate lifetime returns on investment with HSA, partially because of the annual contribution cap. This allows you to have an extremely precise idea of how much money you will have earmarked for health costs when you retire. 

While they are incredibly useful for investment purposes, HSAs are also great last resort safety nets for unforeseen medical costs before you retire. If an average American couple invests the maximum annual contribution at that same 7% interest rate for 30 years, but takes out 50% of their contributions annually for qualified healthcare costs, they will still theoretically arrive at over $500,000 by retirement. 

The IRS’s $50 a year increase to maximum contribution may not seem like a lot, but it demonstrates a commitment to the refinement of the HSA program. It also serves as an excellent recommendation for how to get the most value out of an HSA. Hopefully this change will encourage more Americans to take advantage of this excellent tool for growing their wealth and increasing their medical stability.