Why an HSA Beats an IRA Any Day

A Health Savings Account (HSA), many are surprised to learn, is actually a super-tax-advantaged retirement vehicle. Oftentimes HSA’s are confused with flexible spending accounts (FSA). If you aren’t sure which kind of account you have, the FSA is the spend-it-or-lose-it account, while HSA balances carry over forever.

Why think of an HSA as a retirement vehicle? Compare an HSA’s taxes to other retirement accounts:

Tax-Deferred (IRAs, 401(k)’s, 403(b)’s), Deferred Comp):

Year of Contribution: Deductible

Withdrawals During Retirement: Taxed

Roth IRAs, 401(k)’s:

Year of Contribution: Taxed

Withdrawals During Retirement: No tax

HSA’s:

Year of Contribution: Deductible

Withdrawals During Retirement: No tax (as long as held for at least 5 years or over age 65)

HSA’s are the only account where the contribution is deductible and withdrawals are tax-free.

Why don’t more people know about the double taxation benefit of HSA’s? Because many don’t have access to them. In order to be eligible to contribute to an HSA, your health insurance must be an HDHP – High Deductible Health Plan that is HSA-eligible. Many people either don’t have access to an HSA-eligible HDHP (because they are mostly offered by large employers and not easy to find on the individual marketplace), or choose not to enroll in one. Don’t know if your plan is eligible? A quick call to your provider can help you find out.

So, the catch with the HSA, in order for it to work as a retirement account, is that you must have a high deductible, contribute to the HSA, and then not use it. Instead, you must treat the HSA like an IRA – letting the contributions grow until retirement. HSA accounts do not have to be opened through your health insurance provider. They can be opened at local banks, or online at investment firms like Fidelity, Vanguard, TD Ameritrade or Schwab. Like an IRA, the money can be invested as you wish. Also like IRAs, HSA’s have annual limits on contributions, depending upon whether you are contributing for yourself or your family. Ages 55+ get an extra $1000 catchup contribution, too.

For people with high ongoing medical expenses, affording the high deductible, as well as the HSA contribution, can be too much of a burden. But if you are young, healthy, or simply a high earner, every $1 you put aside in an HSA will save you taxes (think, 15% – 40%, depending on your bracket) now, grow tax-free, and provide a nice tax-free cushion for that nest egg later in life.

The limit for 2017 HSA contributions is $3400 if you are under 55.  So if you have access to one and haven’t taken advantage, you can make at least several hundred bucks back in taxes this year just by reading this post.  (You’re welcome.)

HSA’s – the best retirement account hardly anyone knows about.

Holly Donaldson

Holly P. Donaldson, CFP® writes and consults on the psychology of money. Her fee-only, product-free financial planning practice focuses on increasing financial self-efficacy for those seeking a financial navigator to help them make good decisions. She is the author of The Mindful Money Mentality: How to Find Balance in Your Financial Future (Porchview Publishing, 2013) and publisher of the award-winning monthly e-letter, "The View From the Porch." With a fully virtual practice in Seminole, Florida, she primarily serves clients located in the Tampa, St. Petersburg, and Clearwater areas. Holly will also work with clients who are a good fit located elsewhere in the United States.

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