Blog: Should You Prioritize An HSA Or A Roth IRA?

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Do you want to retire comfortably and pay for your medical expenses without any stress? There are a number of tax-advantaged accounts that let you save for these goals. Two of these accounts are HSAs and Roth IRAs. We are going to discuss both in detail so that you can decide which one you should prioritize to reach your personal goals.

How do HSAs work?

A health savings account (HSA) is a great way to save pre-tax money for eligible medical costs. The first thing to mention is that you must have a high deductible health care plan (HDHP) to contribute to an HSA.

HSAs have a triple tax benefit that is unheard of in other retirement accounts. This means that the contributions are pre-tax, the growth is tax-free and you can withdraw the money tax-free for qualified medical expenses. You can also withdraw the money after age 65 for any reason but you would then need to pay ordinary income tax on those withdrawals.

You can carry the funds forward each year and you can invest any funds that you don’t need right away. You can also withdraw money from your HSA at any time for medical expenses. HSAs have a lot of benefits that HRAs and FSAs do not have. If you qualify for an HSA, then it can be a powerful retirement savings vehicle (even though it’s not technically a retirement account).

How do Roth IRAs work?

A Roth IRA is an individual retirement account where you contribute after tax dollars. You can invest in an IRA as long as you have earned income. You pay taxes on the money that goes into your Roth IRA and then that money grows tax-free. Once you reach 59 ½, and the account has been open for at least five years, you can take tax-free withdrawals. Roth IRAs are usually best if you think your taxes will be higher in retirement than what they are now.

You can withdraw your contributions at any time without a penalty, but you cannot withdraw your earnings without a penalty if withdrawn early. However, it’s recommended to leave your contributions in your Roth IRA to take advantage of compound interest.

The annual contribution limit is $6,500 in 2023 ($7,500 if age 50 or older). The IRS does limit who qualifies for a Roth. If you are a high earner then you may be restricted from contributing the full amount each year.

Is HSA better than Roth IRA?

HSAs and Roth IRAs are both great options to help you achieve your goals. If you qualify for both HSA and a Roth IRA, then it may be worth maxing out both if you can. If you do have to choose between an HSA or a Roth IRA, then HSAs potentially have more advantages.

  • HSAs have a triple-tax advantage. The contributions are tax-deductible, the growth is tax-free and withdrawals are tax-free for qualified medical expenses. An HSA also allows you more flexibility because you take withdrawals now (for qualified medical expenses) and during retirement.
  • Roth IRAs offer tax-free growth. However, the contributions are taxable. But you can take out your contributions anytime without taxes or penalty.

It’s important to look at your unique situation before you decide which option is best for you. A financial planner can help you decide which one is better for your goals.

Should I max out my HSA or IRA first?

HSAs and Roth IRAs are both tax-advantaged accounts. The IRS sets a limit on how much you can contribute to both each year. As we said above, HSA may be a better option to max out first since it offers potentially more savings power.

Should I prioritize my workplace retirement plan before an HSA or Roth IRA?

It really depends on your situation but the general best practice is:

  1. Contribute to any workplace retirement plan that offers a matching contribution such as a 401(k).
  2. Max out your HSA.
  3. Contribute to other retirement savings such as a Roth IRA, or contribute more to your workplace plan.

Is it worth maxing out HSA?

Yes, it’s worth maxing out your HSA. Healthcare costs are one of the biggest uncertainties that you can face, both while working and in retirement. According to a study by Fidelity, an average retired couple age 65 in 2022 may need approximately $315,000 to cover health care expenses in retirement.

If you don’t have an HSA or an emergency fund, a large medical expense can mean people have to take 401(k) loans, or do early withdrawals, where they incur tax ramifications. If you have an HSA then when medical expenses arise, you have the money to cover them. This means less financial stress.

The amount you can contribute per year is based on whether you have an individual or family health plan. You can also use your HSA as an extra retirement account. If you do have an HSA, then a fiduciary financial advisor can recommend the best way to invest your HSA for long-term growth.

Can you contribute to both an HSA and a Roth IRA?

Yes, you can contribute to both an HSA and an IRA. The HSA contribution limit for 2023 is $3,850 for self-coverage only and $7,750 for family coverage. The Roth IRA contribution limit for 2023 is $6,500 for eligible individuals.



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